Episode #29: OptionProfessor Weekly Market Update

Recorded 11:30AM ET on Friday, February 15th, 2019:

Full Transcript:

Good afternoon, good day, everyone. This is Jim Kenney with the update for OptionProfessor.com, for February 15th, 2019. As always I do remind everybody that past performance is not indicative of future results, and that short term trading, option trading, does involve substantial risk. So you should discuss the appropriateness with your clearing firm, your financial advisor, and your good common sense before you enter into anything.

With regards to myself, again I’m Jim Kenney, and I am a graduate of Boston College. And for those of you who haven’t tuned in yet, I’ve been in the investment arena here for decades educating people, thousands and thousands of people nationwide on the uses and risks of option trading. Using options for hedging purposes, for cash flow purposes, and also for limited risk speculation purposes. So again, I’ve been doing this for quite a long time and I’m gonna share my views and my opinions on a wide variety of things here today.

Again, we have seen the market take off to another high on this move. As I brought to your attention last week, the 2750 area was around where the 200 day average is, so there could be some resistance there possibly. But the Elliot wave people, I don’t know if I brought this to your attention last week or during the week through another broadcast, we’re saying that when we got above 2725 this week it opened the door to going towards 2800, even as high as 2940 on this run. So there is some legs to this market right now, again, there’s a lot of talk that the trade deal is just about ready to get going here in the next two weeks. And then of course people are bidding it up in advance of that. And then of course you’ve got the government settling their budget situation, and of course the emergency order that was announced here today.

So there is some things happening in the news that have been supportive. The earnings, while not being that robust, have not been that bad across the board. And so there has been a bid brought back into the market. Again, when the selling of December hit, every Tom, Dick, and Harry, basically got wiped out of their sell orders, and now in the month of January into February the re-instituting of purchasing, and re-balancing portfolios has come into a very little seller environment, and that’s, again, causing the order in-balance that continues here today. Let’s take a look quickly here at what the current markets are. You can see right now on my screen 336 and 25 on the NASDAQ, and the Dow Jones, let’s take a look at the S&P and see if we can get anything out of that, okay. Again, we have the 200 day average around the 2740 area, and again, getting above 2725 this week was a buy signal, particularly for the Elliot wavers who are to the upside there, thinking that the first wave we may either still be in the first wave, or it could be a situation where that dip down to to 2670, could’ve been the pullback, now we’re into the third wave to the upside.

At any rate, taking the [inaudible 00:03:14], that once it did break above that 2720 that I mentioned, it has been a bit up market, and it does seem like it wants to go toward that 2800 area at a minimum. And you see right there on the screen, you broke above 2720 this week, and then bam, you got 50 points to the upside in the last few days. So that number was a pretty accurate number as far as if we get above that number it could go. Also, there was a gap there between 2720 and 2730. Once that got filled, that became support on the pullback, and you can see the pullback right there, and then back up. So again, the question is is was the advance A move up to 2740, and is that all you’re going to get on the B move down at 2680? And then are we now on the C move that takes us anywhere to 2800 to 2940? Only time will tell, but again, there does seem to be a tail wind to the market right now.

Again, let’s take a look at a longer graph, that’s the last 10 days. I’m gonna give you an analysis here going back say to the last three years and give you a little bit longer term perspective here. Okay? Again, the reason you have to be somewhat concerned about the market still is that it’s had three chances tiered in and failed, right? Right there. And now it’s having the fourth chance right now. So if we can’t get above 2800, again, that would indicate that it could roll over from that level. That’s the next resistance level 2800, which is about 35 points from where are now.

Now, with regards to get us above that area, 2940 some people are using as a target, and again, that’s the all time high. 2940. So if we get through 2800, you could be looking at 2940, the all time high, and again, if it goes up to that all time high and cannot surpass it, that’s where some resistance could come in as well. So that’s what you look like right now as far as the SMP’s concerned. And again, with the talk of the deal coming by the end of the month, that could be a situation that creates a little bit of a bud underneath the market.

If they, for whatever reason don’t get anything done and we go up towards 2800 and roll over, that’s when I’d probably be concerned about either locking in some values, or hedging some of the values using the collar strategy or the married put. Again, if you’re not familiar with how to protect your assets against market declines, which obviously I’ll bring the chart back up a little bit so you can see it, people who hedge themselves up around 2900, 2850, 2950 certainly were a lot happier during that big drop to 2350. Again, when you want to protect your stuff is when it’s way up, not when it’s down. So the bottom line is is like any other insurance, you don’t want to buy your insurance after the flood hits, you got to buy your insurance when it’s nice and sunny, and the insurance doesn’t cost very much, and you’re going to be protecting a very sunny day. Now down in the dumps going how do I work that again?

If you have any questions on anything specific, give me an email. [email protected]. That’s O-P-T-I-O-N-P-R-O-F-E-S-S-O-R at Gmail.com, and I’ll respond, and if I can help you, great, and if it’s beyond my scope, I’ll let you know that as well.

All right, so anyway, that is the story on the SMP. Broke above the resistance, ran up here to 2775 area right now, looks like it’s going to have some trouble possible at 2800, but if they come out with a China deal and they blow through 2800 going up towards that all time high is certainly not off the table. So keep an eye on that, and that’s total reversible from down here at 2350. Why such a reversal? Again, the feds said they’re going to pause, that took that off the table. The China deal is getting done it looks like. That’s a big advance, and then of course corporate earnings while not outstanding did not fall off a cliff, which is what the market was kind of predicting.

A retail sales really kind of got whacked though, so you got to keep an eye on that. Retail sales this week came out and this is the worst level in a long time. Now that’s backward looking. Retail sales was for the forth quarter, so obviously people are thinking in Q1 here, those numbers are going to bounce back. But the December numbers were lousy to a large, large degree. So again, the consumer is 2/3 or more of economic growth if they stop buying things, that’s not a good thing.

There are some other markets that I’ve been watching. They’re all rebounding. So again, we’re getting confirmation here, transportation average yesterday was up while the market was down. That was a little tip that maybe that whole bag should’ve been bought. One of the best analysis that I heard after 50 is that gentleman who I know was saying buy every dip until we get back to the 200 day average, which obviously was genius because every single dip we saw between the 2350 and where we are today certainly was a buying opportunity. Right now again, a lot of these markets have just gone through, or right near their 200 day average. Let me tell you the two things that I watched here. [inaudible 00:08:07], which obviously goods and services being moved and people. Being moved around is very important. See the 200 day average? 10,558. Where are we now? 10,556. So we’re right on the number. If they can get through this area here, then you could be looking at some good higher levels, but again, this is the neighborhood.

It looks to me that if it can get above here, 11,000 is going to be your 2800 on the SMP. So your 2800 on the SMP, your 11,000 on the transports, these are the neighborhoods that could be resistant. You got to monitor these very good. Again, the 50 day moving average is under the 200 day average in these instruments, which means there’s still a negative cross there. That’s something to respect even though we’re having such a very robust rally here in Q1. Let’s take a look at the Russel, because they were another leader on the downside and the upside in recent time. 1567, good move in the Russel today. Where is it at on the 200 day average? Let’s take a look. 200 day average on the Russel is at 1587. So we’re not even taking out the 200 day average on the Russel yet. So again, and the enthusiasm is extremely high.

So let’s take a look here at the Russel again and get an idea where that might, because I think 1600 is the number on the Russel. Yeah, 1600 where it broke down from, that’s the number on the Russel where even if we get it right there where it broke down [inaudible 00:09:32] a high point there, got a high point there, that would be a neighborhood where [inaudible 00:09:37] keep in mind on the constructive. But again, we’re barely through the 200 day average on the SMP 500. We’re at the 200 day average on the transports, and we’re under the 200 day average still on the Russel, so let’s compare that to the VIX and get an idea of what’s happening. Because again, my view on the VIX is that when it is above 15 to 20, okay? The market could be stable, it’s higher.

But once it goes above 20 and [inaudible 00:10:06], you’re looking at a dangerous area on the VIX. So again, right now the VIX is right at that 15 mark, and you see there’s highs there on the VIX, and highs there a little bit, and now there’s lows. So we’re getting a very big advance, but I haven’t seen it break that 15 mark yet. Again, if I wanted to get and remain bullish, two things in my view have to happen. The VIX has to start trading between 10 and 15, and we need to sustain moves above the 200 day average. I suspect that’s not going to happen, but again, you don’t fight the tape in this business, and if in fact I does happen, you have to change your tune, but I think this neighborhood between here and 2800, and this neighborhood on the VIX right around 15 is a neighborhood that may see some selling come in unless there’s real stimulative news coming out.

Now the other thing is is the US dollar is picking up steam. Let me show you that too. Trying to give you a reason, a theme on what’s going on. The theme is basically that people don’t get too negative because they were overly negative on China and the fed and everything else in December, and the liquidity in December stunk because most people are trying to lock in gains, not put on now positions in December. Now in January they want to put on new positions. So the market makers actually played it great. They dumped it in December when they knew there wouldn’t be much buying, and they had everybody who wanted to do their year end selling do it into the abyss. That’s pretty sharp on their part. Then they know in January and February, everyone wants to reinvest their money for the new year, plus all that retirement money, pension plan money, IRA money comes in, so they raise the offer to the roof in January and February, and obviously all to buying comes in at the higher levels.

Pretty ingenious on the market makers point of view, but there’s the problem now. You are looking at earnings that are supposed to be pretty muted in quarters two, three this year. Maybe in Q4 they pick up. Earnings drives the market, and multiples drives the markets. People don’t want to pay a high multiple like they used to. So again, the US dollar, 40% of the SMP earnings come from overseas. That US dollar going from 95 back towards 97, 98 is not good for the earnings picture, for these multinationals. So again, that’s another thing that maybe has not been factored in is how the strong US dollar may negatively affect earnings. We’ll have to see. I thought that it looked like it might break, but I did say clearly that we needed to break under 95 and then 94 for us to really say that the dollar has rolled over. And rather than rolling over, they caught everybody short down here, and now they’re killing those shorts by rallying the market. So I’m sure there’s more than a little bit of short covering in this rally in the dollar. Because look at that, lower high, lower high, lower high, lower high, but not a lower low here. That was your tip that maybe it was going to go the other way.

Our yield advantage, meaning how much we pay in interest versus what overseas does. A lot of overseas, they pay negative interest. That means you loan the guy money, and not only do you not get interest, but they don’t even give you your whole principal back. Does that sounds crazy? It sounds crazy. So we’re at 2% money markets, and 3% 30 year, and two and 5/8 on the ten year, and that’s going to attract money from areas of the world, and that’s going to create the dollar strength, which is what it’s not. Now again as I’ve told you, we’ve had a very big run, and that VIX is something that you have to be very careful of, but also interest rate.

Now I’m a believer, because retail sales are down in December, and the economy is going pretty good as far as jobs, that companies are going to raise prices in Q1 here, and they’ll be reflected in numbers that come out on Q2, and if that happens, then the bond market may go the other way. Everyone in the world is saying there’s no inflation, when everyone in the world is telling me something, I know that that is a little bit lopsided and that means that most people are leaning that way. Just like when people were saying the fed is going to hike three more times up here at three … this is the ten year treasury note. Interest, 3.25, area, right? Everybody is telling us there that the fed is going to hike three times this year, maybe four. Now that’s a very pop, and everyone is short the bond market, short the bond market because they’re long thinking the yield is going to rise.

So when yields go up, bonds go down. So they’re all short the bond market. Very crowded trade, and when trades get crowded like Apple at 225, like Amazon at 2,000, they go the other way because you run out of participants on that side of the market, and then all those participants want to get out, and they want to get out into a no … in a liquid situation. So you had everybody short the bond market, and then all of a sudden they talk about pausing and look what happens. Bam, you go all the way down to 255 from 325 in how long? A little over a month, right? A month, seven weeks, right? Bam. Now, everybody down here is telling me the fed is not going to hike all year long, and they’re telling me that there’s no inflation, and blah-blah-blah, okay? Well as you can see after that low, we bounce back and it’s consolidated.

If this thing gets above two-eight, these yields are going higher, and I would imagine that little gap at 3% will get hit. What would make yields pop back up? Well I’m telling you the fed has told you they are watching the inflationary numbers and they don’t see anything happening there. But if they do because companies increase prices in Q1 to make up for the slower retail sales, then you are going to see them, and I go to the store, and you guys all go to the store, and you can see that the prices that I’m paying for food and clothing, et cetera, have gone up, and there is some pricing power even at places like Walmart, okay?

So what are you looking at? I think it’s possible that you could get an inflationary number that they’re not prepared for sometime here in 2019, which would send these yields back up, and if the DOW goes up to 2900, or the SMP up to 2900, and the inflationary news come out, then the fed is not going to stay on hold, and everybody who said the fed’s gone when they put this position on, is going to have to reverse their course, and of course that may also be good for things such as the gold shares. Now one of the things holding back the gold shares right now is the strong dollar. If we saw inflation come back a bit, that is a possible situation where the dollar could weaken a bit. Now again, I’ve been very constructive on the gold miners, and I’ve been showing it to you for a long time. Down here at what? 17, 18? That was the low, then we had higher lows, then we had higher lows, then we had higher lows. So this thing has been up trending here since last September.

Actually it’s had a very big run, and it’s possible it could pull back, particularly if the dollar remains so strong. And that gap right down here? It may get filled because it’s an over blocked condition. But I like the moving averages here, and let’s just take a look at where they are, because this is very under invested as people’s portfolio [inaudible 00:17:05] concerned. And there you go, 2060 in the 200 days, and 2048, they’ve crossed, that’s a good thing. The volume has been picking up on a 50 day basis, so the gold as part of a portfolio may not be a terrible thing long term. If we get the inflationary numbers that I’m guessing it could happen, and if the dollar comes off this 98 area and starts going the other way.

One stock that bought another company is Freeport McMoRan, and Freeport McMoRan is something that I’m watching very closely, and I’ll show you why. They just bought Gold Corps, which makes them I think one of the leaders if not the leader in gold production, and again they just raised the stamp, that’s inflation, that’s a little side of inflation again, and [inaudible 00:17:50] stamp going up from the 60s and the [inaudible 00:17:52] and the 90s and the 2000s showing you that obviously that’s price inflation. Very easy for people to understand. Now this is going back to 2001. This is Freeport McMoRan. As you can see, big run up to 60, then a collapse during the crash of 08. Big run up back to 60 on the rebound, and then a slow steady decline as the dollar got strong, and as inflation came out of the system, okay?

Now you’ve had a run up to 20 and a pullback to 10. This ten area to me is very interesting. And if you can get, now see this volume very high? That looks like capitulation to me. Meaning everybody dumped it. Look at that volume? Where it normally is and where the volume here. That looks like a dump to me. So I’m very much watching this company here, the PE ratio is 7.91, that looks like a pretty reasonably priced thing, and let’s look under the hood here and see if there’s any short interest.

Short interest is sometimes a sign that if the market turns, these people will cover their shorts, and let’s see if anything’s [inaudible 00:18:53], .27, not too much. But as you can see, this ten area is very interesting, and if you can get above 15 and above 20, this thing could be a fairly important stock over the next longer term, because again, they just bought Gold Corps and it creates quite a situation there. So there could be some value.

Let’s do around the horn here and take a look at what a lot of people are looking at. First of all they’re saying get back into the financials. Financials haven’t been a big friend to anybody, let’s take a look at what they’re doing now. The spider on the financials starting to move up, looks like it’s trying to turn up, looks like 22 could’ve been a bottom, and then now it’s trying to make its way up. Still having trouble at above 27, and certainly trouble at 29. So there you go, still in an overall down trend, but it looks like the momentum is turning up. They tell me that the banks will do well looking forward. Again, only time will tell.

The next thing people are looking at is healthcare, and the reason they’re looking at healthcare is, and I’ll show you an ETF on that. They’re looking at healthcare because of the demographics of our nation. When you’re above 65 you needs a lot of healthcare. When you’re above 75 you need really a lot of healthcare. Demographics are working here in the US. So there are people who are very constructive on this as well. This is the Vanguard financials. Again, similar to the other one is definitely turning back up a bit.

Let me get into the healthcare one real quick, and that is VHT, and I’ll put that up, and you can see how that’s going. You know United Healthcare and the drug companies, [Viser 00:20:26], [Merc 00:20:26], and all those kind of guys. Johnson and Johnson. As you can see, it’s not been a big place to be, so financials, and then you’ve got your healthcare, and then two other sectors that seem to be kind of distant places to park money. The other one being the area of industrials. That’s on a vanguard, and it’s VIS. If you noticed Boeing has done extremely well lately, and so has this industrial sector. So there you go, let me show you that, there you go again. Bottomed out at 110, majority at 140.

So again, there’s money coming into the financials to a certain degree. Money coming into the industrials a lot, and money coming into healthcare, and then the other one that could be a hedge on inflation as well would be your energy, and with regards to energy, an ETF that you could look at, again, I’m showing you one example, there’s millions out there, is the Vanguard. Pays 3% dividend right now in the yield, nothing wrong with that, and certainly again, there’s money coming in. So the banks and the energy have turned, but not really run, and obviously the healthcare and the industrials have definitely had a run. But those are four sectors that have pretty good stories behind them, and again those are four sectors if you’re an investor that you might want to sniff around if you’re looking at sectors that look like they’re doing pretty good.

All right, let’s see what else is going on in the world here with regards to high yield. This is something that looks like it’s gotten ahead of itself again. Goes to take a look at the high yield market. Now this is companies obviously that your balance sheets, and that’s why they are called jump bots. Now they pay a better yield than the regular money market, et cetera because of the risk. 546 is the yield on this HYG. You can see a big volume sell off, and obviously again, when everybody gets out, who’s left? Just buyers, right? Because after you sell out like this, and of course after the fed said they were pausing, and the stock market goes up, these people who are all short, they want to get back in. People who have been on the sideline want to get back in, and there’s no sellers, and there you go, boom, right back to 85.

This neighborhood between 85, 86, because the volume has been so low, you can see the volume here compared to the selling. That could turn into selling if the stock market is not going to get above 2800 and start coming back down, and if you’re looking at a situation where they change the tide and they start looking at these corporate bonds. Now again, last year in December, there was no issuance of high yield, none. Now the stock market rebounds and everybody’s coming back to market. The other thing that’s interesting in the corporate world is the buybacks. We hit record buybacks in 2018 because that’s where the money from the tax savings went. It didn’t go to increasing salaries to any degree, capital spending, no. They went back and bought their own stocks. What does that do? It increase or helps their PE ratios, and of course if your stock goes up and you have stock options you’re gonna have a better chance of exercising them, right?

So there’s a lot of good reasons for management to buyback their own stock, and a lot of it may not be for the good of the whole company. But that’s just an opinion, there’s others out there. But again, this year, we’re even going bigger because they’ve announced I think 120 billion more of buybacks. Now I look back at a chart that Bloomberg put up there, and when these guys are buying back tons of stock, it’s sometimes at the highs of the market. In other words in 2000 before the big drop, they were buying a ton of their stock back. In 2008 area, they were buying a ton of their stock back. Last year and this year? They’re buying a ton of their stock back. Again, so as an indicator, I would consider it to be an indicator that we’re somewhat near a high point in stocks because when these guys start buying a bunch of their stock back historically, it’s going to be a great time to be selling it.

Again, during the big drops we say in subsequent years, they were not buying their stock back. So that’s another indicator to me that it’s not that great. Again, after they get the China deal done, there’s not many more rabbits to come out of the hat of the administration. They already played the card on tax cuts, and now they’re playing the China deal, and then they played the new deal with Mexico and Canada, so I don’t know how many rabbits are left to come out of the hat. In fact the rabbits may start going back in the hat when we start seeing the deficit going through the roof because we’re at 22 trillion on the national debt, it’s up 10% in the last two years. That seemed like an accelerating situation.

I don’t think Mr. Trump has a tremendous amount of respect for debt because he comes from the real estate area where they borrow money hand over first and if things don’t work out, they just default on the loans. Case in point what happened down in Atlantic City where all those loans were made, and all those casinos were made, and when they went in the toilet, he went back to New York and everybody was left holding the bag. I am concerned, and everyone should be concerned that there’s going to be a repeat of that behavior, only this time with a tremendous amount of debt called the national debt. So at any rate, there are other things that could be happening that would change the tune down the road, but right now like I told you, we got above 2720 on the SMP, looks like we’re making a run for 2800. If we get above that, the next run could very easily be to the highs, and that could all come with a by the rumor, sell the fact with the China deal that’s supposed to be coming down the pipe.

Let’s see if there’s anything else I can show you here with regard to agriculture, okay? This is something that many of you may not be watching, but one of the big things to supposedly come out of the China deal is supposed to be them buying our soy beans and natural gas. So here’s the story on the soy beans, and you can see the trading at 920. Now you can also see the low is 850, and hang on a second here so I can jig this thing up real quick, and this is the last thing I got for you. Look at the volume right now. The volume seems to be picking up tremendously. I think if we get above 950 and they strike a deal, it could really get going pretty good. If they have no deal or whatever and it breaks under nine, so this would be a situation on a strategy basis. If you went out a year and looked at the calls above the market and the puts underneath the market, you’d have limited risk on both sides, and you’d be betting on volatility. If that were to be something that works out, that could be very good.

So that would be something to investigate, a strangle position in the soy bean area. Limited risk, but good reward if it got volatile. Okay, I got to wrap up now. Today is the 15th of February and 2019, so this is the show wrapped up right now. Again, contact me very easily. [email protected]. Have any questions, comments, you want to talk about anything, again, give me a quick email and we’ll do it. Until next week, I want to wish you all the best of trading, the best of luck, have a great week. This is Jim Kenney signing out, and again, we’ll be back with you next Friday.

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