In This Issue:
Dear Momentum Options Subscriber,
The bears got the weekly win and made Wall Street nervous to start the month of June. However, the damage was limited, as the small-caps and financial stocks offered clues that the bulls aren’t done running.
The Dow dipped 56 points, or 0.3%, to end at 17,849 on Friday. The blue-chips fell to a low of 17,822 but held support at 17,800 on the open. The rebound to 17,940 shortly afterward offered a good clue that the bulls would fight, but they failed to hold the 100-day moving average. There is additional risk to 17,600 and the 200-day moving average on a close below 17,800. Resistance is at 17,900-18,000 and the 50-day moving average. For the week, the Dow lost 161 points, or nearly 1%.
The S&P 500 slipped 3 points, or 0.1%, to settle at 2,092. The index tested a low of 2,085 at the start of trading, with support at 2,080-2,075 and the 100-day moving average holding. A close below the latter could lead to 2,050 and the 200-day moving average. Resistance is at 2,100 and the 50-day moving average, followed by 2,115-2,125. The index gave back 15 points, or less than 1%, last week.
The Nasdaq climbed 9 points, or 0.2%, to close at 5,068. Tech got bombed at the start of trading, as the bears pushed back-up support at 5,025-5,000 and the 50-day moving average. The trip to 5,025 was followed by a run to 5,075-5,100, with the bulls reaching 5,074. The drop below the 5,050 level was recovered and then some, which was a bullish sign. The next 50-point move will probably have the bulls or bears saying “uncle,” which could lead to a powerful breakout or breakdown sometime this month. For the week, the Nasdaq declined less than 2 points.
The Russell 2000 soared nearly 10 points, or 0.8%, to finish at 1,261. The small-caps showed the most strength on Friday after the bears pushed a low of 1,242. The bulls responded by recovering the 1,250 level shortly afterwards and making a beautiful run into the close to clear and hold 1,260. There is additional risk to 1,225-1,200 if and when 1,240 cracks, but the bulls are back on track to push fresh all-time highs. This was perhaps the most bullish clue from last week besides the financial stocks. The index looks poised to test 1,275-1,280 this week, with a possible run a 1,300 into late June or early July. The small-caps gained 15 points for the week, or more than 1%.
The S&P 500 Volatility Index ($VIX, 14.21, down 0.50) was squeezed past 15 again, as the bears pushed a high of 15.65. The bulls held the 15 level for the 19th-straight session, and I have repeatedly said that we won’t turn bearish until the VIX closes above 17.50. The bulls aren’t out of the woods, however, as they need to get the VIX below 13.50-12.50 to get new market highs in play.
For new subscribers, I spend a ton of time analyzing the VIX because it continues to be a reliable indicator. For longer-term subscribers that have followed me for years, the VIX has been our bread-and-butter for predicting trading ranges, breakouts and breakdowns. For the knuckleheads who say the VIX is broken, don’t stop believing, and keep the bad press coming.
The market noise and selloff hype picked up steam last week, but the overall results show a much different and still-bright picture. Of course, the Fed talk of a possible interest hike reached a boil following Friday’s jobs report. The headlines tilted toward job growth acceleration in May, with wages ticking higher.
The good news had the talking heads predicting an interest rate hike in September, while others were guessing for a year-end bump. I have mentioned that the financial stocks have some of corporate America’s best balance sheets following the bank stress tests from earlier this year and that they would benefit from a rising-rate environment. The group was strong on Friday.
The Fed has been “warning” us that it will raise rates this year and, while most of the suits-and-ties have predicted that it could come in September, October or December, I have been on record saying that I wouldn’t be surprised to see a quarter-point rate hike in June.
The Fed’s next meeting is next week, June 16-17, and the two-day event could produce some fireworks. While the threshold to raise rates is very low and the bias to do so very high, it would be the perfect time to throw the market a curveball.
The talk is that the indexes will correct once the Fed pulls the trigger on hiking rates. I haven’t bought into this theory, as I have said it would benefit the banks. A rising-rate environment could also spur a housing recovery we haven’t seen in a while, as buyers on the fence convert to home ownership.
I have always considered owning a house a priority because it is your home base in this world. For the people that want to rent, that is fine, but renting really isn’t a bill you want to be paying when you are retired and in your golden years.
Ben Bernanke recently said that an interest rate hike would be a good move and should be viewed as a positive sign. In late May, he echoed these words:
“I don’t know when (the rate hike will come), but when that begins, that’s good news, not bad news because it means the U.S. economy is strong enough.”
I know Big Ben says he does not know when rates will rise, but surely he has a clue (sly grin). Perhaps his words were another “warning shot” to prepare Wall Street for a rate hike. I have mentioned that the Fed hasn’t hiked rates in nine years.
The Greece debt crisis turned out to be another joke, as the country missed another due date. A 300-million euro payment was skipped, as Greece said they would now make the four payments due this month, totaling 1.6 billion euros, by June 30.
With even bigger payments looming in the months ahead, it’s time for this madness to end as well. The European Commission needs to cut its continued losses and unwind the country off of the euro. This headwind might cause some short-term stress, but it would be beneficial for our stock market in the long term.
Apple (AAPL, $128.65, down $0.71) could sway tech higher or lower, as its developer conference kicks off this week. The stock has the fifth-biggest price weighting in the Dow and will have a major impact on the price action. I said throughout 2014 that Apple needed to be added to the Dow if the index were to reach 20,000 in 2015 or early 2016.
As a side note, earlier this year, activist investor Carl Icahn said that a market correction was looming and a pullback was coming. However, he has also said that Apple shares are worth $200. I might not be as smart as Carl, but my simple math tells me that Apple at $200 should translate to Dow 20,000.
Goldman Sachs (GS, $210.45, up $1.58), the heaviest Dow component, triggered a fresh 52-week peak just south of $212 on Friday. We have exposure to the financial sector and, while I don’t usually trade options on stocks over $100, I do like the GS July 220 calls (GS150717C00220000, $1.56, up $0.28) as a possible short-term trade. The GS July 225 calls (GS150717C00225000, $0.65, up $0.05) also look tempting.
Shares of “Golden Slacks” could make a run into the $230-$240 zone by mid-July, and the aforementioned options would be gold mines on the possibly explosive move. If shares were to reach $230 by mid-July, the aforementioned options would be $10 and $5 in the money, respectively. This would represent massive triple-digit gains, and the risk/reward looks compelling.
The big debate besides interest rates and Greece is how overvalued the market is. While it makes great fodder, even if the market is overvalued, it has been at more extreme levels in past years. Price action is more important than peoples’ opinions on the market.
I have talked about the suits-and-ties, celebrities and money-fund managers that have repeatedly said a market “top” is in during the past few years. I have also mentioned the number of times they have changed their minds after begging for a 10% correction. However, when there has been a 5%-8% dip, these so-called market pundits have failed to step up to the plate.
Right now, the S&P 500 currently trades at 18 or 19 times earnings. The Nasdaq is trading at roughly 33 times earnings. At the peak of the dot-com bubble back in 2000, the S&P was trading at a much higher double-digit earnings multiple, while tech was pushing a multiple in the high hundreds. In other words, the market can continue to be overvalued, and is nowhere near past levels of overvalued hype.
This week promises to be exciting, as does the rest of June. The current sector rotation and divergence has Wall Street confused once again, but they don’t study the market like I do. Retail and restaurant stocks have taken a beating on the rise in oil prices, or so analysts say, but I have been highlighting the strength in the financial and small-cap stocks.
I have talked about a run to all-time highs continuing into mid-June, and here we are. Of course, I would love to say that a summer rally is also on the horizon, but hot summer days can create tension and volatility and make the Fed zombies rise.
While I won’t be afraid to go short or use put options if and when the mighty selloff arrives, I still remain bullish, and our current trades are in great shape.
From desk to press, futures look like this: Dow (-7); S&P 500 (-2); Nasdaq 100 (-4).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 57-18-1 (75%). All trades are dated and time stamped so new subscribers can look at the past history to see how the trades have played out.
Do not risk more than 5% of your trading account on any one trade but do try to take all of the trades. Please remember, all “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless I list one. I will send out a “Profit Alert” or “New Trade” if I want you to close a position or if a new trade comes out. Otherwise, follow instructions at all times in the 9 a.m. and 12 p.m. – 1 p.m. updates. Also, I will usually give you a heads-up if I think I’m going to send an email outside of these time frames.
All prices given in this update are current as of 8:30 a.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every new Momentum Options recommendation is listed with the price at which I entered my own position. If the price is slightly different than my recommended entry or exit price when you receive the alert, don’t let that keep you from getting into or out of a trade. Occasionally, you might even get a better “fill” price than what is posted in the Open Trades and Closed Trades.
Wells Fargo (WFC, $56.61, up $0.47)
WFC July 60 calls (WFC150717C00060000, $0.21, up $0.07)
Entry Price: $0.20 (6/5/2015)
Exit Target: $0.50
Stop Target: None
Action: Shares traded to a fresh 52-week and all-time high of $57.22 on Friday. The major moving averages are starting to curl higher following a couple months of flat-lining. This appears to be a bullish sign, which is why I love the breakout into blue-sky territory.
The breakeven point for the trade is $60.20, technically, which is where the stock will need to be by mid-July. At $61, the options would be $1 in the money. Momentum could carry shares to $60, but a near-term run to $58.50-$59 should be good enough to double (or triple) our call options on the move.
Near-term support is at $56.50, which is where I would like to see a new floor of support form. However, there is risk to $56-$55.50 on a backtest. The July options have over a month before they expire, so we have plenty of time for the trade to play out.
Rigel Pharmaceuticals (RIGL, $3.68, up $0.10)
RIGL September 5 calls (RIGL150918C00005000, $0.55, up $0.09)
Entry Price: $0.40 (6/4/2015)
Exit Target: $0.80
Stop Target: None
Action: Resistance is at $3.75, followed by $4 and the 50-day moving average. Fresh support is at $3.50, followed by $3.30-$3.25 and the 100-day moving average.
The “golden crosses” formed in March and April, with the 50- and 100-day moving averages crossing above the 200-day moving average. These are bullish signs that a major breakout is coming.
You can read my detailed write-up on RIGL in the June 5 Pre-Market Update.
Sony (SNE, $30.05, up $0.03)
SNE July 33 calls (SNE150717C00033000, $0.25, flat)
Entry Price: $0.45 (6/1/2015)
Exit Target: $0.90
Stop Target: None
Action: Resistance is at $30.50 and the 50-day moving average. A close above $31 should get $32-$33 and fresh 52-week highs in play. Support is at $30, with risk to $28 and the 100-day moving average on a close below this level.
Rambus (RMBS, $15.20, down $0.06)
RMBS July 15 calls (RMBS150717C00015000, $0.85, flat)
Entry Price: $0.50 (5/27/2015)
Exit Target: $1.30 (Limit Order on half)
Stop Target: $0.65 (Stop Limit)
RMBS August 16 calls (RMBS150821C00016000, $0.70, flat)
Entry Price: $0.43 (5/27/2015)
Exit Target: $0.90
Stop Target: $0.55 (Stop Limit)
Action: Resistance is at $15.50. A close above this level could lead to a run to $17-$18. Near-term support is at $15, and a dip below $14.75 will likely trigger the Stop Limits.
Dot Hill Systems (HILL, $7.43, down $0.06)
HILL September 7.50 calls (HILL150918C00007500, $0.80, flat)
Entry Price: $0.55 (5/21/2015)
Exit Target: $1.10
Stop Target: $0.57 (Stop Limit)
HILL December 7.50 calls (HILL151218C00007500, $1.15, flat)
Entry Price: $0.80 (5/21/2015)
Exit Target: $1.60
Stop Target: $0.85 (Stop Limit)
Action: Shares tested $7.50 and the 52-week high on Friday. Resistance is at $7.50-$7.75, and a run to $8-$10 appears to be in the works. Support is at $7.25-$7.
Note: I noticed last week that the option chain has now listed December 12.50 call options for HILL. This is a very bullish sign that Wall Street won’t catch but astute investors might. Astute might sound like a fancy word, but, in reality, it’s what studying options for 20 years will do for you.
I talked about the explosive move HILL made a few years ago, and this is another bullish sign. You can read my full update on HILL and check out its 15-year chart in the May 22 Pre-Market Update.
iShares Russell 2000 (IWM, $125.40, up $0.90)
IWM June 128 calls (IWM150619C00128000, $0.40, up $0.09)
Entry Price: $0.70 (5/19/2015)
Exit Target: $0.90 (Limit Order)
Stop Target: None
Action: Resistance is at $126-$127. Short-term support is at $124 and the 50-day moving average. I would like to be out of this trade by Friday.
Trades on Hold — other 2015 Portfolio Open positions (1): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when the trade closes or if the options expire. Click on the Open Trades and Closed Trades pages to see all open and closed positions.
BlackBerry (BBRY) June 13 calls (from March 2015) — I will likely close this trade by Friday, but I could also add some July or August options, as I like the technical setup shares are in now. However, shares need to clear $10 first.
Editor and Chief Options Strategist