Option Investor

Daily Newsletter, Thursday, 4/11/2019

Table of Contents

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

Market Wrap

Patient, Or Data Dependent?

by Thomas Hughes

Click here to email Thomas Hughes


The FOMC say's it's patient and data dependent but the data may be saying the time for patience is coming to an end. Today's round of economic news includes strong labor data and hot inflation data. The data, just a day after the FOMC minutes were released, reinforces the possibility there will be another rate hike this year. Based on the trajectory of PPI it's possible we'll see the FOMC begin sounding hawkish again within another month or two. Larry Kudlow, this morning, said he doesn't think there will be another rate hike in his lifetime. I hope he's not trying to tell us something.

Market Statistics

Despite the strong PPI, the CME's FedWatch Tool is still projecting a rate cut for this year. That said the odds of a rate cut happening by December have decreased to below 50%. The good news is that economic activity is resilient, inflation is bouncing back from the winter lull. The bad news is the shadow of higher interest rates could reemerge to stifle economic activity. The Fedwatch Tool is still showing zero chance of rate hike this year but the odds of a cut decreased.

Markets got a short reprieve from Brexit drama. The EU extended a flexible 6-month extension to the deadline giving the UK until October to figure something out. The extension came with a warning to use the time wisely, an admonishment with the ring of frustration and lack of patience. The EU has not backed down from its position, the deal they've negotiated with Theresa May is the only deal available, so it's still not clear what exactly is going to happen.

Economic Calendar

The Economy

The Producer Price Index came in at 0.6% for March. This is double the consensus 0.30% and the third month of acceleration in price gains. Headline PPI is up 2.2%, also hotter than expected, but only the first month of acceleration following the winter slowdown. At the core level, PPI rose 0.2%, a tenth above expectations, with YOY gains at 2.0%. Most of the increase in PPI is due to higher food costs, a problem seen around the world.

Initial claims for unemployment fell -8,000 to hit 196,000. This is the first time the claims figure has been below 200,000 since October 1969. The previous week was revised up by 2,000 but who cares with claims so low. The four-week moving average of claims fell -7,000 and is also sitting at a long-term multi-decade low. On a not-adjusted basis, claims are up 6.4% versus an expected 10.3% but are down -15% from last year. The not-adjusted claims have broken the winter doldrums and are now showing a re-acceleration of long-term tightening trends.

Continuing claims fell -13,000 but were offset by an upward revision of 9,000. Even so, continuing claims fell to 1.713 million which is a near-term low. The continuing claims figure is still well off of its long-term lows but is moving downward now. With initial claims setting new long-term lows I expect to see this figure retest its long-term low if not set a new one.

Total claims fell more than 100,000 in the last week to hit 1.937 million. This is good sign labor markets are returning to trend but still a bit light compared to my expectations. At this time total claims are trending about -5.0% below last year's level which is about half the long-term average and only a third the difference we saw for most of last year. Regardless, total claims are trending lower in a seasonal and long-term fashion indicative of labor market health and tightening.

The Dollar Index

The Dollar Index got a lift from today's PPI data. The data was strong and points to rising interest rates if not when rates may be raised. The DXY advanced a quarter point on the news forming a medium-sized green candle moving up from the moving average. This is a potentially bullish move and supported by the indicators but it does not negate the trading range yet. A move higher looks likely but resistance is near $97.50, a break above that level would be bullish.

The Gold Index

Gold prices fell in tandem with the dollar's rise. Strong data is pointing to higher interest rates and a stronger dollar and that means lower prices for gold. That said, today's -1.15% drop confirms resistance and at a new lower level below $1,320 but does not break gold out of its trading range. Today's move brings gold below the short-term moving average and the $1,300 level but stopped well short of support targets. The indicators are completely scrambled showing neither bullish nor bearish intent. With that in mind and gold still between $1,280 and $1,320, I think spot prices may remain range-bound in the near-term.

The Gold Miners ETF GDX fell more than -2.0% in today's session. The move shows indecision over gold's ultimate direction and may lead the ETF lower. The indicators are as scrambled here as on the gold charts which is consistent with whipsaw trading within a trading range. A move lower may find support near $22.00 or $21.50, a move up may find resistance at $23.00 or $23.50.

The Oil Index

Oil prices fell a little more than -1.0% today. The move began as a simple pull back from high prices but turned into a bit more as stops were triggered. WTI shed almost $0.90 in the move creating a small red candle that may lead to further consolidation. The indicators are still bullish but showing signs of peaking that are consistent with a price peak and potential for consolidation. If prices aren't able to stabilize near the current level a fall to the short-term moving average near $60 is likely. Longer-term, WTI is still expected to continue its rally as OPEC and its allies tighten the market. OPEC's production fell to a four-year low in the last month so tightening should continue at least in the near-term. The risk now is the cartel may increase output sooner rather than later due to loss of supply related to Venezuela and Iran.

The XOI Oil Index shed about a half percent on oil decline but otherwise looks resilient. The index is still sitting above support at the short-term moving average and the indicators are bullish. The indices may continue to trend sideways and slightly up in the near-term while oil prices consolidate at their new highs. Longer-term I expect to see this index move steadily higher as oil prices and earnings outlook for the sector slowly rise.

In The News, Story Stocks and Earnings

Amazon founder Jeff Bezos fired a challenge to other CEOs, raise your minimum wage to match Amazon. While seemingly altruistic in nature the challenge is a hollow media stunt. Businesses can not afford to pay anyone the minimum wage because they won't keep workers. With 7.1 million open jobs and 6.3 million available workers, businesses are having to rely heavily on compensation and incentives to attract and retain workers. A little later in the day, Walmart's Vice President of Corporate Affairs called Mr. Bezos out saying why don't you (Amazon) pay your taxes. Amazon is well-known to operate in gray areas and through loopholes that have reduced its Federal Tax burden to zero or near-zero for several years.

Drugstore retailer Rite Aid reported before the bell and did not bring what the Dr. ordered. The company says revenue fell slightly over the last year and missed estimates. Adjusted EPS was better than expected but still a net loss for shareholders. What got investors the most though was weak guidance, well below the consensus range. Shares of the stock surged on the news initially but soon fell. The stock gave up the early gains to open with a small loss and then extended that loss throughout the day. In more positive news, the board approved a 1-for-20 reverse-stock split ratio.

Fastenal, a maker of construction fasteners and other products, reported earnings before the opening bell. The company says revenue and earnings grew above expectations and provided a positive outlook for this year. EPS of $.68 beat by a penny and is up 11.9%. Daily sales of fasteners grew +11% while sales of non-fastener products, more than 60% of the mix, rose +12%. Gross margin fell another -1% over the past year but analysts say the downtrend is over, operating margin expanded slightly to 20%. Demand remains strong and is expected to continue fueling double revenue growth this year. Shares of the stock advance nearly 5.0% to set a new all-time high.

The Indices

If you believe in Dow Theory today was a good day. The Dow Jones Transportation Average, the market-leading index, broke out of its consolidation range and set a new high. The index advanced more than 0.80% to form only a small candle but that may not matter. The indicators are bullish and pointing higher so higher prices are more likely than not. The caveat is that momentum is still weak, stochastic high in overbought territory, and earnings season hasn't yet begun so I am still cautious about near-term price movements. If the index is able to keep moving higher there is potentially strong resistance at 11,000 to be wary of.

The NASDAQ Composite also set a new high but it didn't form a green candle. The tech-heavy index formed a small red candle and bearish attack pattern that could mark a price peak. The candle isn't strong but the indicators are consistent with peaking prices so caution is due. The index is extended and well above anything I would call a solid support target so a simple pull-back could easily become significant correction.

The Dow Jones Industrial Average shed only about -0.20% but set a new low. The index is drifting lower and at a two week low just above potential support. Support is likely at the 26,000 level, short-term moving average and long-term uptrend line but it may be tested in the next few days. The indicators have rolled over into a mildly bearish signal that suggests sellers are in control if only weakly. A move below the 26,000 level would be bearish and could lead the index down to 25,250 or lower.

The S&P 500 closed with a small loss near -0.05%. The broad market index formed a small red candle to the side of the previous candle and above support at a previous all-time high. The index may be consolidating for another push higher but momentum is weak and stochastic overbought so a big move may not be coming. A move higher is likely to find some resistance at 2,900 and then the all-time high if 2,900 is surpassed.

The indices have recovered almost all of the losses experienced during the December correction. The rally has been driven on improving outlook but that improvement is painted on a background of slowing growth. Yes, things are as bad as first feared but growth has slowed, and earnings are going to suffer. With a cycle of negative earnings growth on tap and the possibility that will turn into 2 or more quarters of negative growth, I am very cautious about the market in the near-term. I still fear correction brewing. I am still firmly bullish for the long-term, if and when a correction comes I will be a buyer.

Don't forget, tomorrow morning is scheduled earnings releases from Wells Fargo and JP Morgan.

Until then, remember the trend!

Thomas Hughes

New Plays

Tension Building

by Jim Brown

Click here to email Jim Brown
Editor's Note

Investors are afraid of something and buying interest has collapsed. Investors appear to be holding their breath and their cash ahead of earnings. I have warned for weeks that being this close to the prior highs and facing the potential for an earnings recession, could cause some post earnings selling ahead of the summer doldrums. People do not want to buy the highs when there is the potential for a material earnings decline. The lure of a trade deal with China lifted the market to this level and that lure is now fading because it is old news. I do not see any reason to buy stocks over the next couple weeks. Hold your cash and reevaluate in just before the end of April.


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

Relative Strength

by Jim Brown

Click here to email Jim Brown