In This Issue:
Dear Momentum Options Subscriber,
The bulls stretched their winning streak to six-straight weeks despite a sloppy finish last Friday. Volatility stayed slightly elevated amid the “Fed-speak” and mixed earnings, and the bears will try to hold near-term resistance this week.
The trading range that ensued following last Monday’s push past prior resistance is holding fresh support. This is typically a bullish sign, and Friday’s rebound makes the case for higher highs into the U.S. Thanksgiving holiday and possibly Christmas.
The Dow advanced 47 points, or 0.3%, to finish at 17,910 on Friday. The blue chips traded to a low of 17,768 shortly after the open, with support at 17,800 getting stretched. Backup support is at 17,600 and the 200-day moving average. The rebound to 17,912 ahead of the closing bell fell shy of resistance at 18,000. A move above this level should get 18,350 and all-time highs in play.
The S&P 500 slipped a point, or 0.03%, to close at 2,099. The index made a brief appearance into positive territory after reaching 2,101 on the open. Resistance at 2,100 held tight, but there are additional hurdles at 2,120-2,125. A close above the latter could lead to 2,150. The 52-week high is at 2,134. The fade to 2,083 shortly after the open held near-term support at 2,080-2,075. A close below the latter could lead to 2,060 and the 200-day moving average.
The Nasdaq gained 19 points, or 0.4%, to settle at 5,147. The tech index tested support at 5,100-5,075 following a trip to 5,092 half an hour after the opening bell. Additional help is at 5,050-5,000, followed by 4,950 and the 100- and 200-day moving averages. The index hugged its flat line into the final hour of trading before closing at its peak going into the weekend. Short-term resistance is at 5,150-5,200. A close above the latter will likely lead to a test of the all-time high just below 5,232.
The Russell 2000 added 9 points, or 0.8%, to end at 1,199. The small-caps traded down to 1,181 on Friday’s open, with support at 1,180-1,175 holding firm. A close below 1,175 could lead to a retest of 1,160-1,150 and the 50-day moving average. The steady climb to 1,199.96 into the close fell shy of resistance at 1,200. The bulls held the 100-day moving average and will likely challenge 1,215-1,225 and the 200-day moving average on a close above 1,200.
The S&P 500 Volatility Index ($VIX, 14.33, down 0.72) spiked to 16 on the opening onslaught, with the bulls holding 16.50-17.50 and the 200-day moving average. The drop to 14.32 and the close below 15 were positive signs, but the VIX needs to get below 13.50-12.50 to confirm that all-time highs are back in play. I’ll have more on the VIX in a moment.
The bulls made a strong move toward fresh 52-week and all-time highs following last week’s run past the market’s upper resistance levels. Three of the major indices are showing gains for the year, and the small-caps are within spitting distance of erasing their losses.
The Dow is up 87 points, or 0.5%, while the S&P 500 has gained 40 points, or 2%, year to date. The Nasdaq has been the clear winner with its 411-point, or 8.7%, advance. Meanwhile, the Russell 2000 is just 5 points away, or 0.5%, from returning to positive territory for 2015.
The 50-day moving averages on the aforementioned indices have curled higher and are showing strength. It was almost a given that the October rally could push upper resistance along with the 200-day moving averages, and this past week was all about holding these levels.
The small-caps index hasn’t gone this far not to test 1,200 and the 200-day moving average, but its all-time high is at 1,296. That is another 9% away and begs the question of whether the index will also test its all-time high if the other major indices break through to their record highs.
The small caps tend to outperform larger-cap stocks when there is consistent and strong economic growth. Although economic numbers are improving, the U.S. has struggled to maintain momentum in a number of key areas. This may explain some of the sector rotation we have seen throughout the year.
Small-cap growth stocks are also riskier than large-cap value stocks, but they tend to outperform when volatility is low. With the VIX on the verge of a breakdown, it’s possible that the small caps could lead a year-end rally, which is something I said to watch for last week.
I have talked about the possibility of the VIX trading into the single-digits this year, and the Aug. 5 low reached 10.88 before closing above 12.50. I warned then that the market was setting up for a possible pullback. The bottom came three weeks later, with the VIX closing above 40 at 40.72 on Aug. 24.
This is why the 12.50 level is so important for the bulls to recover. If they do, it is still possible that the VIX could fall below 10 this year on a rally to all-time highs. The VIX could hang around in the single-digits for a few weeks or perhaps months and, by then, we would know when a true market top might be in.
I also highlighted the U.S. dollar ($USD, $99.26, up $1.21) and said to watch for a breakout, as the technical setup looked bullish. This could be a bearish development for fourth-quarter, large-cap multinationals’ earnings. However, the move backed support for the small caps, with the dollar surging to its highest level in seven months.
The rotation back into the small-caps could help broaden the current rally, but, again, that is something we will have to watch for when January’s fourth-quarter earnings are released.
The transports are holding support, and a rally in the sector could also lead to higher stock prices in general. The Dow Jones Transportation Average ($TRAN, 8,241, up 61) has been holding its 100-day moving average this month following tests of the 50-day moving average throughout October.
The mini trading range from last week is showing consolidation, and the 50-day moving average is curling higher. A close above 8,300-8,325 would be a clear signal that a test to 8,400-8,450 and the 200-day moving average is coming. A move below 8,100-8,000 would be damaging and a bearish sign.
If the transports can clear 8,300, I will be watching the action in United Parcel Service (UPS, $104.99, up $0.76) as a possible way to go “long” the sector. Shares made a nice run past $107 heading into the company’s earnings announcement in October, but they pulled back after revenue came in slightly lower.
UPS reported a profit of $1.39 a share on revenue of $14.24 billion. Analysts were looking for $1.37 a share on revenue of $14.43 billion. The good news is that the company reaffirmed its full-year guidance of $5.05-$5.30 a share and said it was confident it would hit the higher end of that range. The company expects to complete 10% more deliveries between the U.S. Thanksgiving and New Year’s Day than it did last year.
The chart for UPS shows “golden crosses” formed in October, with the 50- and 100-day moving averages crossing above the 200-day moving average.
If shares can clear $106-$107 during the near term, the UPS December 110 calls (UPS151218C00110000, $0.30, up $0.03) are $6 out of the money and look “cheap” at current levels. The breakeven point for the trade would be if UPS shares trade up to $110.30, technically, by Dec. 18. These calls would double if UPS trades above $110.60.
The time frame of five weeks on the aforementioned calls makes me a little nervous though, which is why I’m also looking at the UPS January (2016) 110 calls (UPS160115C00110000, $0.75, up $0.15). This would add nearly another month of time for the trade to play out, with a breakeven point if UPS shares trade up to $110.75, technically, by mid-January 2016. If shares trade to $111.50, these calls would also double. The 52-week high for UPS is north of $114.
The bullish setup on UPS would turn bearish if shares fail to hold $100 going forward. A move below $102 would be the signal to go “short” using put options. If I take action on UPS this week, I will be sure to send out a Trade Alert.
There were a number of slick-talking pros who predicted a nasty selloff would occur in October, and the exact opposite happened. I have repeatedly said during the years that it is very difficult to call market tops and bottoms, which is why I like playing the trend. Trends are bullish and bearish by nature, so knowing how to use both sides of the playbook can significantly help your trading results.
Buying stocks or call options in bull markets and shorting stocks or using puts in bear markets is my only investment “philosophy.” I’m neither bullish nor bearish by nature, so this helps me keep my emotions in check.
While I’m still rooting for the bulls to make new market highs, I also can’t wait until the next selloff comes, as it will likely be more dramatic than the one we saw during the summer. With the major averages near their summer highs, a continued breakout rally or sudden breakdown could be right around the corner.
We are still in a secular bull market that I expect to last into 2016. At some point, valuations will reset, and presidential election years can be shaky as far as market direction. For now, let the good times roll, as it appears the bulls are in control.
With that said, I have a Trade Alert listed below for our position in the Financial Select Sector SPDR (XLF) that has been on “hold,” so let’s go take a look.
From desk to press, futures look like this: Dow (-43); S&P 500 (-6); Nasdaq 100 (-19); Russell (-3).
Momentum Options Play List
Closed Momentum Options Trades for 2015: 92-36-2 (71%). 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 8:00 a.m. EST.
I hereby disclose that I will be participating in the following trade(s). Every 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 portfolio.
Hilton Worldwide Holdings (HLT, $25.64, down $0.03)
HLT December 27 calls (HLT151218C00027000, $0.45, flat)
Entry Price: $0.45 (11/5/2015)
Exit Target: $1.00
Stop Target: None
Action: Hilton recently matched Wall Street’s estimates for earnings of $0.23 a share, while revenue of $2.9 billion came in higher than forecasts for $2.87 billion.
Looking ahead, the company sees current-quarter earnings of $0.21-$0.23 a share versus estimates for $0.22 a share. For 2015, Hilton forecast earnings of $0.81-$0.83 a share against analyst estimates for $0.82 a share.
Hilton didn’t give any hard numbers for next year, but the company said that revenue per available room, or RevPAR, would increase 4%-6%. RevPAR is a fancy term that calculates revenue by the total number of rooms and the number of days within the time period.
Hilton is a premium name, and it is expanding its pipeline, as its global system of rooms is expected to expand by between 45,000 and 50,000 on an overall basis.
M&A speculation is heating up in the hotel/lodging sector, and I think Starwood Hotels (HOT, $77.75, flat) is the most attractive name at the moment. Current rumors have Hyatt (H) in advanced talks to acquire Starwood. However, in late October, the Wall Street Journal reported that there were three possible Chinese suitors interested in Starwood Hotels.
If Hyatt is the lead candidate to acquire Starwood, the other Chinese bidders could seek an alternative, and Hilton would make perfect sense. Earlier this year, it was rumored that Chinese investors approached Blackstone (BX) about its controlling stake in Hilton and offered up to $45 a share.
To be clear, this trade is based solely on technical and fundamental analysis, but I do like the takeover chatter within the industry.
Another reason I like this trade is that there is the possibility of a Hilton REIT (Real Estate Investment Trust) spinoff. The company is committed to returning cash to its shareholders and recently announced a $0.07 quarterly dividend. While the current dividend makes for a paltry 1% yield, a tax-free spinoff of Hilton’s company-owned properties could add another $3-$4 in share value.
A REIT spinoff is only speculation as well, but it would be part of a trend that has been developing recently. MGM Resorts recently announced plans to convert to a REIT structure.
Hilton shares are down nearly 20% from their 52-week high of $31.60, and they just missed holding the 100-day moving average into Friday’s close. Near-term resistance is at $26-$26.50. Support is at $25, followed by $24.50 and the 50-day moving average, which is curling higher.
The 200-day moving average north of $27 is also flattening out, and that is a level I expect shares to clear by the end of the year. If shares test $28 by Dec. 20, these options will easily double from current levels.
iShares Russell 2000 (IWM, $119.22, up $0.84)
IWM December 124 calls (IWM151218C00124000, $0.70, up $0.14)
Entry Price: $0.58 (11/5/2015)
Exit Target: $1.20
Stop Target: None
Action: Short-term resistance is at $120 and the 200-day moving average. A close above this level could lead to a run to $124-$126 over the near term. Support is at $118-$117.50 and the 100-day moving average.
Comcast (CMCSA, $61.61, down $0.20)
CMCSA December 65 calls (CMCSA151218C00065000, $0.55, down $0.08)
Entry Price: $0.74 (11/3/2015)
Exit Target: $1.50
Stop Target: None
Action: Friday’s low reached $60.83. Near-term support is at $61-$60 and the 100-day moving average. Short-term resistance is at $62-$62.50.
You can read my detailed write-up on CMCSA in the Nov. 4 Pre-Market Update.
Kohl’s (KSS, $46.57, down $0.09)
KSS November 42.50 puts (KSS151120P00042500, $0.54, down $0.06)
Entry Price: $0.95 (10/7/2015)
Exit Target: $1.90
Stop Target: None
Action: Support is at $46-$45. Resistance is at $47.50-$48 and the 50-day moving average.
Earnings are due to be released on Thursday, Nov. 12, before the market opens, which will be the catalyst that will make or break this trade. I’m looking for a lousy report from Kohl’s, with a possible test to $40 coming afterwards. An earnings beat could push shares toward $50.
Corning (GLW, $18.92, down $0.14)
GLW November 19 calls (GLW151120C00019000, $0.27, down $0.13)
Entry Price: $0.60 (9/16/2015)
Exit Target: $1.20
Stop Target: None
Action: Resistance is at $19-$19.25. Support is at $18.25-$18 and the 100-day moving average.
This trade from September still has a chance to break even or possibly make us a profit if shares can clear $19.60. The 200-day moving average is just north of $20, which is a level I think can be tested by the time these options expire.
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.
Financial Select Sector SPDR (XLF) November 22 puts (from 9/24/2015) — I wanted to hold this trade open last week even though the premium has nearly evaporated. Besides KSS, this was our last remaining bearish trade that I used as “protection” in September that didn’t work out. The financials could lead the market’s next leg higher, so I recommend that you sell to close the XLF November 22 puts at the open this morning. If the major moving averages and the financial stocks fail to hold up, we can revisit this story.
Editor and Chief Options Strategist