Jump on the Week – Macro Risks and Volatility

by | Feb 10, 2019 | Bishop's Corner

Despite stocks closing on a 3-day losing streak, all three major indices managed to close positive on the week. Which makes it 7-straight positive weekly closes for the Dow. 

What’s been pushing stocks lower recently?

  • Renewed trade tensions between the U.S. and China
  • A potential government shutdown
  • Fears of the global economy slowing down (weak data out of China and Europe)

Now, I study macroeconomics, dynamics in market volatility, and other big-picture catalysts.

It helps me get clues on where the market will go next, and which stocks offer the best risk-reward setups.

For example, generally, when stocks trend higher, investors are more willing to pile into speculative stocks. They’re not worried about stocks crashing. Instead, they are worried about NOT making enough (they are greedy as heck).

On the other hand, investments like bonds become boring, not sexy, and less attractive when stocks are bullish. In other words, stocks and bonds usually move opposite of each other.

But, do you know what?

Recently, I’ve been watching stocks and bonds both go up… but who’s right?

Anytime I see bonds going up… I’m thinking the smart money is trying to protect themselves. That said, I wait for my money pattern…and then take action.

So instead of betting that stocks will crash… I decided to get long call options on the iShares Barclays 20+ Yr Treasury Bond ETF…

… A nice five-figure cash grab ( a trade I’ve mentioned before here)

The beauty behind options is that you don’t need a lot of money to get explosive returns. And another reason why I prefer them is the fact that you can control your risk and define your losses.

As for earnings… they’ve been okay… with some hits (PM, GM, EXPE  )… and misses (TWTR, TTWO, AMZN).  Names like Nvidia, Yelp, Cisco, Coke, and Pepsi will release quarterly results this coming week.

I see plenty of potential opportunities out there… but I also see plenty of risks.

That said, let’s see what’s on the docket this week.

Are Markets out of Whack?

There’s still a lot of potential risk on the table, namely political, economic, and corporate earnings. Now, the markets have been focused on the potential meeting between the President of the U.S. (POTUS) and China’s leader Xi… which was scheduled to happen prior to the March 1, 2019 deadline. However, it’s unlikely with the potential tariff increase between 10% and 25%.

Not only that, the markets are expecting the POTUS to sign an executive order that would ban Chinese telecommunications equipment from U.S. networks.

The big risk here is what happens post-trade talks. The U.S. leaders want the tariffs to stay at 10% or more, while China wants it to 0.

Whatever happens with the next round of trade talks, we’ll be ready. My thinking is they will push the trade deal deadline past March 1, if the market pulls back.

Here’s what we’re watching in the SPDR S&P 500 ETF (SPY):

Traders have been watching the $270 area very closely (the 200-day simple moving average (SMA) on the daily chart). Notice how the last few times SPY tried to stay above $270, it’s pulled back.

On the hourly chart, the blue line (13-hourly SMA) crossed below the red line (30-hourly SMA). This has been a good indication of a potential shift in trend.

Now, the SPY is over 15% off of its December lows… despite a plethora of risks on the table. That said, we’ve also been eyeing volatility because I’m suspecting the smart money has been buying the weakness and into the trade talks. However, once the news is out, we might see some selling pressure in the markets.

If you look at the hourly chart on the CBOE Volatility Index (VIX), you can clearly see volatility has been low…

If you look closely, the blue line crossed above the red line. That tells me volatility could start to pick up again.

Now, if you don’t know about my money-multiplying strategy… I focus on the specifics and fire away with options once I see the money pattern come up.

Potential Government Shutdown Could Drive Volatility (VIX)

The U.S. government is at an impasse again… and we’re looking at a potential government shutdown, yet again. Now, even though the markets were strong during the shutdown… we could see volatility pick up.

Why’s that?

Well, there’s a backlog of economic data that hasn’t been released yet.

Now that the U.S. has emerged from its shutdown, for the time being, it’s playing catchup… and it’s likely we’ll see one of these catalysts potentially move the markets.

Fears of Slowing Economic Growth Could Spark a Market Selloff

One of the key risks on the table is the fact that U.S. economic growth could slow. In the U.S., there are worries about inflation, trade talks, and the Federal Open Market Committee’s monetary policy trajection. Globally, we’re seeing potential in China’s slowdown. Moreover, the eurozone has been slowing down, coupled with Brexit risk.

Not only that, there are risks on the table with emerging-market economies like Mexico. Economic growth will hinge on these factors:

  • The U.S. – China trade talks.
  • Higher U.S. inflation rates.
  • The Federal Reserve tightening its monetary policy.

For example, traders have been looking to short Mexico, especially when the Mexican peso rallied for nine straight weeks (up until January 25, 2019).

Here’s the hourly chart of the iShares MSCI Mexico Capped ETF (EWW) – an exchange-traded fund (ETF) tracking Mexican stocks. Note – this is what I sent to Weekly Money Multiplier members.

If EWW breaks above $45.50, I’ll stop out, and my target is at $43. With just a small percentage move, I’m looking to snatch 100%+ from this position.

Here’s what’s going on in EWW now.

The blue line (13-hourly SMA) crossed below the red line (30-hourly SMA), and we’re looking for a move below the 200-hourly SMA.

That said, we’re looking at a plethora of risks that could cause a market-wide selloff and VIX to rise.

Now, let’s look at the economic calendar.

Economic Calendar

Monday, Feb. 11, 2019

  • No notable economic indicators

Tuesday, Feb. 12, 2019

  • 7:45 AM EST               ICSC Weekly Retail Sales
  • 8:30 AM EST               PPI monthly data point revisions
  • 8:55 AM EST               Johnson/Redbook Weekly Sales
  • 4:30 PM EST               API Weekly Inventory Data
  • 6:30 PM EST               Fed’s Mester speaks on Economic Outlook and Monetary Policy
  • 7:30 PM EST               Fed’s George speaks on the US Economy

Wednesday, Feb. 13, 2019

  • 7:00 AM EST                   MBA Mortgage Applications Data
  • 8:30 AM EST                   Consumer Prices (CPI) month-over-month (MoM) for January
  •  8:50 AM EST                   Fed’s Mester speaks on Economic Outlook and Monetary Policy
  •  8:50 AM EST                   Fed’s Bostic to speak to European Financial Forum in Dublin
  • 2:00 PM EST                   Monthly Budget Statement for December

Thursday, Feb. 14, 2019

  • 8:30 AM EST                   Weekly Jobless Claims
  • 8:30 AM EST                   Continuing Claims
  • 8:30 AM EST                   Producer Price Index (PPI) MoM for January
  • 10:00 AM EST                 Business Inventories for November
  • 10:30 AM EST                 Weekly EIA Natural Gas Inventory Data

Friday, Feb. 15, 2019

  • 8:30 AM EST                   Empire Manufacturing for February
  • 8:30 AM EST                   Import Prices MoM for January
  • 8:30 AM EST                   Retail Sales MoM for January
  • 9:15 AM EST                   Industrial Production MoM for January
  • 9:55 AM EST                   Fed’s Bostic to speak on workforce development
  • 10:00 AM EST                 University of Michigan Confidence
  • 10:00 AM EST                 Business Inventories for December

Moving on.

Now, we’re going to do things a little different here. Instead of focusing on earnings per share (EPS) and revenue estimates… we’re going to look at the implied move. This gives us an idea of how a stock would move post-earnings. Now, if you don’t know anything about implied volatility or options, check out this eBook here.

This brings us to the corporate earnings calendar (we’re going to be focused on big names here – mid- and large-cap stocks). Additionally, we’re going to be focused on the implied move for the earnings week and comparing it with that figure with the average move over the previous 8 earnings.

Earnings Calendar

Monday, Feb. 11, 2019

Earnings Before Market Open

  • Loews Corp. (L) implying a 6% move. Historical average move ~2.5%.

Earnings After Market Close

  • No notable earnings.

Tuesday, Feb. 12, 2019

Earnings Before Market Open

  • Molson Coors Brewing (TAP) implying ~6.40% move. Historical average move ~6.91%
  • Under Armour Inc. (UA) implying ~11.80% move. Historical average move ~17%.

Earnings After Market Close

  • Activision Blizzard (ATVI) implying ~10% move. Historical average move ~7.50%
  • Akamai Technologies (AKAM) implying ~8% move. Historical average move ~11.50%.

Wednesday, Feb. 13, 2019

Earnings Before Market Open

  • Teva Pharmaceutical (TEVA) implying ~10% move. Historical average move ~13%
  • DISH Network (DISH) implying ~10% move. Historical average move ~7%.
  • Hilton Worldwide (HLT) implying ~10% move. Historical average move ~7.50%.

Earnings After Market Close

  • Cisco Systems (CSCO) implying ~5% move. Historical average move ~6%
  • Century Link (CTL) implying ~8.60% move. Historical average move ~9.80%.
  • MGM Resorts (MGM)  implying ~6.40% move. Historical average move ~6.70%.
  • NetApp (NTAP) implying ~8.70% move. Historical average move ~9.30%.
  • TripAdvisor (TRIP) implying ~12% move. Historical average move ~16%.

Thursday, Feb. 14, 2019

Earnings Before Market Open

  • Coca-Cola Company (KO) implying ~2.50% move. Historical average move ~2%
  • AstraZeneca PLC (AZN) implying ~3.40% move. Historical average move ~4.60%.
  • Pilgrim’s Pride Corp. (PPC) implying ~6.30% move. Historical average move ~6.80%.
  • Canada Goose Holdings (GOOS) implying ~14.50% move. Not enough earnings data for the historical average move. 

Earnings After Market Close

  • Applied Materials Inc. (AMAT) implying ~6.60% move. Historical average move ~6.20%.
  • XPO Logistics (XPO) implying ~9.70% move. Historical average move ~7%.
  • NVIDIA Corp. (NVDA) implying ~8% move. Historical average move ~9.30%.
  • Chemours Company (CC) implying ~9.70% move. Historical average move ~7.30%.
  • Arista Networks Inc. (ANET) implying ~9.40% move. Historical average move ~13.20%.
  • Canopy Growth Corp. (CGC) implying ~10% move. Not enough earnings data for the historical average move.

Friday, Feb. 15, 2019

Earnings Before Market Open

  • PepsiCo Inc. (PEP) implying ~2.60% move. Historical average move ~2.60%.
  • Deere & Company (DE) implying ~5.20% move. Historical average move ~5.80%.
  • Newell Brands (NWL) implying ~10% move. Historical average move ~12%.

One final note, the market is closed on Monday, February 18, in honor of President’s Day. That said, Thursday and Friday’s trading sessions will be important. With so much uncertainty headed into an extended weekend, who would want to be long stocks?

However, that’s just some food for thought. I’d love to hear your ideas, or answer your questions. As always, you can reach me at questions@weeklymoneymultiplier.com 

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