Option Investor

Daily Newsletter, Monday, 3/25/2019

Table of Contents

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

Market Wrap

Mueller, Mueller, Mueller

by Thomas Hughes

Click here to email Thomas Hughes


The market gave up some ground despite Mueller's clearing Trump of collusion allegations. The news is good for Trump and the markets but bad for Mueller and Barr and anyone associated with the investigation. Congressional Democrats are gearing up to investigate the investigation and challenged the conclusions drawn by and from the report. For the markets and Trump the news means the President can turn his full attention back to China, Trade, and the second round of tax cuts he said he wanted.

Market Statistics

The yield on the 10-year treasury fell to its lowest rate in over a year as growth fears persist. The 3-month T-bill and 10-year treasury remain inverted and flashing their recession signal. The caveat is that such a signal typically leads the market by a year to 18 months and is no guarantee of recession. A trade deal, now expected to come mid-April,could easily reinvigorate global economic activity and stave off a recession. In trade news, Mnuchin and Lighthizer are going to Beijing this week for another round of high-level talks with Chinese Vice Premier Liu He.

In Brexit news Theresa May is once again trying to gain support for her much-maligned deal. The EU has allowed the UK an extension on the Article 50 deadline but contingent upon UK lawmakers accepting said Brexit deal. If the UK Parliament fails to accept the deal the EU could withdraw their offer and force a hard-Brexit. Late in the day Parliament voted 329 to 302 to take control of the Brexit process from May's government. This new twist will result in several votes to determine Parliament's views about which direction to take but does little to alter the reality of the situation.

Economic Calendar

The Economy

There is only one economic report today, the Chicago National Activity Index, and very little this week. Some of the data out this week is delayed by the shutdown, most of it is for the 1st quarter 2019. The most important release will be on Friday. On Friday we'll get the January read on core consumer inflation, the preferred read on inflation used by the FOMC. The PCE Price Index has shown inflation is contained and edging lower over the past few months, a variation from that theme could be bad for the market. If inflation is too high it will raise fear of the Fed, if its too low it will compound fear of a slowing global economy.

Friday's data from home and abroad took a big toll on FOMC outlook. The odds of rates staying at their present level through the end of the year fell to 30% and there is no chance for a rate hike. Weak data on Friday could put this figure closer to zero.

The Chicago Fed's Activity Index came in negative for a second month in a row. The reading shows activity in the broad U.S. continues to slow. The February read came in at -0.29, down -0.04 from the previous month, but there is some good news. While the employment and consumption/housing sub-indices both showed contraction the production and sales indices both increased from the previous month and sales at least came in positive. Two of the four sub-indices, fell employment and consumption, while three of the four were negative.

Moody's Survey of Business Confidence edged up over the last week but only by 0.7 points. The index is not at 12.3 but still well off the highs and trending near long-term lows. The only good news is that the index has stabilized a bit over the past few week's and may hold at this level until the trade deal is done, or undone.

Moving on to earnings, the 1st quarter cycle is slowly gaining momentum although peak season is still a few week's off. There have been 11 reports so far and they've been good. A full 10 of the reports beat EPS consensus estimate and 7 beat revenue consensus which is a rate far better than last quarter. Teh blended rate for earnings growth fell a tenth due to revisions to expectations among the other 490 S&P 500 stocks. The 1st quarter is now expected to produce -3.7% earnings growth but, based on past performance and the performance of the 10 who've so far reported, the final rate of growth will be closer to 0 and possibly positive by the end of the cycle.

Looking forward there is good news and bad news. The good news is that earnings growth slowdown is expected to bottom this cycle, the bad news is that outlook for this year is still under pressure. The first and third quarters both saw a -0.1% downward revision over the last week and that pulled the full year estimate down a tenth too. The second quarter estimate held steady at 0.1% but is still in danger of turning negative. Aside from that, we can still expect to see earnings growth begin to rebound in the second quarter and accelerate into the first half of 2019 at least.

The Dollar Index

The Dollar Index gave up a little ground today but otherwise continues to trend within its five-month trading range. Today's action kept the index near the middle of that range and trading around the short-term moving average. The indicators are consistent with a bullish swing in momentum so prices may drift up within the range but no break out is expected soon barring unforeseen events.

The Gold Index

Gold prices got a lift today from fear. The slowing global economy and inverted Treasury yield curve have investors seeking safety in a time of turmoil. The spot price moved up about 0.70% and closed above my uptrend line and look like they could pop in the near-term. The indicators are bullish and stochastic is showing a bit of strength by crossing the upper signal line so upward movement is expected. The caveat is that resistance is not too far above today's close and may keep gold prices contained and within the Feb/March trading range.

The Gold Miners ETF moved up more than 2.0% in today's session on rising gold prices. The ETF continues to exhibit volatility within its range and is now moving up toward the top of the range. The indicators are bullish and point to a retest of $23.50 but there is a weakness in both MACD and stochastic that leads me to believe a break to new highs isn't too likely.

The Oil Index

Oil prices fell in today's session but not much and those losses were recouped after settlement time in electronic trading. WTI formed a small doji candle showing support at Friday's low. The market is wrestling with opposing forces but bullish bias persists. On one hand, slowing global growth is holding buyers back while on the other OPEC's tightening scheme and sanctions on Iran and Venezuela are tightening the market. This week traders are expecting to see another big drawdown in U.S. stockpiles so I think we'll see WTI move back up by the end of the week.

The Oil Index fell in today's session but was able to stabilize at the short-term moving average and long-term uptrend line. Friday's action shows that this market is still edgy, today's action that upward drift is still the more likely scenario. The indicators are weak and pointing lower so there may be another test of support at the moving average. So long as the EMA and uptrend line hold another attempt to cross the long-term moving average is expected. With the EIA expected to report a drawdown and prices supported by OPEC, I expect to see the long-term EMA broken if not this week then very soon. A move above the 150-day EMA would be bullish and likely take the index up to 1,400.

In The News, Story Stocks and Earnings

Apple was the biggest story in stock news. The company held another major product launch and unveiled several new product services that are sure to pad the bottom line. Among the new services are a streaming service, a news service, and a new credit card that will integrate with the Apple iPhone Wallet app. The streaming service, called Apple TV+, will run Apple produced content as well as aggregate content from other producers. For example, if you had an HBOGo account you could view and browse that content from your AppleTV+ account. The news service will cost $9.99 and does a similar job with news resources. The credit card, a gamechanger for the industry, will use Mastercard as processor and Goldman Sachs as the bank issuer. Although analysts say the services will drive Apple's revenue growth over the next few years shares fell more than -1.0%.

Shares of Redhat edged higher in after-hours trading. The company reported a 14% increase in YOY revenue and EPS that beat the consensus by 16%. The company says subscription revenues are up 16% and infrastructure-related products up 10%. Margins came in a bit below expectations but had no serious effect on profits. The company is still expected to be acquired by IBM later this year but regulatory hurdles have not been cleared.

KBHomes is expected to report after the bell tomorrow and may produce a substantial upside surprise, either in actual results or forward outlook. The driving force, forces, are pent-up demand and lower interest rates on mortgages. Although the mortgage app data was a little spotty in the first month of the year they have shown steadily rising numbers of applications and hit record highs over the past month, all because of lower rates. The stock jumped 5.0% in today's action so somebody at least believes this to be true. The candle is long and green moving up from the pair of moving averages so looks strong. Resistance is at $24 if actual results don't meet up to expectations this level could cap gains.

The Indices

The indices tried to stabilize at Friday's lows, and they may, but downward pressure is still present. The bad news is that today's leader is the Dow Jones Transportation Average with a loss of -0.51%, and the index set a new low. The transports formed a small red candle the moved, briefly, below the 10,000 level to set a two-month low. The move raises doubts as to the strength of the 10,000 level and the indicators don't help. Both MACD and stochastic are bearish and pointing lower so another test of 10,000 should be expected. If this level breaks a move to 9,750 is expected.

The SPX posted the second largest decline but only -0.08%. The broad market index created a small doji candle sitting just above the short-term moving average where support is still present. The indicators are bearish so a test of support is likely, possibly a move below, but so far they are not showing a lot of strength. If the index does fall below the short-term EMA the next target for support is the long-term EMA near 2,730.

The NASDAQ Composite posted the smallest loss at -0.06%. The tech-heavy index formed a small doji candle showing support at the 7,600 level. The indicator are weakening, stochastic is bearish, so we may see prices test the 7,600 level and possibly the short-term moving average in the very near term. A move below the short-term EMA would be bearish and may take the index down to 7,400.

The Dow Jones Industrial Average posted the only gain but the move was negligible at 0.05%. The blue-chip index formed the same small doji-like candle as the SPX and COMP but this one is below support targets. Today's candle formed below a long-term trend line and the short-term moving average which suggests it could follow the transports down to set a new two or three month low. The next target for support is the long-term moving average near 26,000, a drop below that may indicate a deeper fall is on the way.

I've been anticipating a top and retreat to support for some time and it may have started. The indices are falling from resistance levels and indicated lower so there is a reason to believe a pullback is brewing. The pullback, in my view, will be driven by the 1st quarter earnings expectation and declining earnings outlook with this caveat; earnings growth is expected to re-accelerate starting in the second quarter. In that light, any pullback that does form may not very deep and will most likely be a sector rotation and not a full-blown bear market. I am still firmly bullish for the long-term but neutral in the near-term, at least until the market shows a little more stability.

Until then, remember the trend!

Thomas Hughes

New Plays

Cautiously Optimistic

by Jim Brown

Click here to email Jim Brown
Editor's Note

The lack of follow through on Friday's decline is somewhat optimistic. The Russell held over 1,500 and the S&P held over 2,785.

The markets had plenty of opportunity to move lower with two concerted efforts to sell off. Both were bought. There were not enough buyers to create a rally but just enough to end the declines. The S&P touched 2,785 twice, four hours apart and both dips were bought. The S&P closed 13 points higher but did post a minor loss and close under 2,800. The solid support could convince investors to buy the dip in greater volume since Friday's collapse did not continue. The Asian markets are positive tonight as well as the S&P futures.


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


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Not Seven Points

by Jim Brown

Click here to email Jim Brown