Options Market Update: Train Wrecks Continue

 
Last night after the close, Amazon, Microsoft and Google delivered blockbuster earnings results. All three stocks exploded higher by approximately 10%, which this sent S&P 500 and Nasdaq futures surging higher. This was after the S&P 500 had gained 1.66% during the trading day after European Central Bank President Mario Draghi had hinted more financial stimulus was available if needed.

Then this morning, China's Central Bank cut interest rates for the sixth time since last November. This added even more fuel to the rally, and the market opened higher by nearly 1.5%. Since the open, the market has been slowly giving back some of these gains, but is still trading higher by 0.8%.

The China rate cut could be viewed two ways. On the one hand, clearly China's Central Bank is concerned about the country's continued slowdown. This is somewhat in line with the European Central Bank's message yesterday. On the other hand, China and the ECB are clearly ready to act if the global economy continues to weaken.

There have been a few interesting market reactions to the China rate cut. Oil and copper, which one might expect to rally on this news, are both trading lower. Also, the VIX is trading marginally higher, which is counterintuitive with the market at recent highs. In addition, the Emerging Markets ETF (EEM) is trading only marginally higher today. It appears that the fear of a global slowdown is becoming more of a reality for many investors.

The market rally has been lead by the Industrials (XLI) in the last several days. This is a sector that had grossly underperformed the market this year. However, companies such as MMM, Caterpillar and Honeywell missed earnings this week, yet their stocks exploded higher.  

Lagging the market is the Retail Sector (XRT). Wal-Mart led with bad news last week, and plenty of other stocks have been crushed on earnings including Under Armour (UA down 8%), VF Corp. (VFC down 13%), PVH (PVH down 7%) and Sketchers (SKX down 35%).

The list of daily "train wrecks" continues to grow this earnings season as Pandora (P) is down 35% today, Whirlpool (WHR) is down 10% and select biotechs have lost 10%-20% each day.

I continue to caution against trying to "buy the dip" in broken stocks and sectors. Too many times, we've seen oil, media, and now biotech, retail and cybersecurity stocks drop, and then continue dropping for the next several months. Rotation in this market is extreme, and dip buyers have been burned many times.

That said, the market is again near its recent highs and my list of stocks outperforming the market is growing. As I've said in the past, I don't like playing earnings releases, however I do like trading stocks that have beat earnings expectations, and gapped higher and outperformed the market in reaction.

Stock Picks

Loews Corp.

This undervalued stock has strong future earnings growth expectations.

Biogen

Biogen is the market-share leader in treating multiple sclerosis.

Weibo

One of Paul Godwin’s favorite stocks in his Cabot Emerging Markets Investor portfolio.

Cabot Wealth Advisory

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