Earnings Trade on Agilient

Within a few days of my last post, SPX retested it March lows and has since again rebounded. Many indicators are looking much more positive since the rally has led to 7 stright days of positive gains. This is usually a sign further bullishness is ahead, although an immediate pause here can be expected.

 

DFEN fell apart several days after that last post and has since rebounded off the bottom line of its linear regression channel.



Earnings season is wrapping up. As of May 6th, 81% of the S&P500 companies have released Q1 earnings. So far, the blended earnings growth rate stands at +24.2%, and sales growth at +8.5%, which is excellent. However, the price reaction to many good earning reports started off very weak this time around, only to rebound recently. GOOG is a good example of this earnings seasons price reactions. The stock was down 5% after posting good earnings (EPS of $9.93 vs estimated $9.21) only to recover those losses completely within two weeks. 

Agilient Technologies (A) is posting earnings after market hours on Monday. Market Makers are pricing in just less than a $4 move on the stock. A May/June calendar spread is giving a it more room than that to the upside, showing that traders are bullishly biased on this stock. The calendar trader is offering a 3:1 reward to risk ratio, which is really nice. 

Graphing the breakeven points on this trade shows that the trade would only show losses after earnings if A trades below the recent level of support or makes an immediate all-time new high.

 

If this trade does give problems, we can adjust with a roll out to a June/July spread. 

Market Rebound

Recently, the US market internals have improved dramatically (VIX is falling, with a positive term structure), and a rebound has taken place. As the SPX approaches the 2710 gap area from March 19th, some pause could take place.

 

The defense sector is holding strong and likely to move higher with Trump's comments supporting "Buy American" initiative to allow more countries to buy more and bigger weapons from the U.S., according to Reuters. 

Look at DFEN - a triple leveraged Defense sector ETF. The stock is running up against its upper Bollinger Band and looks go higher if it can go above the recent down trending line on the chart. 

Ratheyon (RTN) has held up amazingly in the market sell off. It has now broken out to new highs. This supports the DFEN break out above, as RTN runs up its Bollinger Band. 

After the Drop Off

Friday and Monday produced some real damage to the markets. Now, however, there are a couple of buy signals that have emerged, along with some issues that still need to be resolved. This leads me to believe that the markets could stay choppy before finally moving higher.

First, the number of stocks currently above their 20-day moving averages is extremely low (<10%). Usually over the past 20 years, such readings signal intermediate term lows in the market (see second chart). In any case, these are rare events and should be monitored closely.

Second, VIX spiked to above 50 intraday on Monday, and has since fallen back to the mid-20s. This is a 21 day buy signal also, according to McMillan. However, until VXST closes below VIX, I am not going to call the next bullish phase of the SPX.

With McMillan's 21-day Put/Call Ratio averages curling higher from the lowest levels in years, a more bearish picture for the markets emerges. Until they roll back lower, the market could move sideways or even further down.

Also, the SKEW is still high, and actually closed at nearly 137 today. Traders are still buying loads of protection. SKEW readings for a new bull market need to come in below 120, or even better, below 115. Readings above 130 do not provide comfort that the bears are willing to give in.

While the market seems in a position to bounce back after two strong days of selling, everything is not yet bullish. Markets that have rallied are not the usual leaders, instead defense contractors and and industrial conglomerates rebounded recently.