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Market Conditions and Recommendations 2015 04 05

Updated on April 28, 2015

Overall Market/Indexes:

The S&P (2,066.96) and the DOW (17,763) both closed higher THURS (no trading on FRI), and up slightly for the week. However, both had been up much higher earlier in the week, but gave back most of those gains.

Both the S&P and the DOW have formed wedges on their daily charts. Both are also trading below their 20 and 50 day moving averages, and the 20 day moving average for both crossed below the 50 day moving average (also known as the Death Cross). Now, a wedge pattern can break out to either direction. It usually means that there is uncertainty in the market, as traders are waiting to decide if they see more potential in the market or more risk. So, once we break out (Above 2,120 or Below 2,039 on the S&P and Above 18,200 or Below 17,580 on the DOW) we should see a large move in the direction of the breakout.

Ratio of PUT premiums to CALL premiums (0.98 now vs. 1.06 last week) indicate option traders are pricing in slightly more risk to the upside (ie. expect prices to rise), but very close to being neutral.

P/E Ratio for the DOW is at 16.5.

Price-to-Book Value of DOW is at 4.96.

While the P/E ratio does not look overvalued to me from a long-term perspective, the combination of both of these reaching new 12 month highs indicates some overvaluation. Key would be whether earnings can continue to support these valuations. Any indication of a slowdown in earnings will have an outsized negative impact on the market. And earnings estimates for the 1st quarter have already started to get adjusted lower.

News/Commodities:

Oil is at $49.53, and has been trading near $50 for the last two weeks. Oil had been stabilizing around $50, but strengthening dollar (on news of interest rate rise) has lowered prices. We have seen increased volatility in oil prices, and global tensions could provide some support for oil prices.

Pending Home Sales reported last MON came in at a 12% growth over a year ago.

Consumer Confidence for MAR reported on TUE came in at 101.3, vs. an expected 96.0.

Nonfarm payrolls reported on FRI came in at 126k jobs created in MAR, vs. expectation for 244k.

Economic News/Events:

ISM Non-Manufacturing PMI (MAR) gets reported MON.

FOMC Minutes will be released on WED.

Initial Jobless Claims (APR 3) gets reported THURS.

Continuing Jobless Claims (MAR 27) gets reported THURS.

Earnings:

First qtr earnings season to kick off April 8th with Alcoa (AA).

OVERALL SUMMARY:

Signs are pointing towards a correction. Slowing GDP growth (Durable Goods Orders, strengthening dollar, geopolitical tensions, etc…) could begin taking a toll on earnings. The technical are also starting to point to a down turn in the markets. However, volume remains light – which shows that there is little conviction in the market. This could lead to fickle markets (ones that react to news and bounce around – increased volatility).

P/E Valuations don’t look too overvalued in light of earnings. However, any macroeconomic changes that could impact earnings could derail this uptrend and put tremendous downward pressure on the markets. Expectations for earnings and for GDP have been revised lower recently.

There is a definite short-term BEARISH bias currently.

Stock Screening Results:

Accelerating Leaders EQT

Higher on Inc Vol DLPH

Higher on Inc Vol KMX

Higher on Inc Vol M

New High on Inc Vol KMX

New High on Inc Vol M

Lower on Inc Vol MSI

Lower on Inc Vol UAL

Chart Info/Pattern Recognition on Screening Results:

EQT Stock Price $84.61 Looks to be forming new uptrend. Broke above previous peak of $83.46.

DLPH Stock Price $81.18 Nearing a new high. Previous high of $82.24 on March 4th.

KMX Stock Price $74.73 Gapped up on THURS on significantly higher volume.

M Stock Price $67.85 Nearing a new high. Previous high of $68.30 on January 8th. Closed up every day last week, with volume increasing each day.

MSI Stock Price $98.83 Dropped 7% on THURS on increased volume.

UAL Stock Price $61.88 Broken out of a channel to the downside on higher volume.

Technical Analysis: (Currently doing several technical evaluations for 16 Lg Cap Stocks)

MSFT Stock Price $40.29 Trading below 20 and 50 day moving averages, MACD is getting larger, 5 day money flow remains negative.

XOM Stock Price $84.30 Trading below 20 and 50 day moving averages, 9 Day RSI went 14 day RSI, A/D Calculation is negative, 5 day money flow index is negative.

JPM Stock Price $60.52 Trading below 20 day moving average, but above 50 day moving average, 5 day money flow index went positive.

CAT Stock Price $80.24 Crossed above it’s 20 day moving average.

SUMMARY: 9 of the 16 stocks have technicals that are BEARISH. With MSFT, XOM, GS and SNDK being the most bearish.

Recommendations (Looking for 50% gain on option value):

MSFT PUT MAY $40 – Current Option Price $1.18

XOM PUT MAY $85 – Current Option Price $2.81

Previous Recommendations Open (Closed - Removed from list: 5 Success, 1 Fails):

3/28/15 BA $148.85 at time. PUT MAY $150 was $5.90. BA now at $149.30. PUT MAY $150 is now at $4.75.

3/28/15 MSFT $40.97 at the time. PUT MAY $41 was $1.33. MSFT now at $40.29. PUT MAY $41 is now at $1.66.

3/28/15 XOM $83.58 at the time. PUT MAY $85 was 3.41. XOM now at $84.30. PUT MAY $85 is now at $2.81.

3/23/15 FB $85.62 at the time. CALL APR was $2.45. FB now at $81.54. CALL APR $85 is now at $0.30.

3/9/15 TWC $159.02 at the time. CALL APR was $6.20. TWC now at $154.09. CALL APR $160 is now at $0.89.

3/2/15 ADSK $64.42 at the time. CALL APR $65 was $1.80. ADSK now at $59.82. Call APR $65 is now at $0.15.

Conclusion:

Overall volume remains muted, which means that investors are waiting for a signal to either jump in or get out of stocks. The markets were closed on FRI. However, the jobs report that came out FRI was disappointing, and the markets are set to open MON down 1% (Pre-Market per TheStockMarketWatch.com). The poor jobs report, slowing GDP growth, a stronger dollar are all weighing on earnings. Earnings season kicks off this week with Alcoa reporting on WED (Apr 8th). We may get to see the direction get set this week. Even though some stocks showed up in my screens for going up (KMX, JPM, CAT, M, EQT, DLPH). I would avoid going into CALLS, unless we get a signal that the markets are heading up (crossing some technical signals, good economic data, earnings revisions upwards, etc…).

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