Daily Archives: December 28, 2018

Market Preview

Market Preview: Markets Rally Then Close Mixed as President Trump Threatens to Close Border

Markets were on track to finish higher Friday, when the rhetoric between the President and Democrats around the partial government shutdown heated up, with jabs being thrown by both parties. President Trump, in a tweet, threatened to close the border with Mexico, abandon the newly minted USMCA trade deal, and cut off aid to several Central American countries he has criticized for not stopping caravans of immigrants headed to the U.S. border. A spokesman for incoming House Speaker Nancy Pelosi returned fire saying the Democrats had offered solutions to the ongoing shutdown but would not fund the President’s “immoral, ineffective, and expensive wall.”  Markets were once again derailed by the headlines as the DJIA rally vanished and the index finished down .33%. The S&P was off .12%, and the Nasdaq bucked the trend to advance .08%. Most traders are ready to throw in the towel on 2018, as this December will likely go down as one of the worst in history for stock market returns.

Investors will be watching the Dallas Fed Manufacturing Survey closely Monday after a major drop in the Richmond Fed Manufacturing Index on Wednesday. The fall in the Richmond numbers was very unexpected, and caught analysts by surprise. The Dallas Fed numbers have been on the decline for several months now. Tuesday markets will be closed for the New Year holiday.

Redbook retail data and the PMI Manufacturing Index will be released Wednesday. The index tracks private sector output, new orders, and inventory levels to give investors an idea of how manufacturing industries are performing. Analysts will be parsing the data to determine if it ties with the Richmond and Dallas Fed releases.

The first earnings releases of 2019 begin Thursday when Unifirst Corp. (UNF) and The Simply Good Foods Company (SMPL) report. Simply Good Foods has recently shifted its marketing and branding message for its Atkins line from a diet product to a wellness product. The company has ramped marketing spend to get the word out, which has hampered earnings. RPM International (RPM), Lamb Weston Holdings (LW) and Cal-Maine Foods (CALM) all report earnings Friday.

Thursday, will see the release of motor vehicle sales and MBA mortgage applications. Mortgage applications fell sharply last week with the purchase index down 7%. The Challenger job cut report, ADP employment report, and jobless claims will also be released on Thursday. Jobs have remained a bright spot to this point in the economic cycle, and investors are counting on good numbers to kick off 2019. The ISM manufacturing index and construction spending numbers are slated to be released at 10 am Thursday.

The first Friday of 2019 will bring out Fed Chairman Jerome Powell to participate in a panel discussion at the American Economic Association in Atlanta, Georgia. Markets have been shaken recently by the Fed’s attempts to communicate policy, and investors will likely be hanging on Chairman Powell’s every word. Economic data released Friday includes the employment situation report and PMI services numbers.

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Options

Apple (AAPL) Could Get Back To $200 In A Year

When we’re in a bear market (defined by a 20% correction from the top), it’s not unusual to see investors scrambling for value. Looking for good stocks that have been dropped into the bargain bin is at least one way to feel optimistic about the future. After all, it’s not like there’s much in the way of good news when stock prices are plunging.

Nevertheless, patient investors can often find good deals. And, if you’re willing to wait for a recovery, bear markets can be great times to pick up that stock you’ve always wanted at a heavily discounted price.

Of course, that doesn’t mean these stocks aren’t first going to drop further. But, timing the market is the hardest thing to do in investing. If you find a stock you want at a price you like, then there’s nothing wrong with buying it if you plan on holding for the long-term.

In my opinion, Apple (NASDAQ: AAPL) is one of those stocks that’s trading at a very attractive price. Even if the company’s recent product launches aren’t breaking records, it doesn’t mean the business isn’t making boatloads of cash. And, AAPL has a way of beating expectations.

What’s more, the stock is trading at a forward P/E of just 10.7x, which is extremely low. Unlike some other high-flying tech companies, AAPL isn’t at some lofty valuation solely based on future potential.

As I said before, that doesn’t mean the stock isn’t going to fall further. It’s a part of many fund holdings, so when investors sell funds during bear markets, it pulls down all the components – both good and bad. That’s why I suggest a longer-term view.

Here’s the thing…

At least a few options traders agree with me. This week, I’m seeing a lot of action in the January 2020 expiration, almost all of it bullish. Traders are buying long-term (in terms of options anyhow) options strategies that suggest AAPL has plenty of upside.

As I write this, the stock is trading at about $151, well off the highs of $233 in September. But, one trader thinks $200 could be in range over the next year.

This trader purchased the January 2020 190-200 call spread. That means the 190 strike was purchased while the 200 strike was sold. The total cost of the trade was $2.00, which means breakeven is at $192 by January 2020 expiration.

Max gain is at $200 or higher, where the trade makes $8 in profit at expiration. That’s 400% profits for those counting at home. Granted, $200 is almost $50 higher than where we are now. But, there’s over a year of time built into this trade, so plenty of opportunities for AAPL to get its groove back.

The trader purchased this spread 1,000 times, so spent in premium $200,000 on the trade. That’s also the max loss potential. Of course, max gain is $800,000 if the trade works out.

I think $2 per spread is a reasonable price to pay for over a year of bullish exposure to AAPL stock. While the stock has a ways to go to get to profitable levels in this trade, the chance to earn 400% makes it a bet worth taking if you’re bullish on AAPL over the next year.

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Source: Investors Alley