Advantage Point Newsletter - August 1st, 2017
• This Week's Trade Ideas:
Bullish: WisdomTree Japan Hedged Equity Fund. > DXJ. Buy the Sept. 1st 51.5 Calls for $1.57 or less with a close or anticipated close above $52.70 in an up market with expectations for continued strength in equities markets.
Bullish Mentions:
Cisco Systems. > CSCO. This “)@^^!” stock still has potential but from a lower level now and possibly with more risk. A close above $31.65 in a resilient market could be interesting.
MOMO, from a few weeks back in Bullish Mentions, may also be worth another look with 3 weeks to go before earnings are released.
Bearish: STILL: None currently. Essentially, the same as last week. The earnings season euphoria and many of our other presumptions are bearing out like clockwork. At this snapshot in time, we’re not willing to try to thread the needle with bearish ideas in the face of the dominant trend/melt-up/blow off phase that we’ve been expecting which may already be in place. However, …
Bearish Mention:
Keep an eye on Ingersoll-Rand > IR could be on the verge of another leg lower if it makes a new recent closing low and the indices start to allow for a pullback.
• Market Overview:
The DOW has been grabbing all the headlines of late as it’s propelled higher mainly by Boeing’s performance. Will IBM get their act together? The “jobs report” comes out on Friday as well as other impactful reports that will be released nearly every day. How does August look? Don’t miss this week’s Market Overview!
• Below the Radar:
This week in BTR we’re going to jump around quickly from one seemingly unrelated item to the next as a change of pace. However, the theme that ties our smattering together is simple: FEAR! Hopefully, that will keep summertime readers awake longer!
• Options Academy:
We’re going to stick with the theme of “playing the game cheaply” that we touched on last week with vertical spreads. We’re also going to use last week’s “dud” of an idea, CSCO, as a focus because that allows us to weave in “keeping an eye on it” theme and “loading from a lower level”, two concepts that we mention from time to time.
Is the long-anticipated “blow off” phase unfolding? Or about to pause?
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.
The customary “earnings beat percentage” is solidly in place as we expected. The euphoria is ratcheting up as the VIX retreats and the hubris is nearly palpable at this point. This is what “complacency” looks like… As we’ve continually noted however, there’s nothing that’s really “wrong” with the charts and so long as they’ve shown us a positive complexion we’ve sought to go with them. Some indices are approaching overbought on the shorter cycles we chart but there’s little else to complain about at present. The technical concerns that we had a few months back receded and were replaced by another strong leg higher that’s still unfolding. Additionally, there’s still plenty of room to run higher on some measures but we’d be remiss if we failed to note that there are also a few things we can nitpick if asked to do so…
Bullish:
WisdomTree Japan Hedged Equity Fund. > DXJ. Buy the Sept. 1st 51.5 Calls for $1.57 or less with a close or anticipated close above $52.70 in an up market with expectations for continued strength in equities markets.
Bullish Mentions:
Cisco Systems. > CSCO. This “)@^^!” stock still has potential but from a lower level now and possibly with more risk. A close above $31.65 in a resilient market could be interesting.
MOMO, from a few weeks back in Bullish Mentions, may also be worth another look with 3 weeks to go before earnings are released.
Bearish:
STILL: None currently. Essentially, the same as last week. The earnings season euphoria and many of our other presumptions are bearing out like clockwork. At this snapshot in time, we’re not willing to try to thread the needle with bearish ideas in the face of the dominant trend/melt-up/blow off phase that we’ve been expecting which may already be in place. However, …
Bearish Mention:
Keep an eye on Ingersoll-Rand > IR could be on the verge of another leg lower if it makes a new recent closing low and the indices start to allow for a pullback.
Outlook:
This week is last week, sort of: “Obviously, with nothing wrong whatsoever with the charts and the VIX making a new multi-decade low we shouldn’t be worried (just like everyone else, see F&G below) but of course we are! Even if it’s just a wee little bit. This slow-motion melt-up we’ve been sticking with still has room so we approach this week’s ideas with this backdrop fully in mind.”
Events played out fairly close to our expectations but the major indices are jumbled at the moment. The SPYs and NDX aren’t partying quite like the DOW which is being dramatically aided by Boeing’s hyper-performance.
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 stayed away from the bear side and only covered and/or reminded on previous bear names. XLI and XOM remained heavy but once again we could get no solid break down. If the market turns they’re still worth setting an alert on however.
Our bullish names should have been flipflopped! Our mention, APC, had a nice pop at which we noted that profit taking or rolling might not be a bad idea. CSCO, however, our “official” idea, was a great disappointment. It retreated from the key resistance level we identified almost immediately. Granted, tech got heavy towards week’s end but CSCO was a real dud literally all week after acting really well on Monday. It could still be a usable idea going forward with time remaining before earnings hit. A price alert set in a tech market that acts well wouldn’t be a bad idea.
The DOW has been grabbing all the headlines of late as it’s propelled higher mainly by Boeing’s performance. (BA) has the greatest weight of ALL DJIA components coming in at a whopping 7.57%. It’s performance dramatically affects the index more so than any other. Boeing’s stock movement is approaching surreal. It’s practically doubled in less than a year. It’s most recent surge has taken it beyond 3 standard deviations from its longer-term trend on bigger picture charts. There are no laws that prohibit it from marching even higher but to say that a pause or pullback is long overdue would be a dramatic understatement. Should the “zag” that could follow its most recent “zig” be significant, that alone would bring the DOW down significantly. On a side note and half-jokingly, look for IBM to be removed from the DOW in the future unless they get their act together. The powers-that-be can’t allow a failing company to reflect industry’s fortunes. Failure in business or underperformance by a major company may be a reality but the overriding concern is never reality focused but rather keep the party going focused…
As usual the “jobs report” will be the big number this week when it hits the tape on Friday. There are other impactful reports that will be released nearly every day. They could provide movement potential as could the scheduled earnings releases, especially AAPL, but the big question remains one of volatility and complacency. The VIX is less than a week removed from an 8.84% print that set nearly a quarter-century low. It’s lifted a little since then but it’s still quite subdued. But, then again, the historical performance that we dug up a few months ago is bearing out this summer. Will August fall in line?:
All the earnings reports will soon be out of the way and as can be seen above, recent August stock performances haven’t been all that great. August arrives with indices short term overbought at the very least and vulnerable so we shall see. The bottom line remains that nothing is really “off” chart-wise at the MOMENT, so we have to continue to go with the flow until that changes. As can be seen just below, we’re not that far away in time or distance from a high reading on the Fear/Greed gauge:
This week in BTR we’re going to jump around quickly from one seemingly unrelated item to the next as a change of pace. However, the theme that ties our smattering together is simple: FEAR! Hopefully, that will keep summertime readers awake longer!
When we hear “European Banking” our ears always perk up. https://mishtalk.com/2017/07/28/eu-proposes-account-freezes-to-halt-bank-runs/
Euro governments are trying to put measures in place to keep the “proletariat”, and their money, parted. How long before we see the same on these shores? Click on the link above to see what’s prompting them to attempt to ram this legislation through.
In the 25 years we’ve been watching and listening for signs of market turning points, our ears have also perked up at the mention of “RV Sales”. So, when CNBC started beating the drum on those last week, we listened. Talk about late cycle…:
“Notice the mini-spike in the late 1990s and the major spike in mid-2000s, both of which were followed by corrections. Now note the mega-spike from 2010 and 2016.” You can get the rest of the dirt on the RV indicator here: https://dollarcollapse.com/stock-prices/the-perfect-crash-indicator-is-flashing-red/
And NOW…more on that nonexistent inflation you’re not seeing, Special California Edition:
The new normal continues to strongly resemble the old absurd. We can’t let this one go without including a few of our favorite snippets but a full reading at the link above is worth your while:
The US government likes to pretend that the rising cost of living is under control. People in Southern California know better. According to a new report in the Los Angeles Times, median house prices in Southern California have nearly doubled in the last five years.
In case you’re confused, Rudy is referencing that the US government and its central banking partners desire a 2% inflation rate. Government measures the prices consumers pay for a basket of goods and services to determine the official inflation rate called the Consumer Price Index (CPI). However, the “core” CPI doesn’t include vital things like food and energy.
Home prices alone don’t tell the whole story. Renters are struggling the most. According to a recent report in the Orange County Register, the average rent for a house in Orange County is $3,114 per month and $2,548 for a home in Los Angeles County. The median household income in LA County is around $56,000, before taxes. So rent eats about 50-60% of wages. And Southern California is a microcosm of what is happening in many other cities in America.
After loose lending practices, low mortgage rates, and shady Wall Street re-packaging of housing debt enabled the boom period and inevitable bust, the downward trend continued until about 2012 as previously indicated.
Today rates are even lower. Lenders are getting creative again because Millennials don’t qualify due to high student debt and low wages. And Wall Street is as corrupt and greedy as ever. Combine that with the bloated municipalities in desirable areas making it expensive or impossible to get new building permits, and home prices may continue rising at this rate for a couple more years.
And now more on prices, high ones, really high ones...the link followed by the crux and nothing more:
http://www.zerohedge.com/news/2017-08-01/last-time-stocks-were-expensive-was%E2%80%A6-march-2000
As the graphic above notes, 99% continue to live in delusion according to the author. What of the 1%? It’s a different story… First off, Jim Rickards: https://dailyreckoning.com/elites-privately-warning-crash/
His piece contains no graphics but it’s not a long read and it has this:
But it may be time for everyday investors to listen to the big money. They are the ones who see financial crashes coming first.
And next we’ll turn to Mac Slavo for more of the same:
And lest we forget, the “Institutional 1%” aren’t sitting idle either. If you read it in its entirety you’ll receive yet another warning regarding trading the VIX ETFs however:
http://www.zerohedge.com/news/2017-07-30/jpm-investors-are-starting-hedge-against-crash
Maybe the 1% are reading Bank of America’s research??? Here’s a dandy graphic to get us started on that:
This comes from a piece in which BofA is hearing echoes of 2007: http://www.zerohedge.com/news/2017-07-31/bofa-longer-continues-more-current-regime-echoes-2004-2007
Recently we featured Rosenberg and Stockman. This week it is Whalen and Gundlach:
http://www.zerohedge.com/news/2017-07-30/chris-whalen-gundlach-isnt-wrong-hes-just-early
Our favorite passages follow:
Thanks to Janet Yellen. There is a cost to the social engineering that the Federal Reserve Board engages in, and, you know, I think it’s going to—over time the history is not going to be kind to Yellen and her colleagues. Because they have created the next problem. We just haven’t gotten there yet. Rising interest rates could quickly expose the companies’ “short-term thinking” surrounding how we paid for buybacks.”
AND:
“Erik: Let’s come back to treasury yields, because, obviously, a little over a year ago Jeff Gundlach made this big profound announcement that the 35-year bond bull market was over and that’s it. The top is in on price, the bottom is in on yield, it’s all the other direction from here. We’ve heard quite a few views in the opposite direction. Lacy Hunt on this program made a very compelling argument that if you just look at the over-indebtedness of the world and of governments, it’s impossible to get to what we think of as historically normal rates. Now, you just said a minute ago you definitely see a move back toward two percent. Does that mean that you think that Gundlach is right and this is just a correction towards two percent? Or do you think that the jury’s still out on whether or not the 35-year bond bull market is over or not, or how do you see this in the longer term?
Chris: Well I think Gundlach is right, but he’s way early. You know, in order for you to have a selloff in the bond market and really see interest rates move higher, especially medium and longer-term rates, that money has to have somewhere to go. There isn’t an obvious outlet or venue for the funds that are currently invested in US treasuries, US corporates, US high-yield debt. Where else is it going to go in the world? We’ve created so many pieces of paper with pictures of presidents on them that they all want a home and they all want a positive return. And you’re right. The indebtedness of the world, especially the public indebtedness of countries, I think is the real driver behind central bank action. The reason is the dropping interest rates has ceased to be an effective way to get economies moving.
Are we in the danger zone?:
In fact, Henrich warned that he saw this kind of ominous chart action before the epic market meltdowns in 2000, and again in 2007.
“Based on long-standing technical targets,” he says, “we have entered the danger zone, and we have done so with record low volatility, unprecedented in all of market history.”
“Nobody can call tops in advance, nor should anyone as odds are you look like a fool in the process,” but “if markets can’t make new highs soon and instead revert lower toward the 100MA at least or lower (currently 2402) over the course of the next few days or weeks, then markets may indeed follow a familiar and historical script,” he says.
So…there’s a lot of concern out there that’s behind the scenes or at the very least not being featured on the CNBC Party Time Channel. But then Dow Theory isn’t about parties but it is about spotting issues that confirm the market’s action or NOT:
Greg Guenthner’s take from: https://dailyreckoning.com/dont-get-sucker-punched-tumbling-stocks/
The idea is that the two groups combined can measure the overall health of the economy. If the industrials are performing well along with the transports, we can assume goods are being made and delivered. In other words, the economy is humming along. The transports slipping lower could turn out to be an early warning sign that the industrials are in for a bigger drawdown.
That’s why it’s so important that we keep an eye on the sliding transports as we head into the new trading week. We don’t want to get sucker punched by a surprise stock market slide…
Finally, it wouldn’t be BTR if we let these recent articles covering the plight of US Automakers and Amazon’s devastation of the retail space pass without mention:
http://www.marketwatch.com/story/us-car-makers-report-steep-sales-slide-in-july-2017-08-01
The link above is just a read but the weakness we’ve been all over for 9 months is still there. And now on to Amazon’s casualties:
To view the grisly details: http://www.zerohedge.com/news/2017-07-30/amazon-effect-retail-bankruptcies-surge-110-first-half-year
Now on to better times…like 1987! The market’s feeling nostalgic it would seem:
And because it’s soooooo calm, it will feel much worse:
As MarketWatch reports, The Dow hasn’t experienced a 5% drop since 2011, and before that a 5% drop hadn’t happened since 2008, when there were 9 such drops. The blue-chip index closed at a record high on Friday, leaving it just 200 points shy of 22,000. At this level, a 5% selloff would equate to a 1,100-point, one-day slide in the gauge - an eye-popping four-digit drop.
Read all about it:
http://www.zerohedge.com/news/2017-07-30/low-volatility-will-make-next-5-drop-dow-feel-1987
That just about does it for this installment of Halloween in the Summer. Our next FearFest could hit the presses at any time, without notice! Stay hedged my friends!
We’re going to stick with the theme of “playing the game cheaply” that we touched on last week with vertical spreads. We’re also going to use last week’s “dud” of an idea, CSCO, as a focus because that allows us to weave in “keeping an eye on it” theme and “loading from a lower level”, two concepts that we mention from time to time.
Above is a labeled chart of CSCO focusing only on the recent action in stock on a daily basis. Our critical $32.30 level could not be breached on a closing basis in an up market last week, hence, no triggering. But now what? Does technical analysis still suggest that there’s potential in CSCO with earnings due out in a few weeks? Let’s argue that it does but remember this isn’t about a bullish idea in CSCO but more of a theoretical construct. Somewhat arbitrarily, we’ve added in a $31.60 mark-line to denote a possible trigger level or level to at least watch. If CSCO starts to lift above it and looks as if there’s a good chance it could close above it AND the major indices are working well, especially the NDX, we could reconsider CSCO for a lower price point entry. This assumes that solid technical aspects are still in place of course. If we were to enter soon, we’d have to recognize that there will be resistance at our old entry level before CSCO could really pop but that’s just a side note.
We marked up the options chain in CSCO above to show just how cheaply, in dollar terms, an active options investor could become involved in CSCO right now. AND, do it with potential protection. Notice the $0.65 ask price on the Aug. 11 31 calls. That’s right, for $650.00 we can control 1000 shares of CSCO for the next 10 days. It fits us well for other reasons too, namely, after looking at the charts, we wouldn’t want to be long CSCO below the price of $31.00. AND, that call gives us a solid delta with nice gamma for dirt cheap if we’re trying to time this trade well, which we are! But…What if we get in and CSCO starts to slide and makes a new low on its current pullback instead of pushing higher? A bad entry is the result so what do we do? Well, notice the Aug. 4 31 call bid of $0.55. Just a little less than ours and as we’ve noted several times, it could serve us well as a defensive calendar companion should we need it for the balance of this week. Of course, we could go further out with our buy and have 2 31 strike weekly calls “in front” us for hedging purposes as well. That’s always something to consider. BUT, the bottom line remains that we can start out cheap, we can hedge nicely if need be, even make a little after hedging if CSCO falls to the 31 strike and, if not, we have a great call to make money with even if CSCO just moves up modestly.
Even within a crazy market with earnings looming here and there, there are still cheap plays that are possible within liquid stocks. You just have to hunt around for them!
For an actual mini-assessment on CSCO see our Bullish Mention above ^ in Trade Ideas.
If you have any questions please bring those to our next Advantage Point Morning Call webinar.
Have a great week!
The Advantage Point Team