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T3’s Daily Recap Report: Earnings Are Blah, but This Bull Won’t Blink!


1) Earnings Season Rages On

We walked into some big earnings reports today, and unfortunately, they were mostly bear-friendly:

Netflix (NFLX) issued very weak guidance, driving a -13.1% drop in this high-profile momentum name.
-IBM (IBM) and Goldman Sachs (GS) beat expectations, but still couldn't rally.
Rio Tinto (RIO) sank on weak demand for iron ore.
Johnson & Johnson (JNJ) and UnitedHealth (UNH) surpassed analysts' estimates and staged modest rallies, but finished off morning highs.

Coming into this earnings season, expectations were remarkably low, with analysts expecting the fifth straight year-over-year decline in earnings.

And as it stands now, S&P 500 companies are not doing a very good job of vaulting over those lowered expectations.

FactSet data shows that companies are reporting an earnings decline that's basically in-line with the -5.5% consensus.

So even though the bar is low, we're not getting over it.

2) And the Reaction

Many traders have been arguing that the investing public is very complacent. That was not true 2 weeks ago, but it certainly looks true today.

CBOE put-call ratios, the ISE Sentiment Index, and various sentiment surveys all point to widespread bullish sentiment.

Typically, markets top out when sentiment is very positive.

However, let's give this market some respect.

The S&P 500 has barely budged in the face of geopolitical tensions, stretched charts, and the aforementioned weak earnings season.

And with today's -0.1% decline to 2163.78, it's still within 0.2% of the all-time 2069.05 high set Friday!

How could this be?

Well, there are two elements at play.

First, the Brexit is likely driving some buying of US equities, which are perceived as less risky.

And second, US economic data has actually been quite strong over the past few months.

This is a chart of the Citi US Economic Surprise Index, which measures economic data reports relative to expectations:

The yellow line represents the S&P 500, and as you can see, it has been tracking economic data surprises pretty closely all year.

3) An Intel Options Idea

Intel (INTC) is reporting earnings after the close tomorrow, and implied volatility on weekly options is incredibly high.

This creates a good opportunity for a calendar spread, where you short expensive near-term options and go long cheaper long-term ones.

Here's a trade I'd look at:

-Sell $36 call (this Friday's expiration) for 30 cents (IV of 44%)
-Buy $36 call (August 19 expiration) for 44 cents (IV of 20%)

Debit of 14 cents per lot (give or take 2 cents).

This is an extremely cheap way to play a flat or up reaction in Intel shares, and it could profit even if the stock drops modestly into earnings.

The best case scenario is Intel closing at $35.99 on Friday. That would put the short call at 0, and the long call worth around 58 cents, assuming a drop in IV to 17%.

That would be a 314% profit.

Worst case is Intel drops big, which would wipe out the entire 13 cent debit.