Option Investor
Newsletter

Daily Newsletter, Thursday, 3/14/2019

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Optimism Fades

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Markets pushed higher despite fading optimism a trade deal is close at hand. Not surprisingly, the negotiations have hit some form of a snag. The latest reports say both sides want to push back the Trump/Xi Mar-a-Lago meeting to April at the earliest. The reason is simple, China wants the deal locked in place before Trump and Xi sit down face to face and Trump would rather settle the final details in person. If this issue, the issues, can't be resolved traders counting on a quick-fix could get left out in the cold.

Early trading was affected by some weak data out of China. Chinese industrial production fell more than expected and to a 17-year low as the economic slowdown continues. The weakness is due in part to U.S./China trade relations and likely to persist if no deal arises. On the flip-side, fixed-asset investment and retail sales both rose more than expected showing there is still life left in China's expansion. The fixed-income investment was boosted by the latest round of Chinese stimulus so take it with a grain of salt.

Market Statistics


EU markets were able to move higher despite mounting uncertainty over the Brexit. The UK Parliament has voted to reject the possibility of a no-deal Brexit which means several things are possible. The UK may try to negotiate a new deal which is very unlikely given the EU's position, or they may try to extend the Article 50 deadline which will again need EU approval. With that in mind, it seems like there is a chance the EU could stand its ground and force a hard-Brexit or withdrawal of Article 50 and no Brexit.

Beto Orourke may have just emerged as the Democratic forerunner for President. Although a Democrat and championed by the left he says he's a capitalist and can't picture the country moving forward with the help from the market. His policy tendencies are far-right of mainstream

Economic Calendar

The Economy

The jobless claims data continues to support labor market health but there is growing evidence that tightening is over. Not to say the labor market is deteriorating or reversing, just that trends are leveling off and further YOY improvement in jobless claims data may not be forthcoming.

The initial-jobless claims figure rose 6,000 from last week's not revised figure to hit 229,000. This is above expectation and trending flat for the 12-month period. The four-week moving average of claims fell -2,500 but is also relatively flat for the period. On a not adjusted basis claims fell -5.0% from the previous week versus an expected -7.7%, not-adjusted claims are up 2.0% over the same time last year.


Continuing claims rose 18,000 to 1.776 million. This is on top of a 3,000 upward revision and slightly ahead of estimates. The four-week moving average of continuing claims fell by -1,000 but it will move up again next week unless there is a sharp drop in claims. A drop in claims is possible, we are on the cusp of the spring hiring season, but it doesn't look like we're going to see a new low in this figure soon.

The total number of claims fell -12,379 to hit 1.776 million. The drop is expected but it is well short of estimates. The total number of claims is now only -5.3% below last year's level, the figure is hanging at the seasonal peak longer than expected and flashing a warning sign something is up. The total claims should have, based on historical data, made a much deeper dip this week but there is still time; the red-flags I'm seeing may be short-lived.


Import and Export Price data were both stronger than expected. Both advanced 0.6% for the month beating expectations for 0.3% and 0.1% respectively. On a year over year basis import prices are down -1.3% and export prices are up 0.3%. The data is a bit mixed showing weakness in the YOY figures and strength in the MOM data. My take, the global economy slowed some over the last year but is rebounding or stabilizing at its new rate of expansion.

New Home Sales fell more than expected in January. The annualized rate of 607,000 is 11,000 below forecast and down 6.9% from the previous month. New homes sales are also down YOY, -4.1%, but there is a caveat. This data is for January, mortgage applications and the Home Builders Index suggest activity has picked up some from the first of the year. We're still looking for two more months of data to be current with this data point.


The Dollar Index

The Dollar Index rebound from Wednesday's sell-off but the move isn't strong. The index gained about 0.30% to regain the upper side of the short-term moving average but remains near the middle of a six-month trading range. This range has been dominated by shifting sentiment that at first had the global central bank outlook turning hawkish and now dovish. In the mix are the Brexit, U.S. China trade relations and slowing global growth. The net result is the trading range between $95.50 and $97.50 where I expect the index to remain over the next week at least. Next week is the March FOMC meeting and a potential catalyst for change.


The Gold Index

Gold prices were firmly rejected by resistance at the short-term moving average and uptrend line. Wednesday rebound looked good but the market wasn't having it. Today's decline wiped a full percent off of gold's price and took it back below $1,300. This is potentially very bearish and points to a retest of $1,280 much sooner than I thought. A fall below $1,280 would confirm downtrend and may lead spot price to $1,260, $1,240, and $1,220 in their turns.


The Gold Miners ETF fell -2.5% in today's action but found support at the short-term moving average. The ETF has now confirmed a top and possible trading range that could contain prices for the foreseeable future. Today's support is near $22.25 but my target for the bottom of the range and strong support is closer to $21.50. The top of the range is near $23.50. The indicators are firmly mixed and consistent with range-bound trading so I am not expecting any kind of organized market move soon.


The Oil Index

OPEC's plan to tighten the market is slowly working despite the slowing global economy. WTI edged up another half percent today to settle at a four-month high. Now that the black gold is moving up I expect we'll see some momentum develop and push the price up to $64 and $68 over the next couple of months.


The Oil Index edged higher in today's trade but it is still capped by resistance. The index formed a very small candle beneath the 1,300 level where it may stay despite rising oil prices. The indicators are turning bullish so a test of resistance is likely. A move above 1,300 may be bullish but there is additional resistance at the long-term moving average to worry about. With oil prices on the rise, the outlook for the energy sector is improving but I can't sound the all-clear until prices for the index rise above the long-term moving average.


In The News, Story Stocks and Earnings

Shares of Boeing remain under pressure while it navigates the 737 Max-8 crisis. Most analysts are maintaining the ratings and price targets despite the crisis, the 737 is by far Boeing best selling aircraft it will be fixed. As of yet there is no smoking gun for the cause of Monday's crash but similarities have been noted. One analyst says it may be as quick as 6 months to a fix once the issue is uncovered which is a short time span on a complex project. Boeing is not expected to slow down production of the 737 which is great news for investors. This could be a good time to buy, the stock has yet to fall below the long-term moving average which is a positive sign of long-term support.


GE fell after issuing weaker than expected guidance. The stock fell more than -4.40% in the early pre-market session but the drop was used to advantage. Once analysts were able to dig into the numbers the consensus settled at 'not as bad as it could have been' and shares regained all the losses and more. The stock opened with a small gain and was able to hold the level, above the long-term EMA, into the close of the session.


Adobe reported Q1 earnings after the bell delivering 25% YOY revenue growth and beating estimates. The company also reports margins better than expected and EPS above consensus on strength in all categories. Second quarter guidance is a little lighter than expected but not bad, and full-year EPS guidance was raised, but shares fell in after-hours trading anyway. The stock shed close to -2.0% to erase more than the stock gained in today's session.


Oracle also reported after the bell delivering top and bottom line beats. The news was taken without much fanfare, revenue is flat YOY, despite a 26% increase to the dividend. Shares of Oracle are trading just shy of the all-time high with highly divergent indicators, it may keep rising but it looks ripe for profit-taking after rising close to 25% the last two months.


The Indices

The indices were able to hold steady despite mounting uncertainties. Today's leader was the Dow Jones Transportation Average with a loss near -0.20%. The transports formed a small red candle with visible lower shadow testing support at the pair of moving averages. The moving averages, both the 150-day and 30-day EMA's, are handing near 10,350 where support may be strong. The indicators are rolling into a bullish signal that has not yet been confirmed by MACD, a move up is possible but how much and for how long are questionable. If the index does move up my target for resistance is 10,500 and then 10,600.


The NASDAQ Composite was today's second-biggest loser with a loss slightly bigger than -0.10%. The tech-heavy index formed a small spinning top candle to the side of Wednesday's candle in a move that looks indecisive. The indicators are rolling into a bullish signal so higher prices are possible but MACD has yet to confirm. A move up may go as high as 7,800 before hitting the next resistance pocket, support is near 7,440.


The S&P 500 also closed with a loss near -0.10%. The broad market index formed a small spinning top doji in the process and looks like it could go either way from here. The indicators are rolling into a bullish signal but MACD has not confirmed so caution is due. A move up may be coming but resistance is not far overhead, near 2,875.


The Dow Jones Industrial Average closed with virtually no movement, +0.02%. The blue-chip index formed a very small spinning top doji sitting on the uptrend line. The indicators are rolling into a bullish signal so a move higher is likely. The caution is that resistance targets are not far above today's close and need to be broken. A move above 26,000 would be bullish but I might wait for a better signal.


The price action over the past two week's or so bears the hallmarks of a classic, long-term, bullish trend-following entry but I am dubious as to it's true portent. A move higher is possible, but it may be the last gasp of a relief rally within a greater bear market. The good news is that the bear market is really a consolidation within the longer-term secular uptrend, the continuation of that uptrend will resume eventually. The bad news is that side-winding within the consolidation range may persist for a few months at least. I am firmly bullish for the long-term but neutral in the near.

Until then, remember the trend!

Thomas Hughes


New Plays

Resistance

by Jim Brown

Click here to email Jim Brown
Editor's Note

Currently 1,550 is resistance but the critical levels are 1,583 and 1,600. The 1,550 level puzzles me. That was not material resistance, but it has turned into a high traffic area. The Russell faded sharply at the close and broke through two hours of consolidation at 1,550. If it were not for the strong futures late tonight, I would expect the Russell to collapse on Friday. Whether the futures will last through tomorrow's open remains to be seen. The Russell futures are up +4.50 and the S&P futures +8. You may remember last week then the markets surged in the last hour of trading on a Friday and I theorized it was a program trade triggered to force short covering at Monday's open. It will be interesting to see if we get a similar pattern this Friday.



 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Back to 1,550

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell traded back to the 1,550 level for the 4th day. This was only minor resistance, but it has turned into a price magnet. The index fell back to close fractionally below it again today and used it as support at the close. There is no excitement in the small caps and they are following rather than leading. The Nasdaq was the leader today. We currently have a lower high on the Russell chart and any new move below 1,550 is going to be a sell trigger.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


XON - Intrexon
The long position was entered at the open.

MDR - McDermott
The long position was closed at the open.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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3-6 month Option Trades = Ultimate Investor


Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

MDR - McDermott International - Company Profile

Comments:

We closed the position at the open.

Original Trade Description: March 2nd.

McDermott International, Inc. provides engineering, procurement, construction and installation, front-end engineering and design, and module fabrication services for upstream field developments. It operates through three segments: the Americas, Europe and Africa; the Middle East; and Asia. The company delivers fixed and floating production facilities, pipeline installations, and subsea systems from concept to commissioning for offshore and subsea oil and gas projects. Its operations include fabrication and offshore installation of fixed and floating structures; and the installation of pipelines and subsea systems, as well as provision of shallow water and deep water construction services. The company's customers include national, integrated, and other oil and gas companies. McDermott International, Inc. was founded in 1923 and is headquartered in Houston, Texas. Company description from FinViz.com.

McDermott posted a whopping $15.33 per share loss for Q4 after writing down $2.2 billion in goodwill. The adjusted loss was $1.55 and analysts were expecting earnings of 17 cents. This was a kitchen sink quarter. They knew it was going to be bad so they bundled everything they could find into the quarter to get it over with in one bad report.

On the flip side they guided for full year earnings of $1.65-$1.75 and analysts were only expecting $1.47. Revenue forecast of $9.5-$10.5 billion was also better than the $9.8 billion estimate.

They ended the year with an order backlog of $10.9 billion and have received $5.5 billion in awards YTD in 2019. They are bidding on $93.1 billion in projects. They have $1.4 billion cash on hand and $2 billion in unused credit.

They recently closed a merger with Chicago Bridge & Iron (CBI) which gave them broader expertise, additional capabilities, and a deeper order book. They expect the $475 million in cost savings synergies to be realized in 2019.

They are currently planning to sell their pipe fabrication business and storage tank business to focus more on their key sectors. They expect proceeds in excess of $1 billion. The pipe business is expected to close in Q2 and the tank business in Q3.

The strong guidance is the key to this position. Shares have rebounded sharply from the earnings disaster and should break over $10 in the next couple of weeks with the potential to move a lot higher. The risk should be minimal because all the bad news is over.

Position 3/4/19:
Closed 3/14: Long May $10 call @ 90 cents, exit .45, -.45 loss.

Previously Closed 3/7: Long MDR shares @ $9.16, exit $8.15, -1.01 loss.



BEARISH Play Updates

No Updates on Current Positions