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Daily Newsletter, Thursday, 3/21/2019

Table of Contents

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

Market Wrap

Another Push Higher

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market is throwing off a bullish signal but I'm not buying it. While today's action looks like a nice rebound at face value I just don't see a compelling reason to buy. Stocks are not overly cheap, the growth outlook is crumbling, we're on the cusp of at least one quarter of negative earnings growth, the U.S./China trade deal is questionable, and a Hard-Brexit looks all but inevitable.

Market Statistics


The FOMC's outlook and policy stance was a mixed bag. The Fed got dovish like they were expected to do but they took it a step further. Their outlook and view on global risks have added to the growing fear the global economic slowdown is going to slow again. Ultimately the Fed's new stance will be a boon for the economy but not until after the risks dissipate if they do. Ironically, the Fed's overly-dovish stance may be able to do what nothing else has; spur home buying. The rate on a 30-year mortgage fell sharply overnight to a +1 year low 19 basis points lower than this time last year.


The banks were among today's big losers. The financial sector is very sensitive to rate changes and now, with the outlook for rates so much lower than before, their ability to make profits is declining. The worst part is that the financial sector was expected to be one of this year's earnings growth leaders. Now I expect to see downgrades to the sector that will further impair earnings growth outlook for the broader market.

Economic Calendar

The Economy

The jobless claims numbers are OK but not great. The data shows the labor market is stable but no longer tightening despite signs of market strength in other data (today's MBOS). Initial claims fell -9,000 and more than expected, -8,000 when factoring in the revision to last week's data. The four-week moving average of claims rose by 1,000 to hit 225,000. On a not-adjusted basis claims fell -7.3% versus an expected 3.6%. Not-adjusted claims are only -2.2% below last year's level. Not-adjusted claims have been trending flat to last year for the longest stretch I can remember seeing in the almost 9 years I've been tracking the data. I don't think this means the labor market is reversing but it does look like tightening is over, at least for now.


The number of continuing claims fell by -9,000 to 1.75 million, the last week was revised higher by 1,000. This is the lowest level of continuing claims in a month and could mark the end of the recent uptrend we've seen in this figure. Longer-term, continuing claim are still near long-term low levels consistent with labor market health.

The total number of jobless claims fell -25,168. This is much less than expected. The total number of claims should have begun to drop off by now with spring/seasonal hiring. At this level, it is only -4.8% below last years level. This puts it at the smallest margin to the previous year I've seen in a long long time and at risk of going positive in the next couple of weeks. Thinking about what this might mean I have two theories. The first is that labor markets are in reversal, the second is that more and more Americans are joining/rejoining the workforce and not getting hired quite as fast as in the past. If reality is closer to the first than the second we could be in for an actual recession, only time will tell.


The Philly Fed's MBOS rebound from the last month's negative reading as manufacturers catch up with some of their backlogs. The Activity Index moved up more than 17 points to hit 13.7. The gain was driven by increases in orders, shipments, and labor although shipments were by far the strongest component. New orders rose only a few points to 1.9, positive at least, while shipments jumped more than 25 to hit 20. On the employment front, the hiring index fell nearly 5 points to 9.6 while the average workweek edged higher. On the inflation front, prices paid moved lower.


The Index Of Leading Indicators came in positive for the first time in months. The index rose to 0.2% from the previous months upwardly revised 0.0%. The index shows U.S. economic activity is still expanding but economists at the Conference Board caution expansion will slow by the end of the year, nothing new about that. The coincident and lagging indices continue to support expansion as well, if slowing, coming in at 0.2% and 0.0% respectively.


The Dollar Index

The Dollar Index made up all of Wednesday's losses and more in today's session. The move is supported in part by today's data but more so by weakness in the pound and euro. Both currencies are getting hit by fear of a hard-Brexit, the deadline for which is only 8 days away. The pound was also hurt by the BOE. The BOE released its policy statement today and they too held rates steady, citing risks to the economy, and lowered their forecast. Regardless, the Dollar Index is still firmly in the middle of its trading range and not showing signs of organized movement. It may move up, it may move down, but I think it will hold between $95.50 and $97.50 for a bit longer. If there is a hard-Brexit it may break out to the upside.


The Gold Index

Spot gold tried to extend its rally today but resistance at the uptrend line gave it the smack-down. Gold gave up all its gains and more settling the day with losses near -0.35%. The short-term moving average provided support but that may not last long. The indicators are bullish but momentum is very weak and stochastic is quickly approaching overbought levels so, while prices are under resistance, I don't see a lot of upside in this market. If spot price is able to regain the upper side of the trendline and move above the $1,320 level it would still need to surpass resistance at the $1,340 level before an all-clear can be sounded.


The Gold Miners ETF GDX was able to move higher in today's session but the move was weak. The ETF only gained a few tenths and the candle is doji so indecision is the assessment. The ETF is still trending near the middle of its new consolidation range and does not look like it will break out soon. The indicators are mixed, rolling into a bullish signal, but that is not confirmed and resistance is just overhead. The first target for resistance is $23, the next is $23.50.


The Oil Index

Oil closed with a small loss today after setting a new high above $60. While today's move shows the presence of resistance at the $60 level so far that resistance has been weak. The move higher is supported by tightening markets caused by OPEC+ and U.S. sanctions against Iran and Venezuela. According to estimates, global stockpiles have fallen by about 40 million barrels over the past two months. With OPEC set to extend its cuts beyond June, even just talking about it, we can expect to see oil prices continue to climb higher. In the near-term resistance is $60, once that is broken a move to $64 is next.


The Oil Index extended its move above the long-term moving average. The candle isn't big but it's green and closes solidly above the EMA. The move is supported by both indicators so higher prices are expected. My next target is 1,350 for minor resistance and then 1,400 for possibly much stronger resistance.


In The News, Story Stocks and Earnings

Apple was among today's leaders and the best performing Dow component with a gain near 4.5%. The stock is moving higher on the 2nd and 3rd of three recent upgrades citing valuation opportunities. Today Citi reiterated its buy rating on the expectation Apple will increase its dividend and share repurchase program in the next earnings cycle. Needham went strong-buy on the stock on its value as an ecosystem. Both analysts put the price in the range of $220 which is about 20% from upside from here.


Micron gave the whole semiconductor sector a boost after releasing earnings yesterday after the bell. The company reported revenue fell -20% for the year but came in well above expectations. The news is a relief because chip demand is not as weak as previously thought and bodes well for tech in general. Shares of Micron gained 10% in today's action while the Semiconductor Index rose about 4.0%. The $SOX set a new all-time closing high with today's candle but there is a risk in getting bullish. The indicators are divergent from this high and there is still resistance at the all-time intraday high, near 1,465, to contend with.


Biogen was today's big loser. The company announced it was ending a trial of an Alzheimer's therapy after a study of results showed it would not meet its target goals. Some sell-side analysts had been predicting a big hit for Biogen, and it would have been if successful, and that was seen in today's action. The stock fell more than -30% on heavy volume.


Afterhours news was dominated by Cintas and Nike. Nike reported revenue grew 7.0% YOY and beat estimates on the top and bottom lines. The results were driven by strength in all categories, expanding margins, and a lower effective tax rate. Shares of the stock traded at and closed at a new all-time in today's session but fell more than -3.5% after the earnings release.


Dividend Aristocrat Cintas reported after the bell. The company reported revenue grew 5.7% YOY narrowly missing consensus with EPS of $1.84 more than a dime above expectations. The results are driven by improving margins and solid 6% organic growth despite the impact of storm-related closures in the quarter. Shares of Cintas gained about 1.4% in the open session and then gave up those gains in after-hours trading.


The Indices

The indices moved solidly higher in today's action. The moves are bullish and may lead to further gains but caution is still my call. The day's leader is the Dow Jones Transportation Average with a gain near 1.50%. The transports created a long green candle moving up from Wednesday low but the move was capped by resistance. Resistance is the pair of moving averages which are tracking on top of each other. The indicators are still mixed, momentum remains bearish, but they are otherwise consistent with an upward swing in momentum. A test of resistance at the EMAs is likely, a move above them may be bullish. If the index does move above the EMAs resistance targets at 10,500 and 10,650 may keep it range bound.


The NASDAQ Composite made the second largest gain today at just over 1.40%. The tech-heavy index created a long green candle moving up to set a new high above 7,000. The move looks bullish but momentum is highly divergent from price and stochastic is overbought so there is substantial downside risk. If the index does continue to move higher a touch to 8,000 is possible.


The S&P 500 posted the third largest advance at 1.11%. The broad market index created a long green candle moving up from support to set a new high above 2,850. The move is supported by the indicators if weakly so higher prices look probably. The risk is that momentum is diverging, still, and there is a target for strong resistance just above today's close. The target is 2,872, the all-time high set way back in January of last year. A move above this level would be bullish but possibly only in a near-term sense as there are more targets for resistance between 2,872 and the current all-time high of 2,940.


The Dow Jones Industrial Average posted the smallest gain at 0.84%. The blue-chip index moved up from support creating a long green candle but it did not set a new high. The index appears to be extending the Vee-Bottom reversal begun in December but the indicators have not yet confirmed the move. Stochastic is tracking higher but momentum remains bearish so there is risk resistance at 26,000w will keep prices in check. A move above 26,000 would be bullish and may take the index up to retest the all-time high.


I'll be blunt. I don't think the indices should be moving higher right now but the market isn't listening to me. Although the indicators are bullish they are weak and divergent, I think this rally is overextending and ripe for a reversal, the question is when? It may begin next week when the Brexit deadline is reached, it may develop over the next few weeks as the earnings cycle develops, or we may get some bad news on trade negotiation that sends investors ducking for cover. Whatever the case, the market seems to want to move higher right now so I am going to change my stance to very cautiously bullish for the near-term. I am still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes


New Plays

Out of Character

by Jim Brown

Click here to email Jim Brown
Editor's Note

Investors were caught by surprise when market breadth turned against them. I wrote yesterday about the 2:1 A/D line in favor if decliners on the S&P. Breadth had been negative all week with only a few big caps leading the market higher. Today, that breadth reversed to 2:1 in favor of advancers on the S&P and 4:1 in favor of advancers in the small caps. Nasdaq stocks were 3:2 in favor of advancers but the Nasdaq big caps were almost all strongly positive and that lifted the market.

When breadth reverses suddenly there is only one reason and that is short covering. There is no bell that rings in a down market as a signal for everyone to rush into the market. A few headlines appear and some nervous Nellies begin to cover their shorts and it sets off a wave of short covering. Futures are down again tonight so it will be interesting to see if this short squeeze is a one-day wonder.



 

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NEW BULLISH Plays

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NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Dodged a Bullet

by Jim Brown

Click here to email Jim Brown