• This Week's Trade Ideas:
We very 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.
Bullish: Mondelez Intl. Inc.> MDLZ – Buy the May 5th 43.5 Calls for $2.05 or less with a close or anticipated close above $44.90 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)
Bearish: IShares Taiwan ETF> EWT – Buy the May 19^th 33 Puts for $0.80 or less with a close or anticipated close below $32.75 in a down market with expectations for continued weakness in the indices. (SPECULATIVE!)

• Market Overview:
Mimicking the current news cycle somewhat, there’s a lot going on with respect to the market technicals at present.  It’s not easy to see but we’re currently seeing the 10 and 20 SMAs (with negative slopes) dropping below the 50 SMA.  The price of the DIA (using the “diamonds” as our proxy for the market at large) has remained below the 50 SMA for 4 trading sessions and counting.

• Below the Radar:
This week’s Below the Radar will not provide many bright spots.  So please consider yourself warned!

• Options Academy:
Last week we covered a split-strategy approach that combined premium collection with directional trading.  The argument that was advanced suggested that this type of approach works well when markets are going nowhere fast, or slowly, and it also permits us to maintain our long-term long bias as many desire to do.

Thermonuclear War?  Shhh…just buy the dip!  Well…maybe not!

The Trade(s):

We very 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.  Geopolitics and other factors have elevated risks to a relatively high level.  Much as we wrote last week, swing trading simply becomes more speculative as volatility increases.  News events that we can’t foresee are now more likely to impact trading conditions without warning, as we saw on Thursday and Monday.

It’s with this continuing backdrop that we’re publishing these ideas.  We’re cautiously maintaining a “singles” oriented / risk-averse mindset and approach.  Despite our best efforts, the recent up strongly then down strongly market has made it very difficult to isolate low-cost, low-risk ideas.  Please keep that in the forefront of your mind as you read over this week’s ideas below.

Bullish:

Mondelez Intl. Inc.> MDLZ – Buy the May 5th 43.5 Calls for $2.05 or less with a close or anticipated close above $44.90 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

Bearish:

IShares Taiwan ETF> EWT – Buy the May 19^th 33 Puts for $0.80 or less with a close or anticipated close below $32.75 in a down market with expectations for continued weakness in the indices. (SPECULATIVE!)

Outlook:

Risks remains ratcheted up dramatically from where they were a few months ago.  We still believe that a volatile flux could remain in place in the near future.  We suggest attending the Advantage Point Morning Call webinar on Wednesday morning for a prudent discussion of the news cycle and these speculative 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 few Weeks:

Somewhat recent ideas KO and WMT continue to power higher in what has become a weakening market.  Unfortunately, the major indices have remained in a corrective mode as those two names were heating up.  More explosive upside may have been had if the markets had cooperated more.

Despite gold and the metals complex generally moving higher, SLV has remained a “dud” and has yet to approach our trigger price.  SLW and PHM, bullish ideas from last week, were updated as the week closed out.  We essentially concluded that without strong conviction they were probably due to be closed out (had they even been entered) as the week ended as they never really did much to warrant holding them.

AMAT, last week’s bearish idea, has remained a little weak and if it should show a little more technical weakness (falling below a few Mas), it could trade down to near the $36.00 as we mentioned in our late week update.

Mimicking the current news cycle somewhat, there’s a lot going on with respect to the market technicals at present.  It’s not easy to see but we’re currently seeing the 10 and 20 SMAs (with negative slopes) dropping below the 50 SMA.  The price of the DIA (using the “diamonds” as our proxy for the market at large) has remained below the 50 SMA for 4 trading sessions and counting.  We’ve highlighted critical components of the price structure with colored lines as we normally do.  The green channel of a lesser degree is providing resistance it would seem and it’s doing it in confluence with the red (formerly support) line that underpinned the market’s trend post-election.  We’re in jeopardy of the market breaking that trend and not being able reestablish itself above the 50 SMA.  Those are two concerning development to say the least.  If the support on the yellow line that was established with a prior low doesn’t hold, things could start to tumble more aggressively.  We’re sticking the orange support zone should another round of selling send the index cascading lower.  We believe support should evidence itself near what would be 20,000 in DJIA terms.  We also believe that there could be a support zone below there all the way down to about 19,800, again, in DJIA terms.

To close things out technically, we present 2 more charts of key sectors:

As can be seen, the “technical story” is very similar with respect to transportation and financials stocks, represented by the XTN and XLF ETFs respectively.  These are 2 very important sectors and when they’re not performing it typically becomes very difficult for the major indices to perform well.  Both sectors are in more advanced stages of weakness than the major indices at present.  Should this exacerbate even more we’d expect the major indexes to further deteriorate as well.

More and more “storm clouds” are amassing.  There would seem to be a lot of pressure on the earnings catalyst to save this market from further immediate downside.  It’s either that or we’ll need to see more low volume/short-covering/relief rallies like we saw on Monday.  Many of the major indexes had been on protracted daily close losing streaks.  We were overdue for a bounce and the lack of negative developments over the weekend provided the right stuff to get the rally caps on tight.  As a side note, Monday’s trading volume was the lowest of 2017 despite the rather significant points movement upward.  Yes, the operators did that thing that they do so well…  We’re sticking with “nimble” as the word of the week!

To be sure, we’re not the only ones that are “feeling it”.  Global financial stress has recently jumped dramatically:

This week hasn’t started off very well with respect to economic releases.  When combined with what is, so far, a “ho-hum” reaction to earnings reports, things are on their way to officially becoming more dicey.

Although the “gang” bought last week’s dip on Monday, seemingly forgetting that the threat of nuclear war seems to be “out there” just a wee-bit more than usual (to say the least), we can only imagine how positively the indices will be treated if and when this North Korea-episode is remedied or fizzles out.

Bottom-lining it, the markets are trading with a little more volatility as we expected.  We’re sticking with that expectation for now with earnings releases about to come fast and furious along with international developments remaining largely unresolved.  Domestic politics complete the trifecta as the hoped-for Trump agenda seems to be at least temporarily stalled.  The French election has been built-up somewhat as a potential market mover but rather than get caught up in it, we prefer to see how things unfold once it’s completed.  Remember how Brexit was going to slam the market?  Remember the same being the case if Trump were to win?  Yes, we prefer to sidestep these emotionally-driven and much ballyhooed events rather than bet on them.

This week’s Below the Radar will not provide many bright spots.  So please consider yourself warned!

The Atlanta FEDs Q1 GDPNow forecast has cratered at this point.  It’s almost down 3% in just the past 2 months and there are whispers that it is on its way to ZERO.  With the better-than-recent-years winter weather that was seen across much of the country, this would seem to be a very disappointing outcome with few excuses to hide behind.  This is simply a poor start to the year if it bears out.  That will put a lot of pressure on the remaining quarters to pull out a solid year of growth.

Some may be thinking, “It’s just 1 quarter, it’s not the entire year, plus the markets have backed off a little bit and it’s not as if forward P/Es are exceptionally high right now”, trouble is, they are indeed high right now.  They’re 10 year high right now!:

Still though, the PermaBulls among us may still be arguing “yes but it’s not as if the markets have gotten too frothy with respect to (heavily engineered!) earnings performance”.  The problem is, they sort of have:

It may be worth noting that as we write, the normally reliable source of upside propellant, “earnings beats”, seem to not be up to the challenge, as of yet.  Notably, NFLX, Goldman and J&J reported and their stock prices are getting battered.  When earnings cease to work, we’re forced to ask “exactly what will work then?”

To further emphasize exactly where things may stand, please have a quick look at the graphic below:

The green line represents the PEAK in S&P 500 EPS that was seen in late 2014.  The red dot represents where things stand NOW.  So, YES, you’re seeing and reading this correctly.  The S&P 500 rose nearly 15% from late 2014 levels to the recently registered highs despite EPS falling by over 10% at one point from then until the present.

The major indices have, to this point, brushed off the retail apocalypse but in the real world of everyday lives that’s simply not the case.  Things are already bad and getting worse.  We’ve discussed this quite a bit of late but it’s hard not to touch on it consistently because it continues to metastasize.

http://www.businessinsider.com/retail-job-losses-are-hurting-the-economy-2017-4

The retailers list and store totals are piling up rapidly as can be seen in the graphic above.  Although this doesn’t look good, it would seem that it’s about to become even worse and possibly much worse.  The vicious cycle in place is intensifying.  SEARS has announced only 42 closings but they’ve also recently conceded that they may not be around much longer.  Thus, another major anchor retailer will disappear from many malls across the country further exacerbating the “ghost mall” situation.  Here’s a key takeaway from the BI piece courtesy of Mark Cohen from Columbia Business School:

"This is creating a slow-rolling crisis," Cohen told Business Insider. "The people that work in retail stores will lose their jobs, then spend less money in retail stores because they are no longer employed. That creates a cascade of economic challenges."  We hasten to add that this simply can’t be good for consumer psychology nor should we expect it to embolden commercial real-estate investors and merchants anytime soon.  This cycle appears to have many innings left in which to fully play out so it seems that things are likely to get worse before they improve.

If you’re wondering if bail-outs may be on the horizon that will save this space, we’ve got bad news on that front as well:

“Annual retail bankruptcies peaked at a total of 20 in 2008 — a level that the US could reach by September if the current rate of filings continues, according to CNBC. 

During the recession, private equity firms and banks came to the rescue of some retailers and brought them out of bankruptcy through restructuring.

But there aren't many firms willing to rescue dying retailers these days, according to RBC Capital Markets.

"Private-equity firms [and] banks seem less willing now to step in to save these failing retailers as the issues this time around are more structural rather than quick operational fixes," RBC analysts wrote in a recent research note.”

Hmmm…Banks won’t return the favor?  NOW there’s a shocker!  So, once again, this “recovery” seems unlike any other recovery of recent memory.

The short accompanying piece can be read in in its entirety here: http://www.businessinsider.com/retailers-are-going-bankrupt-at-a-staggering-rate-2017-4

“What about the restaurant space?  Maybe that can help out matters?”  - We’re glad you asked but that’s the limit of our happiness.  Things seem to be out of line there as they are mostly everywhere when it comes to surveys/expectations vs. realities:

Notice on the far-right side of the graphic just how far the spread has widened between the current situation in blue and “hopes” in red.  One rather concerning section of the piece:

As TDn2K further adds, with a same-store sales decline of 1.6%, the first quarter of 2017 was the fifth consecutive quarter of negative results. The last time the industry experienced a similar period was in 2009 and the first half of 2010, as the economy began recovery following the recession. Only this time the move is in the opposite direction. 

Furthermore, the first quarter of 2017 followed a very disappointing 2.4 percent sales drop in the fourth quarter of 2016, highlighting the difficult operating environment currently facing many operators.

Worse, same-store traffic dropped even more, or -3.6% in Q1, consistent with the average -3.4% quarterly declines experienced since the beginning of 2016.

The full piece: http://www.zerohedge.com/news/2017-04-17/us-restaurant-industry-suffers-worst-collapse-2009

Real Estate can aid the cause though, right? Ummm…

In theory, real estate (home building) could help but it may take a while.  As can be seen above, the most recent “starts” data dipped again and has generally been worsening since last November.  Yellen’s plans wouldn’t appear to wind at the backs of builders.

About the US Manufacturing renaissance…:

Factory output just cratered!  We have to go back in time a little to find an equally disappointing rate of change.  Autoland’s inventory issues may have affected this at least somewhat so here’s yet another graphic lest we forget:

Inventories at these levels are concerning enough but when higher interest rates are factored in, well…, that certainly doesn’t improve the situation.

We’re going to wrap up our graphics portion of Below the Radar with this critical one we came across just now:

We’ve surveyed many key areas of the economy but what can clearly be seen above is the situation in the aggregate and it’s not pretty.  Citi’s MacroEcon Surprise Index is negatively diverging from the S&P 500 price level in a significant and rather ominous way at present.  We’ve seen over the past few months and certainly this week that the major indices have been able levitate higher and higher without the support of many formerly important and highly correlated pieces of data.  How much longer can this go on when other key factors are also considered?  Things like thermonuclear war and a sidetracked political agenda and rising interest rates and the unwinding of Central Bank balance sheets…

Finally, we’ve recently and only semi-seriously offered conjecture relating to the “deep state’s” tactics with respect to “outsider Trump’s” presidency.  As in, what would be the best way to not only discredit his populism but all future populist insurgents?  How about another round of economic devastation?  That surely would knock a few legs of Trump’s stool out from under him, no?  Apparently, we’re not the only ones contemplating such things.  If you’re up for a brief trip down the rabbit hole then have a look at this that includes a “special foreword” from Bernanke and Yellen:

“Regarding the Great Depression… we did it. We’re very sorry… We won’t do it again.” – Ben Bernanke

“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both”. – Janet Yellen

Here’s the link: http://www.internationalman.com//articles/creating-another-crash-of-1929

BE CAREFUL.  BE SAFE.

Last week we covered a split-strategy approach that combined premium collection with directional trading.  The argument that was advanced suggested that this type of approach works well when markets are going nowhere fast, or slowly, and it also permits us to maintain our long-term long bias as many desire to do.

We fielded a few questions on this topic in our Advantage Point Morning Call Webinar last Wednesday morning.  We also received a few questions and even a few phone calls from former students that just so happened to be contemplating this approach after being long only the past few years.  Given the response that it elicited, we decided to add just a little more food for thought on the same subject in hopes that we can further aid the cause of some options-based investors.

Recall that we effectively combined a stock-replacement long call position with a short vertical put spread.  We began with a 10 lot of ITM stock replacement calls and then instead opted to only hold 5 of those as we added 5 short put verticals (bull spreads).  Remember, none of these contract totals are set in stone.  We’re just using 5 and 5 as a starting point for this hybrid approach.  Are there other enhancements or adjustments that can be made?  Why, YES, yes there are!

It may seem counterintuitive but one thing that some premium collectors like to do is to “collect on both sides”.  The thought process goes something like this: “If I sell one OTM vertical spread on the downside of a stock’s price then why not sell the other OTM vertical spread on the upside of the stock’s price?”  Those sentiments are then followed by: ”If I’m getting hurt both on my short put credit spread and my long ITM stock replacement calls, at least I’ll have that short call credit spread helping me out.”  Not surprisingly, they also have good thoughts about the OTHER side too: “If the stock’s moving up, I’m already winning on my short put vertical, that’s helping to offset the losses in my short call vertical and I’m also winning nicely with my stock replacement calls.  As a kicker, I also plan to buy to close my short upside call once the stock price makes it past the resistance level at …”.

That may be a lot to follow!  But trust us, that’s just about how the conversation goes nearly every time.  It seems that premium collection becomes something that most folks can’t get enough of once they begin to contemplate it!

This conveys a lot better when we’re able to pull concrete examples from options markets in real time.  Which is why we plan to address any questions regarding this enhanced split-strategy approach should they arise, and time-permitting, cover this approach in a brief “walk through” in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team