"Defense to me is the key to playing baseball." -- Willie Mays
For the Love of The Game
More than 400 companies currently residing within the S&P 500 have now reported results for the second quarter. The season has gone rather well to date. Of those 400 plus companies, 72% have beaten EPS (Earnings per share) expectations to the upside. Earnings growth is now running at a hot 11.6% year over year, which itself is ahead of expectations. Revenue? Glad you asked. Revenues are fairly hot as well, up 5.2% on a year-over-year basis. You may recall that a couple of weeks back, expectation for yearly growth were skating around 9% for earnings, and in the mid-fours for revenue. Now as "earnings season" enters its final stage, we hand the ball off to the retailers as much as we do any other group.
The beleaguered retailers? Not so fast. Or, to seem sophisticated, "au contraire." The migration of shoppers from brick-and-mortar retailers to e-commerce is no longer a new trend. Neither is the "stay-at-home" economy that continues to develop. You've all seen the backyard pummeling taken by the movie industry. "Retail earnings season" always fascinates me. The names are such that every small investor is familiar with them, and quite possibly has an opinion on that is not necessarily related to fundamental, nor technical analysis. The fact that you may not rely on such analysis brings an element of fun back to this sport. For the love of the game. What draws us to certain retailers? What about ourselves do we see in an underdog that shows up early for a fight with the big kid after school? What makes us root for a struggling firm that won't just go away, as if they were a losing sports team?
While there is this element of fun, and possibly a fatal attraction as well, one must divorce oneself from such feelings. The group is troubled. Myself? I am long the shares of Kohl's (KSS - Get Report) and Walmart (WMT - Get Report) for different reasons. They are the only two individual retailers that I am long, except for the Home Depot (HD - Get Report) , which I consider completely different all together. The ability to maximize assets (KSS), or the ability to fight the big kid (WMT). Both work for me. Surprisingly, these have been two of my better long side trades of the Summer. KSS reports later this week, along with Macy's (M - Get Report) and Nordstrom (JWN - Get Report) . Walmart and Home Depot bring up the rear of the group next week, with WMT's more traditional rival, Target TGT. The stocks of these retailers have for the most part done well over the past month or so. So has the corporate debt of these firms, which, at least to this stone-turning investor, suggests that bond traders do not expect their imminent demise. Results, however, will be scrutinized for further decay in the business despite Amazon's (AMZN - Get Report) miss this quarter. So, how does the small investor defend him or herself in the space?
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Showing up for the Fight
There are several ways to defend yourself going into a news event sitting on sizable profits. The easiest and most blunt way to protect is these gains is to simply buy weekly put options expiring at the end of the same week as the scheduled news event. Personally, I absolutely hate buying options of any kind. Really. They simply add to your cost basis, and often enough, you do not end up needing them. Insurance? There are times that you will be glad that you went that route. I'd rather come back with my shield, than on it.
For me, I would prefer do one of two things. One is simply to take my profit. Yup, that's right. Ring the register. You will either get a chance to buy the name back cheaper, or you won't. I don't like to chase, but either way, guess what? You'll live, and if you play this game like you love it, you'll find opportunity.
The second way to put up your fists, and one of my favorites, is to sell, or write puts against your long positions with strikes that loom attractive to you. In the event of a selloff in said name, you are then forced to buy more shares at the strike price that you already thought advantageous. If the stock goes the right way, you decreased your cost basis, enlarging your margin of victory.
You must make sure of two things before taking on this strategy. Make sure you have the tolerance for the increased risk of having to buy more shares, and make sure that the risk/reward is there at the strike price considered prior to making that sale. You want to make sure that you can significantly lower your cost basis. Otherwise, you will feel like a fool adding to your long with a stiff wind in your face.
More on Small Cap Divergence
I have made much of late of the underperformance of the transports and the small-caps. I think for good reason. The Dow Jones Industrials have been our leader of late. Anybody who played this game for more than a season knows that this is not necessarily indicative of a healthy market, particularly when the gains are centered on just a few winners. The Nasdaq Composite, long our champion, actually posted negative performance for the week ended last Friday.
What I think we have to keep an eye is this. The Russell 2000 Small Cap Index has diverged as U.S. dollar valuations have waned, and hopes for corporate tax reform have faded somewhat. The index, after falling 1.2% for the week, however, turned green on Friday, and now faces possible resistance at the 50-day SMA (Simple Moving Average), which is currently 1415. This average had served as staunch support since early June. The index, should the moves made on Friday hold, could have made a triple bottom on the chart that begins with June. Should this not hold, significant declines could seem apparent. You guys know that I love my Pitchfork models. On such a model that begins with the weakness in March, lower trendline support broke in late July. Now beginning a new model with the mid-July strength suggests support around 1380 for the index. What does that all mean?
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My point is that mixed signals abound for this index. The immediate future of the small caps will be more reliant on the performance of the U.S. dollar versus its peers, and how urgent legislators appear to be in their pursuit of policy concerning the budget, the debt ceiling, tax reform, and infrastructure building. Washington matters to domestic based-firms. Bigly. Volatile future? Rocky road.
10:00 - Labor Market Conditions Index (July): Expecting 2.0, June 1.5. This composite index of 19 labor market-related sub-components is considered experimental by the Federal Reserve, and does not impact the marketplace. That said, it is with great interest that we follow along in this space. With zero being the yardstick against which an expanding labor market and one in decline are defined, this item is expected to show a ninth consecutive month of improving labor conditions.
11:45 - Fed Speaker: St. Louis Fed Pres. James Bullard will speak from Nashville, Tennessee on the economy as well as monetary policy. Bullard, who is more dovish than most Fed officials, does not vote on policy this year. That, however, does not usually get in the way of his making a big splash with the media, and he does intend to take questions at the conclusion of this event.
13:25 - Fed Speaker: Minneapolis Fed Pres. Neel Kashkari will be in Sioux Falls, South Dakota to speak to the Rotary Club there. Kashkari, a rather dovish voice at the FOMC this year, will participate in a Q&A session with the audience.
15:00 - Consumer Credit (June): Expecting $15.7 billion, May $18.4 billion. May was the strongest month for gains in consumer credit seen in six months, with particular growth seen in revolving credit (credit cards). This, while welcome by most economists, would mean that either the consumer is more comfortable taking on additional debt at this time, or lending standards have fallen. Simultaneously, rising credit card defaults force this question to be asked. More to come at 3pm ET.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500 and the Russell 2000 might either pause or turn.
SPX: 2492, 2484, 2478, 2468, 2459, 2449
RUT: 1428, 1421, 1414, 1407, 1400, 1391
Today's Earnings Highlights (Consensus EPS Expectations)
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