• This Week's Trade Ideas:
Bullish: Haliburton Co.> HAL – Buy the May 19th 46 Calls for $1.85 or less with a close or anticipated close above $47.25 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)
Bearish: None at this time.  Several under watch.

• Market Overview:
We seem to be heading back towards the phase wherein “nothing matters if it’s even slightly bearish”.  Over 6 weeks of weakness has almost entirely been erased in a few trading days with news that was largely expected providing the “new” fuel to jam higher.

• Below the Radar:
Given that last week was reportedly the worst week for Macro data in 6 years, the soft data rollover could just be getting started and it clearly has a long way to fall before meeting up with deteriorating hard data.

• Options Academy:
This week we’re going to focus on options selection.  Many folks that are new to options investing seem to be seeking a blueprint or a series of guidelines that they can use to apply the proper strategy while using the right options to employ said strategy.

Vive la EU! and Why worry about nuclear war when there’s Tax-Cut-Talk and Earnings “Beats”?

The Trade(s):

Again, 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.  Many of the same risks remain present despite the past few days of euphoria.  Technicals have improved however and that could make it possible for the major indices to challenge recent highs and even potentially breakout for another leg to the upside.  Unfortunately, many stocks have moved so dramatically from levels seen late last week that we find ourselves with a far from perfect entry window having traveled so far so fast.

We’re still maintaining a “singles” oriented / risk-averse mindset and approach as we’ve been for over a month.  Despite our best efforts, we were not able to find any “lay up” type trades due to the extreme upside movement of the past few days.  Bullish-patterned stocks have ran excessively and those of the bearish variety have largely moved away from the “danger zone” and are no longer in precarious technical positions.  Additionally, earnings releases in the very near future effectively eliminate many other stocks from consideration for the time being.

Bullish:

Haliburton Co.> HAL – Buy the May 19th 46 Calls for $1.85 or less with a close or anticipated close above $47.25 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

Bearish:

None at this time.  Several under watch.

Outlook:

The players have managed to move the major indices up nearly 3% since the lows that were put in late last week.  This has been done on the basis of an election outcome that fell in line with polling numbers and tax proposals that were already part of the perky rally that ensued post-Trump’s election.  Given that all-day buying has been absent from this scamper higher, we need to see if the all-time highs will be taken out or if a double-top could play out.    We suggest attending the Advantage Point Morning Call webinar on Wednesday morning for appropriate technical coverage.

Technicals:

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

Fundamentals:

These trade idea(s) 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 presented MDLZ and EWT as bullish and bearish ideas respectively but we emphasized that we weren’t in love with either idea and we liked the market environment even less since it’s not our preference to need to guess to make money.  Of course, the guessing was in reference to geopolitical developments and the French election over the weekend to be followed by Trump’s tax cut proposals this week.  By Friday, both stocks were not far from where we had spotted them early in the week so we put out this update:

“With the French election being held over the weekend in the wake of another terror event in Paris, "who knows?" how the markets will react come Monday.  Some believe that the future of the EU is literally at stake but as we noted this week, Brexit and Trump's election were supposed to tank the markets and well...

The markets seem more predisposed to want to rally here after being weighty for the past 6 weeks or so.  Unfortunately, the aftermath of this weekend's election could radically alter that complexion before we can even react on Monday morning.  For the record, we're going to remain completely neutral and on the sidelines for now with respect to any and all ideas.”    

That about sums it up.  We sniffed out what did come technically but we sat on the sidelines over the weekend because one can never know and guessing isn’t what we do.

We seem to be heading back towards the phase wherein “nothing matters if it’s even slightly bearish”.  Over 6 weeks of weakness has almost entirely been erased in a few trading days with news that was largely expected providing the “new” fuel to jam higher.

As can be seen on the chart above of the SPYs (S&P 500 ETF), our proxy for the market, the action of the past few days has not only taken out the resistance line in green, but it has also surpassed 3 recent highs that are highlighted by the orange dots.  Since the “news” is being utilized rather selectively and some would say cynically, it appears that the technicals are what will matter, if only on the upside.  As things stand now, we’re not very far from the all-time high that is noted by the yellow resistance line.  Do we get there?  Do we retest?  Do we go through?  OR, do we double-top?  Those are the questions going through our mind at present and we’d expect a retest of the highs for sure.  Short side players are once again on the ropes and let’s not forget that more earnings “beats” are likely to hit the tape in the next day or two.  Many of the beloved tech sector companies will be reporting as well and that typically delights the financial media which tends to add fuel to the bullish fire.  Anyone that’s still wants to insist on seeing more downside may be better suited by remaining patient right now.  We’ve discussed how the bigger picture charts (weekly and monthly candles) needed to be “saved” and quickly, and that’s exactly what is happening.  The indices were risking more downside if a little more technical damage had been done and just in the nick of time this powerful rally materialized like an old-fashioned cavalry charge.

This Week’s Economic Calendar

Yet again the week hasn’t started off well with respect to economic releases.  The Dallas and Chicago FED reports on the economy were rather weak.  Of course, that mattered little as they were lost in the euphoria of the French election outcome that seemed to have many investors flustered just last week.  So, what happened?  The pre-election favorites finished in accordance with the polling data.  In other words, there was no surprise.  But this is Wall St. and the lack of a surprise was actually a “double-secret” surprise in camouflage so that meant instant relief rally/short squeeze of the > 1% kind.  So, to recap, if you were about to sell on news since that’s what purportedly works and the news played out as expected so then why did the indices scream higher???  Hopefully the previous sentence didn’t make a lot of sense to you as was our intention.  Our point is to illustrate that guessing with the Wall St. gang can be very difficult.  Let’s just note here that we now have Brexit, Trump’s election, and pre-Frexit in our rearview mirrors and thus far none of them tanked the equities markets as we were told they could or they would.  As for us, we’re glad we chose to dance the Sidestep last week and beyond.

Earnings releases will mushroom up in a big way on Wednesday and Thursday with hundreds of releases slated.  They will be accompanied by significant economic releases mainly on Thursday and Friday.  We have to wonder though, if any of it will matter in the grand SCHEME of index levels.  It would seem that Monday and Tuesday’s euphoria should tide players over a bit until we get to Wednesday’s Tax Cut panacea which could induce state of prolonged ecstasy.  Once again, it’s likely that will see and hear about tax code modifications that are largely known and thus expected and theoretically priced-in to equities markets even though they haven’t been enacted.  BUT, we should all know by now that news such as that simply makes for good rally propellant even if it’s been used many times over as it seems to never get old, much like debt-fueled stock buybacks and the raising of dividends.  EPS may not get boosted in the traditional ways, selling more products at better margins produced by greater productivity but by golly what’s so bad about higher EPS via tax rate manipulation?  Take what you can get right???  In conclusion, much as the spice must flow, EPS must rise! (And we care not HOW)

Picking up where we left off last week, that is, with weakening data, we begin with a graphic highlighting the current state of national economic activity that was mentioned above:

http://www.marketwatch.com/story/march-hiring-reluctance-hits-national-economic-index-chicago-fed-2017-04-24?mod=MW_video_latest_news – for those that wish to read the entire piece.  This is simply more confirmation that things are far from robust in the economy right now.  Last week we aired a laundry list of “rollovers”.  Area after area of the economy continues to flash weakness by and large.  In a way, this has been the case for the past few years as we’ve noted here.  Clearly bulls are focused on other items aside from actual performance and it appears that their focus isn’t even on “soft” data any longer.  We’ve covered the chasm between soft and hard data that’s persisted since last fall.  Well, that may be closing and not in the way that was hoped for:

Given that last week was reportedly the worst week for Macro data in 6 years, the soft data rollover could just be getting started and it clearly has a long way to fall before meeting up with deteriorating hard data.

It really wouldn’t be another installment of Below the Radar without a trip to our local mall, AKA Ground Zero for the Retail Apocalypse:

http://www.zerohedge.com/news/2017-04-22/retail-bubble-has-now-burst-record-8640-stores-are-closing-2017

We’re not going to go too deep into it as we’ll let the link see to that for those interested but we will partially summarize retail land’s creeping malaise with this graphic:

It’s obvious and well-known at this point that Internet retailing has been the primary driver of the demise of many mall-based retailers.  This has been one of the more interesting trends of the past 20 years or so the story goes.  What’s even more interesting though is viewing similar transitions over the course of history.  Fortunately, Slant Marketing has made that possible for us in a very cool way:

Not only is this graphic informative and sharp, but it’s also interactive!  You can mouse over it , read about and further analyze the evolution of American commerce over the course of time here:

http://www.slantmarketing.com/top-industries-fortune-500/

Before we leave this behind we want to note that the little dot in the upper right section is NOT Pluto.  Unfortunately, that’s actually… MANUFACTURING!

As we continue, here’s a rather acidic piece from Raul Meijer who argues that even if you believe otherwise, “you are not an investor”.  Before he’s dismissed out of hand, it may be worth the read.  His argument amounts to…Since central banks and their cohorts have taken over the markets by utilizing what else?  Debt, debt, more debt and financial gimmickry, we no longer have true markets.  Without true markets we can’t really be investors as we’re essentially wagering that a scheme will continue to work as opposed to investing the old fashioned way.  Hard to argue with since we’d be arguing with ourselves in the process.  Here’s a key graphic from the essay followed by the link:

https://www.theautomaticearth.com/2017/04/you-are-not-an-investor/

After presenting yet another graphic that illustrates the potential for a massive dislocation in the equities markets, we’re going to pick up on that.  So, if you’re wondering what’s keeping the indices semi-permanently levitated despite the lack of economic/earnings performance and with problems seemingly cropping up all over America and the world, and with many key trends actually worsening, then wonder no longer!  It’s turns out it’s the same as it ever was!  Central Banks continue to juice liquidity by acquiring financial assets at a record rate!  Yes, that’s right, despite the global recovery they’ve tried to hard-sell us the past 8 years and counting, they’re still up to their liquidity injection tricks.  “Why would they continue to do this?” – a very reasonable question!  The answer of course is:  THAT’S ALL THEY EVER DO OR HAVE DONE!

The graph above lays it all out.  When the FED attempts to tighten, the process is always reversed back towards easing by the fallout from a critical financial event.  One might begin to think “wow, what a series of coincidences...”, but that’s really not the case.  What we have here is addiction friends, plain and simple.  Addiction to artificially created liquidity.  Without the continued flow of liquidity something eventually “blows up” that in turn requires more LIQUIDITY!  What a system!  Also, please do remember that, officially speaking of course, there’s no inflation.  So that home that your parents bought in 1962 for $15,000 that recently sold for $400,000, that’s appreciation.  That nice new automobile they purchased for $2000 that same year that’s now $35,000, well that’s due to technological enhancements.

To learn more about why nothing matters but the punch bowl:

http://www.zerohedge.com/news/2017-04-21/why-nothing-matters-central-banks-have-bought-record-1-trillion-assets-2017

Clearly the punch bowl has powerful qualities that can modify the behavior of many that drink from it even if they’ve been parched for a while.  Mind you, they haven’t been in the press with respect to their punch bowl-induced trading proclivities but they’re back!  They’re not mentioned specifically but the Taxi-Driving-Trading-Public has returned to the stock market like it’s 1999, well, make that 2000.  Harken back to those Internet Bubble days if you will, and you may recall CNBC segments that focused on multi-tasking cabbies in NYC that were flipping stock on laptops as they navigated the canyons of the great city at break-neck speeds!  It would now appear that, after getting clobbered in the commodities bubble, and losing their shirts and homes in the housing bubble, those indomitable hacks are back for another round of stock market mania.  Behold the following choice snippets:

“A few days ago, Charles Schwab, the investment brokerage firm, announced that the number of new brokerage accounts soared 44% during the first quarter of 2017.  More specifically, Schwab stated that individual investors are opening up stock trading accounts at the fastest pace the company has seen in 17 years.

17 years.  Anyone remember what happened 17 years ago?

Oh right. The Dot-com bubble burst.”

AND THIS ONE:

“Investors are once again clamoring to buy expensive, popular stocks at price levels never-before seen in the history of the stock market.  Company valuations are sky-high.

At 26.44, the S&P 500’s Price/Earnings ratio is the highest EVER, except for two occasions: the 2008 crash, and the 2000 crash.

At 28.93, the “Shiller P/E ratio”, which looks at company valuations over a longer-term, 10-year period and adjusts for inflation, is at the highest level EVER, except for two occasions: the 2000 crash, and the 1929 crash.  Price to sales ratios are near the highest levels in at least 50 years.

Price to book ratios haven’t been at this level since the 2008 crash.

And the stock market cap to GDP ratio is the highest since the 2000 crash.”

Heck, this market even has your author tempted enough to get Ubering and to connect his Square account directly to his Schwab account to real-time fund the double-fisted accumulation of every share of Snapchat he can lay his hands on!  The entire article by Simon Black can be read here:

https://www.sovereignman.com/trends/the-last-time-this-happened-the-market-crashed-21379/

On a side note, we’ve recently discussed a few Elliott Wave basics and along with them Robert Prechter who is probably the most recognized Elliott Wave practitioner of these times.  He hasn’t been very prominent in the media the past few years and you can learn more about why that’s been the case and what he’s forecasting here:  http://www.marketwatch.com/story/legendary-technical-investor-robert-prechter-is-awaiting-a-depression-type-shock-in-the-us-2017-04-21

BE CAREFUL.  BE SAFE. (Especially if you go on an NYC cab ride in the near future.)

This week we’re going to focus on options selection.  Many folks that are new to options investing seem to be seeking a blueprint or a series of guidelines that they can use to apply the proper strategy while using the right options to employ said strategy.  This is only natural as they’re operating in new territory that’s much more nuanced than shares of stock or mutual funds and it certainly takes time in the trenches to before most people begin to feel comfortable.  Quality options education programs normally steer new-to-options investors into using stock replacement options (SROs) and with good reason.  This type of options selection is probably the most likely to keep an investor comfortable.  That is, by using deep in-the-money options with high deltas and low theta, an investor will not be very far from stock-type performance, which is what they’re already accustomed to experiencing.  Thus, a level of comfort can be found more quickly while using options as an investment vehicle.  This stock-to-ITM-options conversion process normally goes smoothly.  It’s the NEXT step that seems to throw the proverbial monkey wrench into the mix…

A little over 6 weeks ago, just after many of the major indices topped out and began to correct, we began to further emphasize our preference for utilizing the slightly in-the-money options.  As implied volatility levels have remained quite subdued, this hasn’t been a difficult decision to make.  However, as expected, several students have questioned this shift to “slightlys”.  They’ve been wondering why we’d choose to leave all the positive qualities of stock replacement options behind since, well, they’ve recently become very comfortable with those types of options.  The questioning is only natural and once they’ve heard the reasons as to why the switch, they’re then ready to take the next step themselves.  Let’s get into the details courtesy of good old compare and contrast.

What do SROs bring to the table for us?

Recall that we get stock-like performance via high delta, low theta (low extrinsic value), in addition to much lower cost vs. stock ownership and we have an embedded “protective put” or “protective call” depending on if we buy a call or put respectively.  That’s quite a bit of very good stuff which is what makes options such as fantastic investment vehicle.  Why would and why did we leave these benefits recently?  Well, we didn’t leave them entirely!  Let’s cover the slightlys…

Slightlys have lower deltas and higher thetas (greater than deep ITMs extrinsic value).  This results in less initial payout on delta and greater theta each day.  Again, many may be wondering:  WHY???

Here’s the thing, often times, slightlys can cost ¼ or less than SROs which means that we only have about a quarter of the capital at risk.  This is the main reason why they are intriguing to us right now.  Additionally, their deltas may not be all that much less than those of SROs and if our expectations pan out the high gamma that they offer will have us enjoying SRO type performance in very little time BUT for a fraction of the initial capital outlay (dollar risk)!  That’s pretty good stuff too!  And, if our forecast doesn’t work out or new undoes us, we won’t lose nearly as much since we have only a fraction of capital at risk vs. SRO players and even more starkly vs. stock players.

To summarize, our recent decision to favor slightlys invited a little more in the way of Greek risks but it dramatically lowered our proceeds at risk in a market that we haven’t felt comfortable in for a while.  Thus, we were able to continue to participate in a market had us concerned instead of sitting on the sidelines altogether.  Another way to understand the benefits is to consider this:  Stock and futures operators managed to move the DOW up over 600 pts in 1 full session and 1 opening!  Consider this hypothetical:  If we’d held onto deep ITM (SRO) puts after Monday waiting to see what Tuesday would bring, we’d have lost another significant portion of our ITM value.  With slightlys this would have been a far lesser loss yet we would still have been in the game in a significant way if our forecast for more downside had played out (hypothetical).

If attendees are interested in seeing these differences between SROs and slightlys in real-time, we’ll cover them in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team