Option Investor
Newsletter

Daily Newsletter, Monday, 4/1/2019

Table of Contents

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

Market Wrap

Data Drives Stocks Higher

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

A round of positive data and hope for trade helped drive global equities higher on Monday, but the news isn't all good. There was plenty of negative data to counterbalance today's raft of positive reports, the market just chose not to think about it. The most positive news came from China, both the Caixin and Official Manufacturing PMI readings came in above expectation and positive. This makes the first month in four for China's broad manufacturing sector to expand and a sign stimulus efforts are working and, by extension, helping stave off a global recession.

Market Statistics


That data was backed up by positive reads on U.S. manufacturing and inventories but offset by weakness in retail sales. Additionally, the EU produced a round of weaker than expected data including PMI and CPI. European manufacturing PMI came in at 47.5, down from the previous month, as the sector continues to contract. The EU equities markets were able to produce a fairly strong up day despite the weak data as stronger U.S. and Chinese activity suggest activity in Europe will soon follow.

Much of the contraction in EU manufacturing is due to global trade relations but the Brexit can't be ruled out. The UK Parliament is expected to vote on some more measures today but the purpose is unclear. Theresa May is expected to reintroduce her deal in a lighter version tomorrow. The UK has only two weeks to figure something out or else its hard-Brexit for sure.

In trade news, Chinese Vice Premier Liu He is expected in Washington this week to continue last week's round of negotiations. Hopes are high a deal will be reached soon and it may. China's pledge to continue suspending auto tariffs past April 1st is a sign progress is still being made. The talks are likely to continue supporting the market while they are in progress; when they conclude it may be a different story.

Economic Calendar

The Economy

The Retail Sales figures for February were released at 8:30 AM. The data was not only weaker than expected it was downright terrible. The only mitigating factor I can think of is that the government shutdown had some kind of carryover effect on consumer habits. Regardless, headline sales fell -0.20% versus an expected rise of 0.30%. The only area of strength was gasoline sales, retail sales ex-gas and autos fell -0.60%. Core retail sales were also weak at -0.40%. The good news is that sales are still up YOY, +2.2%, and supported by strong labor markets and rising wages.


The ISM report on Manufacturing came in much better than expected. The headline index came in at 55.3 showing expansion and acceleration within the manufacturing economy. This makes the 119th month of expansion within the sector. The strength was driven by new orders, production, and employment which all came in positive and rose from the previous month.

Employment was the strongest sub-index of the ISM report with a gain of 5.2 points. According to the report, delivery times are still falling but at a slower pace, backlogs are rising, inventory of raw materials are rising, and customer inventories are still too low. All in all this report shows acceleration within an expanding economic sector with fundamental conditions set up to drive activity over the next few months.


Business Inventories, for December, echo the message told by the ISM report. Business inventories are on the rise and outpacing sales but still low relative to past recoveries. Business Inventories rose 0.8% in January following a 0.8% gain in December, inventories are up 5.3% YOY. Total trade sales and shipments from manufacturers increased by 0.3% for the month and 2.8% for the year. The inventories to sales ratio rose in the last month but is still below the 2016 peak.


Construction spending figures for February were also above expectation. The caveat is that the 1.1% increase in monthly spending is primarily due to non-residential and government spending. Residential spending fell -3.6% in the month while non-residential rose 4.8% and total public spending rose 11.5%.

Moody's Survey of Business Confidence rebound in the last week. The survey jumped 2.5 points to hit 14.8 and the highest level in six weeks. Despite the rebound, sentiment is still hovering near long-term lows and consistent with an economy operating below its potential. The US/China trade war and Brexit are cited as the two number one causes of concern but that is not a surprise. What is surprising is that South American businesses are benefiting from troubles in the northern latitudes.


The Dollar Index

The Dollar Index was supported by today's data but it wasn't able to make an advance. While the data is positive there are still areas of weakness and concern that point to a global slowdown and the underlying causes of the slowdown are still with us. The DXY confirmed support at $97.00 with today's candle and set a new three-week closing high but any additional upside is questionable. The indicators show a range bound asset and one nearing or at the top of the range. It is possible the index will continue to rally but without a close above $97.50, I am skeptical it will get very far. This week's data, particularly the labor data, could alter the situation but until then the DXY is inside a trading range and looks like it will stay there for the near-term at least.


The Gold Index

Gold tried to edge higher but wasn't able to overcome resistance. The spot price moved up above $1,300 but only briefly and only long enough to attract sellers. The metal fell from that level confirming resistance targets at the $1,300 and short-term moving average that may send prices down to $1,280. The indicators are bearish and suggest falling prices with the caveat momentum is weak and stochastic is near oversold. A move lower would be bearish and may reach my $1,280 target quickly, a break below $1,280 could be very bearish.


The GDX gave it up today, the market capitulated on gold's uncertainty and fell -2.5%. This move is bearish but only brings the ETF down to the bottom of the trading range so any further downside is questionable. The indicators are bearish and have room to run lower so a move to $21.50 or just below to the long-term moving average is likely. A close below $21.25 would be bearish and may lead the ETF down to retest the bottom of the longer-term trading range near $18.00.


The Oil Index

Today's data was enough to stiffen demand outlook for oil and that (on top of the OPEC+ tightening scheme) sent WTI up about 2.5%. WTI is now trading well above the $60 level with bullish indicators and looks like it could touch $64 with little effort. A move above $64 would be another trigger to buy and may get the price up to $68 over the next few weeks to two months. Longer-term I don't think that OPEC or Russia will open the spigots until WTI is back above $72. Why would they?


The Oil Index is still not following its commodity higher. The XOI made a green candle today but it is small and within the near-term consolidation range. The indicators are becoming bullish which is a good sign but there is no indication of when a break to the upside may come. With oil prices on the rise, it is inevitable the index will follow, it's just a matter of time. The only risks I can see is if the trade talks fall apart, or if OPEC starts pumping again, or if Venezuela comes back online, but at least two of those three things are unlikely to happen soon.


In The News, Story Stocks and Earnings

IPO darling Lyft gave up all of its opening day gains today. The stock fell -22% from its intraday high on 44 million shares and may be a harbinger of doom for the broader stock market. With companies like Uber, Slack, and Pinterest on tap debut in public trading there is a new fear the IPO market could sap liquidity from the market.


The Financials were today's leading S&P sector with a gain near 2.5%. The sector was lifted by rising bond rates which helped to further widen the spread between the 10-year note and the 3-month bill. The spread has re-flattened, there is still some inversion, but the 10-year is above the 3-month.


The financials created a long green candle moving up and through both moving averages so looks stong. The indicators are showing a decent but not strong bullish entry signal so upward movement is expected in the near-term. Resistance at $27.00 may be strong going into earning season so caution is recommended.


The broad market made a seemingly strong move higher in today's session and yet the VIX fell a mere -2.26%. The fear index created a small red candle moving lower and that is bullish for the market. The warning I give is that today's action halted at what I see as a significant point of potential support while the S&P 500 set a new high. I could be ducking from shadows but better to be cautious than broke. A drop below 13.40 might negate my negative outlook on fear.


The Indices

The indices, despite my best misgivings, continues to move higher. Today's action looks just like a strong trend-following bounce from long-term trend lines and was led by the Dow Jones Transportation Average. The transports advanced 2.26% forming a large green candle moving up toward a key resistance level. Resistance is just above today's close at 10,685 and may be broken in the next day or so. It may also not be broken so waiting for another confirmation signal is a good idea. The indicators are solidly bullish, both forming crossovers simultaneously with today's candle, so upward movement is expected. A break above resistance would be bullish and likely take the index up to 11,000 or higher.


The NASDAQ Composite gapped up at the open and moved slightly higher to form a small green candle. The price action looks a little frothy but is bullish and supported, weakly, by the indicators. The indicators are rolling into a bullish crossover but momentum is very weak and stochastic is meandering lower so not a reliable signal. A move above the high set two week's ago would be bullish and might get the index up to 8,000 in the near to short-term.


The Dow Jones Industrial Average posted the third largest advance at 1.27%. The blue-chip index created a medium-long green candle that gapped above 26,000 and closed near the high of the day. The index set a new high in the process and is accompanied by bullish crossovers in the indices. The crossovers are on the strong side as both %k and %d are moving higher in stochastic and from a higher low. A move higher may make it to 27,000 but I think resistance may set in closer to 26,750 and the all-time high.


The S&P 500 posted the smallest advance at 1.15%. The broad market index formed a medium-sized green candle extending last week's bounce from support. The indicators are weakly bullish and indicate higher prices with the caveat a resistance target is just above today's high. A move above this level, the all-time high set in January last year, would be bullish but even that might not get very far.


The indices all look bullish and yet most are facing resistance and all suffering from weak momentum. The gaps that formed this morning are also a warning sign, a warning that bulls are chasing prices and that is not a good thing, eventually those greater-fool traders are going to get left high and dry. Speaking technically, a wild push higher could cross one of my resistance targets and unleash a round of profit taking we haven't seen in about five months. The indices are up more than 20% and ripe for profit-taking; when it starts it could get wild. The signals are bullish but I am going to maintain my cautious, neutral stance on near-term market positions, I am still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes


New Plays

Resistance Remains

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell closed 10 points under critical resistance and well below recent highs. When a trade agreement is announced it could be a sell the news event. With several levels of critical resistance ahead the Russell has a rough road ahead.

The China news catapulted the indexes to 5-month highs but there is a test ahead. The equity markets are up 16% or more for the year and approaching the record highs set last October. Stocks are not running on earnings excitement but on expectations for a trade agreement. When that agreement is announced there is a very good chance the markets will gap higher and if they are not already at the prior highs, they should go there on the announcement of a visit by President Xi. That will be a very strong test of market sentiment. How long will the excitement hold and what will be the gains? Once that hurdle is past, the focus will turn to earnings and that is not a pretty picture at this point. Immediately after earnings we head into the summer doldrum period. The post announcement resistance test will be critical for market direction after earnings. Do we fail at the prior highs or begin a new leg higher over the summer when the market are already up 20% for the year? (anticipated post announcement level)

 

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

Good, Not Great

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap Russell gained 16 points or 1% but remains below resistance. Monday was a good day in the market but while the S&P closed at a 5-month high, the Russell closed 10 points under critical resistance. It would take another day like Monday to push through that 1,566 level and hopefully trigger some short covering. I don't want to put down the Russell gains but we have a long way to go to match the big cap indexes and the Russell is supposed to be the market leader.



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


HAIN - Hain Celestial
The long stock position was stopped at $22.85.

IMMU - Immunomedics
The long position was stopped at $17.50.



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


BULLISH Play Updates

HAIN - Hain Celestial - Company Profile

Comments:

Shares fell -2% after JP Morgan downgraded the stock from overweight to neutral. Hain had a good run but good things don't last forever without hiccups. We were stopped out of the stock position, but the option position is still over.

Original Trade Description: March 2nd.

The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products. The company operates in seven segments: the United States, United Kingdom, Tilda, Ella's Kitchen UK, Canada, Europe, and Cultivate. It offers infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; plant-based beverages and frozen desserts, such as soy, rice, oat, almond, and coconut; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, and cereal bars; canned, chilled fresh, aseptic, and instant soups; yogurts; chilies; chocolates; and nut butters. The company also provides juices, hot-eating products, desserts, cookies, crackers, frozen fruits and vegetables, pre-cut fresh fruits, refrigerated and frozen plant-based meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads, jellies, honey, marmalade products, and other food products. In addition, it offers snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla and whole grain chips, pita chips, and puffs; personal care products consisting of skin, hair, and oral care products, as well as deodorants, baby care items, body washes, sunscreens, and lotions; and herbal, green, black, wellness, rooibos, and chai tea. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and clubs, and drug and convenience stores in approximately 80 countries worldwide. The Hain Celestial Group, Inc. was founded in 1993 and is headquartered in Lake Success, New York. Company description from FinViz.com.

In early February Hain posted earnings of 14 cents that missed estimates for 25 cents. Sales declined -5% to $584.2 million and missed estimates for $611 million. All of the guidance was terrible. Shares fell 20% on the news.

Shares began to rebound almost immediately. The company announced an investor day for February 28th and it was well received. Two analysts posted positive notes about the company the following day.

The most bullish event was a four million share purchase in the open market but the biggest shareholder, Engaged Capital. Director Glenn Welling has purchased five million shares since the analyst meeting and both entities were still buying on Thursday. I see a potential takeover play ahead or at the least and activist shareholder play. Shares are exploding higher on the active buying.

Earnings May 9th.

Update 3/15: Shares are still rising but there has not been any additional insider buying since March 7th when Glenn Welling bought 1.8 million shares and Engaged Capital also bought 1.8 million. Those two entities bought 7,949,822 shares in the week ended on Mar-8th at an average price of $20.25. That is $160 million in new purchases Engaged now owns about 15%.

Position 3/11/19:
Closed 4/1: Long HAIN shares @ $21.44, exit $22.85, +1.41 gain.
Optional: Long May $23 call @ $1.00, see portfolio graphic for stop loss.



IMMU - Immunomedics - Company Profile

Comments:

No specific news. Shares spiked to a 3-month high at the open then fell more than 8% to stop us out.

Original Trade Description: March 16th.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, develops monoclonal antibody-based products for the targeted treatment of cancer. Its advanced antibody-drug conjugates are sacituzumab govitecan and labetuzumab govitecan, which are in advanced trials for various solid tumors and metastatic colorectal cancer, respectively. The company focuses on commercializing sacituzumab govitecan as a third-line therapy for patients with metastatic triple-negative breast cancer in the United States. The company also develops IMMU-140, a humanized antibody directed against an immune response target. Its other product candidates include products for the treatment of cancer and autoimmune diseases, including epratuzumab, an anti-CD22 antibody; veltuzumab, an anti-CD20 antibody; milatuzumab, an anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. Immunomedics, Inc. has clinical collaboration with AstraZeneca and MedImmune, to evaluate Imfinzi, a human monoclonal antibody against PD-L1, with sacituzumab govitecan as a frontline treatment of patients with TNBC and urothelial cancer; collaboration agreement with The Bayer Group for the development of epratuzumab; clinical and preclinical collaborations with academic cancer institutions, identifying new cancer indications for sacituzumab govitecan and the biology of the Trop-2 antigen; and research collaboration with the Memorial Sloan Kettering Cancer Center to investigate Sacituzumab Govitecan and Labetuzumab Govitecan in preclinical cancer models. Immunomedics, Inc. has a partnership agreement with the Samsung BioLogics Co., Ltd. to manufacture hRS7, an Immunomedics proprietary humanized antibody. The company was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics has had a rocky year but they are starting to pull out of their funk. On February 26th they reported earnings but more importantly announced a complete changing of the guard with new board members, new CFO and the exit of the CEO. Shares spiked on the news.

On March 11th they presented at the Cowen and Company 39th Annual Health Care Conference. Shares spiked again. Investors apparently liked what they heard.

They have multiple drugs in the FDA approval process and several more in the research stage. Sacituzumab govitecan has demonstrated a significant clinical benefit in multiple hard-to-treat cancer settings including breast cancer. The company is currently preparing a new Biologics License Application (BLA) in response to the recent CRL from the FDA. They recently published in the new England Journal of Medicine regarding that drug in the treatment of a variety of epithelial cancers.

The company had $497 million cash on hand and enough for an additional two years of research and operations.

Earnings May 27th.

Shares have accelerated to the upside after the earnings and investor presentation.

Position 3/18/19:
Closed 4/1: Long IMMU shares @ $18.56, exit $17.50, -1.06 loss.
Optional: Closed 4/1: Long May $21 call @ 75 cents, exit $1.00, +.25 gain.



BEARISH Play Updates

No Updates on Current Positions