MomentumOptions.com Pre-Market Update for 5/4/2020

Bears Growl to Start May

8:00am (EST)

The market  closed lower to start the month of May and on a decidely more downbeat note after a number of Tech earnings failed to impress Wall Street despite revenue topping expectations. Company uncertainty about the next 3 months along with pulling 2020 guidance cooled sentiment. 

Meanwhile, President Trump threatened China with new tariffs in retaliation for the coronavirus and causing fresh concerns over the increasing possibility of resurgent U.S./ China friction. The losses erased most of the weekly gains the bulls had built throughout the week with the bears getting their 2nd-straight overall weekly win.

The Russell 2000 was hit the hardest after tanking 3.8% while testing a low of 1,241. Crucial and upper support at 1,250-1,235 was breached but held with a move below the latter signaling a further retreat towards 1,225-1,210.

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The Nasdaq was hammered for a loss of 3.2% with the afternoon bottom reaching 8,566. Near-term and upper support at 8,600-8,550 was tripped but held with a close below the latter reopening risk towards 8,475-8,425 and the 200-day moving average.

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The S&P 500 sank 2.8% following the intraday fade to 2,821. Current and upper support at 2,825-2,800 was cracked but held with a close below the latter getting 2,775-2,750 and the 50-day moving average back in focus.

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The Dow was down 2.6% after testing a late session low of 23,645. Upper support at 23,750-23,500 was breached and failed to hold with a close below the latter and the 50-day moving average signaling additional weakness towards 23,250-23,000.

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For the week, the Nasdaq shed 0.3% while the Dow and the S&P 500 dipped 0.2%. The Russell 2000 climbed 2.3%. 

Energy lead sector weakness after plummeting 5.7% while Consumer Discretionary and Financials fell 3.7% and 3.2%, respectively. There were no sectors that showed strength.

Over the past 5 sessions, Energy (3.6%), Communication Services and Materials (1.9%) and Financials (1.5%) were the best performing positive sectors. Utilities (-4.2%), Healthcare (-2.5%) and Consumer Staples (-1.9%) were the weakest sectors.

In economic news, ISM Manufacturing Index dropped -7.6 points to 41.5 in April, versus forecasts for a print of 37.5, and follows the 1 point decline in March to 49.1. This represented the fastest pace of contraction on record, and is the lowest level since April 2009. Employment tumbled -16.3 points to 27.5 from 43.8 previously and is the weakest in over 70 years. The new orders component fell -15.1 points to 27.1 from 42.2. New export orders slid -11.3 points to 35.3 from 46.6. Imports inched up 0.6 points to 42.7 from 42.1. Prices paid fell -2.1 ticks to 35.3 from 37.4.

Construction Spending increased 0.9% in March, versus forecasts for a decline of -3.5%, and follows the -2.5% drop in February. Residential spending bounced 2.3% following the prior -4.7% drop while nonresidential spending dipped -0.1% versus February’s -0.9% decline. Private construction spending rose 0.7% following the prior -3.1% slide and public spending climbed 1.6% versus February’s -0.6% slip.

Baker-Hughes reported the U.S. rig count was down 57 rigs from last week to 408, with oil rigs off 53 to 325, gas rigs lower by 4 to 81, and miscellaneous rigs unchanged at 2. The U.S. Rig Count is down 582 rigs from last year’s count of 990, with oil rigs lower by 482, gas rigs off 102, and miscellaneous rigs up 2 to 2. The U.S. Offshore Rig Count is down 1 rig from last week to 16 and down 4 year-over-year. 

Dallas Fed Robert Kaplan believes the economy could contract as much as 30% annualized in Q2, and will shrink about 5% this year, even with a recovery in the second half of 2020. He said the unemployment rate could hit 20% this quarter and end the year in the 8%-10% range. In the near term, he thinks it’s more likely there will be disinflation over the short run. 

Kaplan confirmed rates are going to stay lower for longer and indicated the Fed is going to need to do more…to bridge this period. He went on to say the Fed is trying to use its lender of last resort capability to ensure functioning of the financial markets. He added the new Main Street program will offer relief but there will be a need for more fiscal stimulus to help the recovery.

The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 2-session slide to remain in a 13-session trading range with Friday’s high reaching $168.11. Lower resistance at $168-$168.50 was cleared but held with additional hurdles at $170-$170.50.

Current support remains at $167-$166.50. A close below the latter would start to signal a breakdown out of the current trading range with additional downside risk towards $165.50-$165.

RSI is back in a slight uptrend with resistance at 55-60 and the latter holding since mid-March. If cleared and held, there is upside towards 65-70. Key support remains at 50 and a level that has been holding since mid-April.

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The S&P 500 Volatility Index ($VIX) was up for the 2nd-straight session after gapping up to an intraday high of 39.57. New and lower resistance at 39.50-40 was breached but held with a move above the latter reopening upside risk towards 42-42.50.

Rising support is at 35.50-35 followed by 32.50-32.

RSI is in an uptrend with lower resistance at 45-50 holding. A close above the latter would signal additional momentum towards 55-60 and late March peaks. Support is at 40-35.

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The S&P 400 Mid Cap Index ($MID) fell for the 2nd-straight session following the intraday plunge to 1,573. Near-term and upper support at 1,575-1,550 was breached but held. A close below the latter and the 50-day moving average would be an ongoing bearish development with additional weakness towards 1,525-1,500.

Current and lowered resistance is at 1,600-1,625. Continued closes above the 1,650 level would be a more bullish signal for a retest towards 1,675-1,700 with last week’s high at 1,709.

RSI is in a downtrend with support at 50 and a level that has been holding since mid-April. A close below 50 would signal additional weakness towards 45-40. Resistance is at 55-60.

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The Financial Select Sector Spiders (XLF) extended its losing streak to 2-straight sessions after trading to a midday low of $21.91. Current and upper support at $22-$21.75 was breached but held. A close below the $21.50 level would signal additional weakness towards $21.25-$21.

Lowered resistance is at $22.50-$22.75 and the 50-day moving average with additional hurdles at $22.75-$23.

RSI is in a downtrend with upper support at 50-45 failing to hold. There is risk to 40-35 on a close below the latter. Resistance is at 55 and last week’s peak.

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The percentage of Nasdaq 100 stocks trading above the 50-day moving 

closed at 70.87% on Friday, down 13.59%. Prior and upper support at 70%-67.5% was challenged but held. A close below the latter reopens downside risk towards 65%-62.50%. Overbought levels remain in play with lowered resistance at 72.5%-75% and last week’s peak clearing the 90% level.

The percentage of S&P 500 stocks trading above the 200-day moving average average settled at 20.19%, down 3.96%. Oversold levels and upper support at 20%-17.5% were challenged but held with downside risk towards 15%-12.5% on a close below 17.5%. Resistance is at 22.5%-25%.

The Q1 earnings season is halfway completed with results from 277 S&P 500 members, or just over 55% of the index’s total membership, having announced. The flood of earnings releases continues this upcoming week, with more than 1,200 companies set to announce, including 156 S&P 500 members. By the end of the week, Q1 results from more than 85% of the index’s total membership will be in the books.

The results thus far have given Wall Street a good sense of the earnings impact of coronavirus related policies. This week will likely show another batch of companies that have either been hit hard by the pandemic or have proved to be relatively immune to its ravages, if not benefiting from it.

The Q1 results from 277 S&P 500 members that have reported numbers show total earnings are down -12.6% from the same period last year on 2.1% higher revenues, with 68.6% beating EPS and 63.9% topping revenue estimates.

The Q1 results thus far also show the opposite effects that results from the two largest sectors in the S&P 500 index, Finance and Technology, are having on the aggregate growth picture.

Had it not been for the Finance sector drag, Q1 earnings growth for the remaining S&P 500 companies at this stage would have been a lot better, thanks primarily to the Technology results thus far. Excluding the Finance sector, whose Q1 earnings for the companies that have reported already are down -39.9% on 3.7% higher revenues, earnings for the rest of S&P 500 companies that have reported would be down only -3.3% versus down -12.6% with Finance.

Meanwhile, Q1 earnings for Tech companies that have reported are up 6.2% from the same period last year on 4.5% higher revenues, with 74.3% besting EPS estimates and 71.5% ahead of revenue estimates. The proportion of Tech companies beating both EPS and revenue estimates is 62.9%, which compares to 48.4% for the S&P 500 index as a whole.

Excluding the Technology sector results, earnings for the rest of S&P 500 companies that have reported would be down -18.8% versus down -12.6% with Technology.

For Q1 as a whole, combining the 277 companies that have reported results already with estimates for the still-to-come results, total earnings are expected to be down -12.5% on 2.1% higher revenues.

I have updated our latest trade, CCL, from Friday afternoon. I could also have additional new trades at some point today so stay locked-and-loaded in case I take action.

Momentum Options Play List

Closed Momentum Options Trades for 2020: 19-5 (79%). All trades are dated and time stamped for verification. New subscribers can look at the past history to see how the trades have played out or to research our Track Records. 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 “Stops” entered to close any trades or “Limit 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 Daily‬ updates.

Carnival (CCL, $13.93, down $1.97)

Buy to Open CCL May 13 puts (CCL200515P00013000, $0.85, up $0.40)

Entry Price: $0.80 (5/1/2020)

Exit Target: $1.60

Return: 8%

Stop Target: None

Action: Friday’s low kissed $13.73 with upper support at $13.75-$13.50 getting breached but holding. Lowered resistance is at $14.25-$14.50.

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