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.

November Weakness

November usually begins the stock markets best six month period. Already next week is options expiration week (again, a usually bullish period with the DOW outperforming other indexes (see here for details).

However, the bullish tendency may not play out so dramatically this year. First of all, we are headed into the weakest days of the month, which this year correspond with options expiration week (more details here.

Second, volatility is rising, but has not yet entered a spiking stage. Although still at low levels, any rising trend should be taken as a warning sign when the markets have traded with such low volatility for so long.

Third, according to McMillan's research, weighted Put/Call ratios have moved to sell signals from extremely low levels. This is likely to signify SPX will struggle in the near term. Recent market leaders, Facebook and Netflix, P/C ratios rolled over to sell signals from very low levels this week. This will likely mean a change of leadership in the market going forward - potentially by oil stocks as they have been outperforming along with consumer staples and real estate stocks.

September Monthly Market Review

The S&P 500 finished the third quarter by registering yet another new high Friday to mark its 50th occurrence this year as the bull market continues in US stocks. The main US index appreciated by more than 4% over the past three month - its 8th straight quarter of gains. Recently, moves have been tiny fluctuating just 0.3% daily. As such, the CBOE Volatility Index (VIX) is again below 10. The Dow Industrials ($DJI) captured a 5.2% improvement during the same time-span. The NASDAQ grew 5.7% even with Apple’s (AAPL) recent struggles to see its fifth straight quarterly improvement.

Globally, the STOXX Europe 600 captured a more modest 2.3% gain over the last quarter with better numbers coming out of Europe. The Japanese Nikkei had its best month of the year with a 3.6% surge in September. Australia has not fared nearly as well after falling for a fifth straight month with the weakness in commodities (especially iron-ore). Emerging markets were also weaker recently.

Gold Futures recorded a disappointing 2.8% loss for the month of September, which is the largest single month drop in nearly two years after the U.S. dollar finally appreciated as the long awaited US tax reform pressuring the 10 year Treasuries back above 2.3%. Crude oil witnessed a 12% improvement over the third quarter with most of those gains coming in September alone as all 4 weeks of the month were positive and pushed Oil Futures back up above $50 a barrel.

The S&P 500 was strong in the second and fourth weeks of the month. It is extended nicely above its 50 day moving average while moving bullishly higher.

September's greatest moves came from the Energy and Financial Sectors, followed closely by the Materials. Utilities and Consumer Staples fell. This sector breakdown is bullish for the market going forward.

The US medium and small companies did extremely well during the second and fourth weeks of the month, also. They have been leading the market higher which is bullish for US equities. After recent weakness in August, the 50 day moving averages are now curling higher as they maintain higher than the 200 day moving averages.

Non-US developed market traded choppy but higher during September. 

Emerging markets did not perform as well in September. They sold off during the third and fourth weeks, and spent two days below the 50 day moving average before bouncing back on the last day of the month. This makes emerging markets only tentatively bullish for October. 

Real Estate was choppy until it broke down in the third week of the month also. It now trades below its 50 day moving after bouncing off the low prices of August. While this is not outright bearish, Real Estate looks like it may see some sideways action in October. 

As noted in the S&P 500 sector graph above, commodity producers (energy and building materials companies) outperformed in September. Most of the gains were made in the first two weeks of the month as a continuation from the end of August. 

Commodity prices did not support the move seen in the graph above. USCI could test its 50 day moving average in October. 

US government bonds pulled back in the last three weeks of the month. After an initial test of the 50 day moving average, AGG has now traded three days below it. This could be a set up for a stronger bearish move in bonds, which would support the continuation of a bullish move in equities. 

Inflation indexed bonds also suffered in last three weeks and are now trading below support after a failed bounce off the 50 day moving average.

Non -US bonds look weak. BNDX has made a break of its 50 day moving average and now traded three consecutive days below that level. All the bonds have upward sloping 50 day moving average that are above their 200 day moving averages, so bearishness is not overwhelming at this point.

Much of the bond's bearishness can be explained by USD bullishness, as witnessed in UUP's action in the last two weeks of the month. UUP has now traded above its downward sloping 50 day moving average for 4 days. The strength of USD bearishness is weakening.

February Monthly Market Review

February was extremely bullish for the US equity markets, Real Estate, and even bonds. Commodities and Natural Resource companies were weak. Some new bullish trends are developing in bonds.

The S&P 500 really was strong during the middle of the month. It saw a bit of consolidation towards month end.

The US mid-caps showed more of a pullback at month's end, but still had pronounced gains for February. 

The US small-caps had a false start to the month. As with the larger cap stocks in the US, mid month was bullish. About half of the month's gains were given back in the last five trading days of February, however. 

The non-US markets also did well, similar to the smaller caps in the US, after a flat start and some decent gains, the last three days sold off. 

Emerging Markets saw strength up until the last three days of the month also. 

Real Estate had a big bullish move in February. RWO broke above its 200-day moving average and is dragging its 50-day moving average up behind it. This looks like a new bullish trend is developing. 

Natural Resource companies led the sell off at the end of the month. The HAP ETF below is sitting right on its 50-day moving average. It must hold this to remain a bullish momentum. 

Commodities are still in a downtrend, with USCIs staying below its 50-day moving average after a mid-month test of that level. 

Bonds are starting a new bullish trend, it appears. The world bond ETF - AGG - has tested its 50-day moving average twice now, and both times has bounced very bullishly. The 50-day moving average is rounding up.

Non-US bonds also performed well in February. The strength came in the latter part of the month. BNDX broke above its 50-day moving average which is also now moving higher.

US inflation indexed bonds may also be starting an uptrend. The TIP ETF has traded above its 200-day moving average. The 50-day moving average is trending higher and could cross above the 200-day average. This would signify a new bullish trend. 

The USD is struggling to trade higher. UUP has witnessed resistance to any further gains above its now flattening 50-day moving average.

SPX rebounds for 6th positive close

All indexes sold off in the first hours of trading today, but rebounded and closed higher. This relentless bullish market is continues to press higher. NDX has now closed positive for 8 consecutive days.

The only signs of the market topping out soon are coming from the fact that the volatility indexes are buried at multi-month lows and the SKEW remains trading near or above 130 for almost a month now.

The VIX is below 11 again, while the 'older' measure of VIX, called VXO, now trades under 10. When the VIX trades below 11 and VXO trades below 10, these are usually good indicators that the market will retreat to levels much below where the market currently trades in the next months. In other words, VIX will rise soon from these levels.

As VIX falls, I bought some VIX 11 calls that expire in two weeks. I paid $1.45 for these, but after today's bullish reversal, they only trade for 85 cents. All the better to add more to the portfolio either tomorrow or later this week. 

As this is options expiration week, bullishness is not uncommon. It's what the market does at the end of this month is important. 

SPX is currently trading above its 4 standard deviation Bollinger Band based in implied volatility. If SPX closes below the 3 standard deviation BB level, around 2320 currently, this will give a strong sell signal to the market.