• This Week's Trade Ideas:
Bullish: Pulte Group Inc.> PHM – Buy the May 5th 23 Calls for $1.25 or less with a close or anticipated close above $23.87 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!) AND / OR… Silver Wheaton> SLW – Buy the April 28th 21 Calls.  Idea specifics will be covered in our Morning Call webinar due to riskier nature of metals trades, SLW’s surge, and current perceived market risks. (SPECULATIVE!)
Bearish: Applied Materials Inc.> AMAT – Buy the April 28th 39 Puts.  Idea specifics will be covered in our Morning Call webinar due to this being a counter-trend trade idea and current perceived market risks. (SPECULATIVE!)

• Market Overview:
Last week the major indices tried to cling to the widely-watched 50 day SMA.  Overall, they held up fairly-well and were able to do so but it became apparent that sellers were becoming more aggressive as well.  Nearly every rally attempt was knocked backed down forcefully.  The “big news” vacuum we spoke about last week seemed to aid the cause of sellers as there wasn’t a great deal of good news that the bulls could seize upon to maintain a rally.

• Below the Radar:
In a week where risks and “downside” are dominating the discussion thus far, we’re going to get started with a decidedly “upside” and upbeat offering from Morgan Stanley.  After all, Below the Radar’s mission is to uncover content that’s overshadowed or lost in the mix.

• Options Academy:
In active options trading and discussions thereof, the question of “What to do?” arises consistently.  Many new-to-options folks are intrigued with the idea of premium collection while others are mesmerized by the outstanding use of leverage that options can provide to investors.  The thing is, it doesn’t have to come down to one or the other.  The questions we’re asking, (as least for this week!) are Why does it have to be either/or?  Why not do both?

Geopolitics take over…

The Trade(s):

We strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these idea(s), last week’s and options education.  With geopolitics taking front and center, risk has been ratcheted it up in many ways.  Essentially, in environments such as this one, swing trade ideas become more speculative.  News events that we can’t foresee are now more likely to impact trading conditions without warning.  Sometimes it’s best to step away and let things sort themselves out.  This may be one of those periods as “earnings” may also receive outsized-reaction treatment from stock market operators.  The potential for wild swings in both directions is more possible now than we’ve seen in a long time in our view.

It’s with that backdrop that we’re publishing the ideas below.  These ideas would rate highly in a normal market environment but need to be evaluated with even more caution considering what we’re currently contending with as of the past few weeks.

Bullish:

Pulte Group Inc.> PHM – Buy the May 5th 23 Calls for $1.25 or less with a close or anticipated close above $23.87 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

AND / OR…

Silver Wheaton> SLW – Buy the April 28^th 21 Calls.  Idea specifics will be covered in our Morning Call webinar due to riskier nature of metals trades, SLW’s surge, and current perceived market risks. (SPECULATIVE!)

Bearish:

Applied Materials Inc.> AMAT – Buy the April 28^th 39 Puts.  Idea specifics will be covered in our Morning Call webinar due to this being a counter-trend trade idea and current perceived market risks. (SPECULATIVE!)

Outlook:

Reading through the newsletter would yield at least a basic overview with respect to the many risks that are prevalent.  Things have the potential to stay in volatile flux for some time as per our reading of the news this week.  We suggest attending the Advantage Point Morning Call webinar on Wednesday morning for a prudent discussion of the news cycle and these ideas.

Technicals:

Will be discussed in-depth in the Advantage Point Morning Call webinar.

Fundamentals:

These trade ideas are technically-driven.

(Editor's note: This trade idea may be updated periodically, in keeping with market conditions. It is intended solely for educational purposes.)

Recap of Last Week:

Last week we had a near triggering of the KO idea and we provided an update in case a few decided to initiate on their own.  Unfortunately, the markets couldn’t escape the consolidating pattern they’ve been in which kept KO and nearly all other stocks from making significant moves and holding gains.

SLV, despite the dominance of geopolitics news-wise last week, never approached our trigger point.
(Editor's note: This trade idea may be updated periodically, in keeping
with market conditions. It is intended solely for educational purposes.)

Here is a selected line from last week’s Market Overview section:  “Naturally there are some notable economic reports due out this week and in the weeks that follow but this could be a period in where the markets are forced to try to stand on their own to hold the gains we’ve seen since the election.  With Q1 GDP shaping up rather poorly, and the Trump agenda in turmoil, this could be a time where sellers become a little more emboldened.”

Last week the major indices tried to cling to the widely-watched 50 day SMA.  Overall, they held up fairly-well and were able to do so but it became apparent that sellers were becoming more aggressive as well.  Nearly every rally attempt was knocked backed down forcefully.  The “big news” vacuum we spoke about last week seemed to aid the cause of sellers as there wasn’t a great deal of good news that the bulls could seize upon to maintain a rally.  Earnings releases will begin to trickle out very shortly and then accelerate as of next week.  The forces at opposition now would seem to be 1) Another round of positive quarterly earnings despite what’s likely to be a weak quarter in terms of GDP.  VS. 2) The Trump Agenda seemingly adrift.  AND 3) Geopolitical Risks abounding.  So yes, it seems to be 1 vs. 2 & 3.  At the very least conditions have become potentially more volatile because they seem to have become less predictable.  We have to face the fact that at least a few “wildcards” have entered the game.  The charts are currently telling a similar tale:

 We’ve now seen a few lower highs in the SPY (S&P 500 ETF) chart above.  After trying to hold the 50 SMA, the index may finally be giving way.  This could lead to a test of the lows made approximately 3 weeks ago.  We could see support there which could result in a potential double-bottom pattern forming but if that gives way we’re likely to see a slide of a least a few more percentage points down towards the 227-228 level.

One notable difference we’re seeing now is the rapid ascension of the VIX (above).  The VIX has been suppressed for some time, really since the election outcome.  It seems to have finally be embarking on a run higher.  Obviously, things can change at a moment’s notice but this is our highest reading since November.  This tells us that at least some market participants are becoming more concerned and that that volatility could be on the verge of accelerating.  However, we also can’t overlook the tendency of the market to shake out “weak hands” just before surging higher.  Earnings will soon be upon us and it’s also possible that the geopolitical machinations are being utilized to create the appearance of an imminent breakdown just in front of an earnings-report-fueled ramp job.  Once again it may be best to remain nimble!

With respect to this week’s Economics, it’s really the back half of the week that brings the “bigger” data into the equation.  Consumer sentiment on Thursday and then all of Friday’s releases are generally considered important.  The lesser releases earlier in the week are likely to be overshadowed by global political madness which could easily extend to the balance of the week.  The problems with which are mainly a lack predictability and opaqueness.  Meaning, that it’s quite possible that by Friday these releases may be a non-event since we’re not trading in typical times.  On the flip side would be an announcement that informs us that diplomacy has won out and that things return to “normal”, whatever that means at the present!

In a week where risks and “downside” are dominating the discussion thus far, we’re going to get started with a decidedly “upside” and upbeat offering from Morgan Stanley.  After all, Below the Radar’s mission is to uncover content that’s overshadowed or lost in the mix.

Here’s the headline that appeared on ZH:

"Think 1999": Morgan Stanley Sees Huge 30% Surge In Stocks "Investors Cannot Afford To Miss"

YES, you read that correctly!  Morgan Stanley is referencing 1999 as a reason to be long stocks.  Essentially the argument distills down to… A lot can be made late in the cycle as long as we get out just before the plunge that follows.

As can be seen in the supporting graphic below, MS only sees about -11% downside potentially over the next 12 months as opposed to 27.4% upside in the best case.

Naturally, since this information comes to us filtered through the cynics at ZeroHedge, Morgan Stanley’s optimism is treated rather disrespectfully and comically.  The thing to keep in mind though is that, time permitting, it can be beneficial to at least entertain the “other side” at times where there is a strong consensus.  Consider the following:  At present, most players are focused on their downside risks and not on how this year may turn out to be a very good one.  Two months ago, the opposite was true.  Optimists were dismissing nearly any and all market concerns.  Here’s the link for the explorers among us:  http://www.zerohedge.com/news/2017-04-10/think-1999-morgan-stanley-sees-huge-30-surge-stocks-investors-cannot-afford-miss

As we noted above in Market Overview in the form of the VIX chart, we’re now seeing the highest levels of “fear” and subsequently the most expensive “insurance” since November’s election.  So, whatever the outcomes are, the current risks that have dominated the discussion the past few weeks are being taken more seriously than at any time over the past 6 months or so.  So, take that for what’s it worth or better yet read more about it.  http://www.zerohedge.com/news/2017-04-10/american-investors-fear-highest-trumps-election

In this space and in our webinars, we often discuss the fact that a great divide exists and has existed for some time between GDP projections/EPS projections and what’s actually been delivered.  Of course, we also note how, despite the fact that optimistic projections haven’t been in terms of GPD for some time, stock prices seem to not reflect that fact and thus “investors” seem to care not.  With earnings about to at least attempt to take center stage, this piece by Jeffrey Snider may be a timely one to read:  http://www.alhambrapartners.com/2017/02/21/the-market-is-not-the-economy-but-earnings-are-closer/

We’re going to jump-cut to the conclusion of his piece because it largely supports the discussion we’ve been having but for those that wish to gain further insight into the economic performance vs. earnings performance vs. equities performance, it’s well worth reading.

As can be seen above, the S&P 500 has been able to levitate and ascend for several years despite aggregate EPS estimates failing to match.  Prior to this current bull market, the relationship between the two had been much tighter.  Maybe most importantly, Snider’s assessment is that things need to work out without a hitch for the markets to keep the music playing…

Many wonder, aloud at times, how it is even possible for equity prices to consistently move up without support from economic performance or after having failed repeatedly to reach projected earnings levels.  In other words, if economies aren’t performing well and aggregated earnings haven’t met up with expectations, then where does the support come from?  Well…

To say that training wheels have been in place is to dramatically understate what’s actually occurred.  As can be seen above, CB balance sheets have roughly tripled when measured prior to 2008’s equity markets descent.  Notice too how they’ve remained exceedingly high at present.  As the FED noted recently, they hope to at least begin to reverse this process later this year.  What does that portend for equity prices then if the build-up has meant so much to upside equity performance?  Not a bad question to ask at this time and answers may be found here: http://www.zerohedge.com/news/2017-04-08/citi-central-banks-took-over-markets-2009-december-unwind-begins

Finally, it should be clear to even a casual market-watcher that debt of many kinds has greatly aided the equity markets rise from the ashes of 2009 through 2017.  Picking up somewhat from last week, is this graphic with respect to how corporations have been doing their part to boost EPS in an economy that’s largely disappointed in terms of aggregate performance.

Just as with prior cycles, CFO’s have tapped debt markets to buy back shares to reduce the number of shares outstanding.  By doing so they’re able to juice EPS higher (“beat”) as fewer shares outstanding enhances Earnings Per Share via simple math that divides by fewer shares!  At 30% we’re now bumping up against extremely high levels of companies engaging in this type of financial magic.  Unsurprisingly, debt of many kinds has played a large part in the ascent and maintenance of stock prices.  It seems all but forgotten that too much debt of dubious kind was the primary cause of the 2008-09 crisis.  It also would seem that we’re trying to solve the problems created by carrying too much debt with even more debt.  What could go wrong?

In active options trading and discussions thereof, the question of “What to do?” arises consistently.  Many new-to-options folks are intrigued with the idea of premium collection while others are mesmerized by the outstanding use of leverage that options can provide to investors.  The thing is, it doesn’t have to come down to one or the other.  The questions we’re asking, (as least for this week!) are Why does it have to be either/or?  Why not do both?  Let’s take a look at this with a few specifics and we’ll get started with the ever-popular credit spread with a focus on a stock that’s caught our eye recently WMT (Walmart).

If we travel back to February 24th, WMT was trading near where it was yesterday, $72.80.  It’s fair to say that we could have purchased the April 21st 70 Call for $3.20 on the 24^th.  Rather frustratingly, that’s exactly what it is currently valued at today.  So…if we bought a 10 lot of those calls and held them until now, we’ve essentially made NOTHING!  On the other hand…had we kept our bullish bias but instead opted to initiate a credit spread to reflect our bullishness, things may have turned out a little differently.  Let’s check it out.  If we had sold the April 21^st 72.5 – 70 put spread for a $1.00 on February 24th we’d find ourselves in the enviable position of closing out that trade yesterday for a $650.00 profit (assuming a 10 lot) as the spread is now only worth $0.35.

It’s clear that when “things sit still”, collecting premium beats the even the slow and minimized decay of owning an ITM option.  But what if WMT’s price had rocketed up $5.00 in the past 2 months?  The credit spread would have delivered its full potential of a $1000.00 profit which is quite nice.  However, the 10 lot of long 70 calls would currently by worth $7.80 apiece at a minimum thus that 10 lot would have produced not exactly but quite nearly a $5000.00 profit!  Quite a difference between the two approaches in that scenario.  What if we leave “either/or” mindset?

Instead of picking only one approach, why not split the strategy application?  Maybe we should consider “1/2 credit spread” and “1/2 Long ITM Calls”?  Had we done that and WMT “went nowhere”, we’d still be up $325.00 on a 5 lot of those credit spreads and the long 5 70 calls would currently be a wash.  BUT…we’d still have unlimited not CAPPED upside on those 5 long calls.  AND, with WMT threatening to break out to new 2017 highs as we write, that could be a very attractive position to be in!

We'll plan to address any questions regarding this split-strategy approach should they arise, time-permitting, in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team