Advantage Point Newsletter - August 29th, 2017
• This Week's Trade Ideas:
Bullish: None at this time.
Bullish Mentions: US Silica Holdings > SLCA. Very speculative counter-trend idea with less than ideal options selections available.
Bearish: None at this time.
Bearish Mentions: IShares Germany ETF > EWG. SPDR Euro Stoxx 50 Fund > FEZ.
Both are vulnerable technically but may need a little more time to develop but they do have better options market liquidity than SLCA.
• Market Overview:
For the third week in a row the low volatility, some would say “no volatility”, environment has given way. This week Hurricane Harvey’s devastation and North Korea’s latest round of madness are being felt in the markets. Last week we noted that the financials and the transports haven’t been acting well. That’s still the case this week as we revisit things but this week we’re adding our “FAANG” chart to our SPYs chart because we can see that the financials and transports aren’t the only sources of concern.
• Below the Radar:
Friends, the sub-surface, aka the market internals just aren’t there. For months, we’ve been chronicling problematic issues that would matter in most times but have been rendered moot due to the staggering financial engineering that remains at work. To be sure, we write this as the levitators are working “OT” to stave off more selling begetting more selling. Let’s get this whirlwind cranked up…
• Options Academy:
With volatility returning of late, we’ve been covering concepts that relate to that development. This week we’ll do so again but in the form of a very simple hedge that goes unnoticed by many. We’ve covered it before but with volatility spiking and the market’s intermediate term trend in technical jeopardy, revisiting it now probably isn’t the worst idea!
Just a little more volatility or the start of something more ominous?
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.
They’re still “not quite there yet”. Last week we used that line with respect to the bulls trying to end summer trading quietly. They’ve had a good year so far and were able to make new all-time highs in the summer months. Everything was moving along swimmingly but things got a little too quiet and that’s what caught our attention along with the attention of many other long-time observers. Now, we’re seeing more VIX spiking action:
But…will they be able to erase this latest eruption so easily yet again? We’re more concerned about this eruption than the prior two. This is not due to the North Korea news specifically but more so the technicals that could develop in the wake of that news.
Last week we noted that the players had been able to prop things up just enough and that the bulls were due to take the stage. They attempted to do that nearly every day by demonstrating strong early morning action but they could not sustain the buying for long and thus indices closed lower than their opening prices nearly every day. That’s something we haven’t seen a lot of recently and it’s not healthy action. The fact that most of it occurred below an intermediate term key support line only adds to the suspense.
We saw very few bearish ideas last week but were not in short supply of bullish ideas. Our work once again helped us identify what the market’s preference was but there just wasn’t enough juice left for bulls to do much with. We noted that a failure to launch could be a signal in and of itself. Which is exactly why we’re concerned at the moment. We need to see how the markets handle the North Korea news, hurricane Harvey news and if we’re only seeing thin, late summer trading or if the volatility we’re seeing is real and for a reason.
We’re putting out a few mentions but the indices are at a juncture that leaves their next move perfectly unclear to us. Initiating at a time like this is about as close to it gets to pure gambling. We looked at dozens of stocks but nothing was even close to a “lay up”. If things sort out then we may have an official idea but we’re sitting on our hands and not forcing anything in this late summer trading environment. We’ve included a few mentions because they’re technically intriguing at this moment.
LATE UPDATE FOR MU:
If the stock continues to trade up it could find resistance just above $32.00. The next tier of resistance above there would likely be just below $33.00.
Bullish:
None at this time.
Bullish Mentions:
US Silica Holdings > SLCA. Very speculative counter-trend idea with less than ideal options selections available.
Bearish:
None at this time.
Bearish Mentions:
IShares Germany ETF > EWG.
SPDR Euro Stoxx 50 Fund > FEZ.
Both are vulnerable technically but may need a little more time to develop but they do have better options market liquidity than SLCA.
Outlook:
August has been a bit of a disappointment with few trading days remaining. The markets are near a critical juncture. Trading can be very thin in late August and thin trading can make volatile movement more of a possibility. Trading now is much more speculative than when we’re on more solid footing especially with all of the economic news due out in the back half of this week. The markets could move swiftly and strongly either way.
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 the “bull stall” capped our MU idea and all the bullish mentions. We knew that could happen but we also knew that there weren’t any bearish ideas to work with at the time. MU has moved up of late and we covered that in our special video update that was sent out Tuesday morning. It’s likely that only the most aggressive players became involved in MU due to the indices struggling to perform during the trading day after strong openings. MU is acting fine but we must always consider the market environment in which we operate.
For the third week in a row the low volatility, some would say “no volatility”, environment has given way. This week Hurricane Harvey’s devastation and North Korea’s latest round of madness are being felt in the markets. Last week we noted that the financials and the transports haven’t been acting well. That’s still the case this week as we revisit things but this week we’re adding our “FAANG” chart to our SPYs chart (both below) because we can see that the financials and transports aren’t the only sources of concern. The SPYs and this small basket of leading stocks is flashing warning signs as well:
Wall St. operators are doing are nice job, as always, holding the markets above key levels. As we write, they’ve managed to set a bear trap for short term traders but we need to see what more they can do with it before we can determine what’s likely to happen next. The one certainty, as we see it, is that risks are much higher now than they have been in quite a while.
We noted how important it would be for the SPYs to be able to get back above trend. That’s still in doubt at this moment. That’s why risk is greater in our view at this time. We can only wait and see…
Last week’s lite data week is followed by a fairly heavy week that features quite a few “heavy duty” numbers. Home prices, consumer confidence, employment reports, Q2 GDP and many other reports will hit the tape this week especially in the back half on Thursday and Friday. This deluge of data could also add to the volatility we’re already witnessing. “Sticking and moving” during weeks such as this has served us well in the past. This could be a good week for pure trading should the markets overshoot and we’ll know if that’s the case soon enough.
Friends, the sub-surface, aka the market internals just aren’t there. For months, we’ve been chronicling problematic issues that would matter in most times but have been rendered moot due to the staggering financial engineering that remains at work. To be sure, we write this as the levitators are working “OT” to stave off more selling begetting more selling. Let’s get this whirlwind cranked up…
Above is something we came across from Tom Lee at FundStrat and the picture says all it needs to. 23 of 24 times is significant to say the least. Tom Lee is not alone however…
From our experience, this is the type of action that’s preceded other market selloffs. Market (SPX) bulls will need to keep prices levitating above the 100 SMA near 2443 or and then 2400 to prevent much more forceful selling from setting in. The point is, conditions are in place so we must step lively. But now…we’re going to take a brief step backward…
Why did the markets make new all-time highs during the recent earnings report deluge? “Beats, beats and more beats” right? Uhhhh….not so fast. As we’ve noted several times and in other ways, it’s a rigged game. Set the bar at the right height and we all win (Courtesy of Lance Roberts):
Time and time again the forward earnings projections have been far too optimistic but no matter, simply revise them lower as they draw closer and claim victory! Works like a charm but hopefully now some readers will better understand our lack of patience for the reporting that comes from Smilin’ Bob “Beats” Pisani on CNBC. Just to put things in perspective, even with all the financial rigging, earnings for the S&P 500 have just made it back 2014 levels but let’s not forget that the gang has pushed up equity prices by 20% since then!:
Another underreported area of concern is Autoland. We’ve covered it here in BTR and some have asked us “Why?”. Popular thought holds that autos aren’t close to what they once were in terms of the US economy. That’s very true but so is this:
“Vehicles account for 20% of retail spending. A crash or even a significant slowdown will impact retail sales and thus GDP.”
That comes from Mike Shedlock as does this:
https://mishtalk.com/2017/08/26/dealers-wildly-overweight-suvs-as-sales-slow/
Worry not, we’ll do what we always do when the rubber hits the road and we’re up against it…we’ll turn to even more creative lending! This time it looks as if they’ll just call it something else:
In an economy that’s never allowed to heal properly and has been almost entirely dependent on credit, the answer seems to always become more credit. What could go wrong?
Before we move on, let’s not forget that what works in autos can work in housing. Guess what else is making a big comeback?
CORRECT!:
You’re not watching the Boomerang Network but you may feel as though you are. It’s time to tap that housing ATM like it’s nearly 2007!
What’s the harm though, right? This time home prices are on a much more solid foun...:
YES, that’s accurate, the credit creation gang has jammed home prices up 5X more than inflation! There’s no air in there especially when we factor in 4 out of 5 Americans are playing the paycheck to paycheck game (see below).
Speaking of more credit, the main money printers were busy recently. They tried their best to “sound the bell” for us by patting themselves on the back for decreasing our purchasing power while they inflated asset prices. Let’s check out the sad dichotomy we return to here in BTR time and time again. First, we’ll listen in on the “haves”:
Bank of England Governor Mark Carney said in early July that “We have fixed the issues that caused the last crisis.”
Fed head Janet Yellen a few days earlier had proclaimed that “[US] Banks are ‘very much stronger’, and another financial crisis is not likely ‘in our lifetime’. “
Just a few days ago, ECB President Mario Draghi somehow managed to squeeze through his windpipe that “QE has made economies more resilient”.
And now a little from the “have not” camp:
The quotes above all come from here: https://www.theautomaticearth.com/2017/08/jackson-hole-and-the-appalachians/
4 out of 5 full-time workers are living paycheck to paycheck while central bankers pat themselves on the back at Jackson Hole. That link is worth visiting if you’re interested in going deeper into the “recovery” years.
We normally don’t include our own chart work in this section but since the precious metals are routinely dismissed by mainstream financial media, we thought this might be a good time to include a chart of the GLD ETF:
As can be seen above, GLD is approaching a key level near $130.00 after potentially making a higher low after a recent new high. Gold may be on the verge of a trend change and the last time that happened after a multi-year corrective phase things became very interesting for gold’s price and then very interesting in the economy a few years later…
The end of summer on Wall St. seems to be producing a little less source material but much as we’re covering the shaky “recovery” in the US, we didn’t want to leave out another. So, this week we’re closing with a few links for those that want to go deeper into “the other” important economy in the form of China. Jake Van Der Kamp doesn’t have much long term confidence in the central planners in China. He sees their “Ponzi Scheme” coming to a sad end: http://www.scmp.com/news/article/2108442/my-prediction-coming-collapse-chinas-ponzi-scheme-economy
And lastly, Ann Stevenson, who’s pulling no punches with respect to China’s housing market along with their currency:
With volatility returning of late, we’ve been covering concepts that relate to that development. This week we’ll do so again but in the form of a very simple hedge that goes unnoticed by many. We’ve covered it before but with volatility spiking and the market’s intermediate term trend in technical jeopardy, revisiting it now probably isn’t the worst idea!
We’re referring to the Calendar Spread. In the past, we’ve discussed how it is typically taught and demonstrated when it’s being initiated. The “vanilla” application if you will. To cut to the chase, the idea is what we “buy time” by owning an outer month call and sell a nearer term call against it, both at the same strike price. We hope for little to no movement and the passage of time will make us money since our long call decays at a significantly slower rate than our short call. That’s just fine and dandy but, in the end, we do still need the stock’s price to cooperate with us and to close around our strike price. Significant movement away from our strike in either direction doesn’t end well for us. There’s more to it but that’s enough for our purposes.
Our preferred use of the trade, and this week’s focus, is to employ it NOT offensively but defensively. We won’t go into all the nitty gritty again but we want to demonstrate why this strategy is of potentially great use to us at the proper time.
Technical times like these can be harrowing. If we have correctly identified that there’s much greater risk at present yet the long-term trend remains (at this moment) bullish, what should we do? Well…assuming we’ve been riding the uptrend via long calls, let’s look at a fitting example…
Let’s say that we’ve been using the AAPL Nov. 145 calls as our vehicle to ride AAPL’s stock through most of the fall. With AAPL’s price near $162.70, it is valued at $20.00 with an 81 delta. Let’s say that we’ve been holding 10 of those calls so our aggregate delta is 810 (10 calls x 81 delta). Thus, AAPL “feels” like about 810 shares of stock to us now and it is on its way to feeling like 1000 shares as long as AAPL remains above $145.00 at November’s expiration. That’s what we’re controlling at present.
Now, we have to imagine that we still like AAPL but that the indices have left us concerned at the moment. In fact, we know from history that early September can be rough on stocks. If we’re uncomfortable we can get out but we really do not want to do that as AAPL continues to act well. So, instead, we decide we’d rather stay in and hedge our risk for the moment but just for the moment. We decide that we want to be closer to neutral while the market decides if North Korea matters or not etc.
How do we do it? Very simply. We opt for the defensive calendar spread. If we look at the September 22nd expiration and find the $145.00 strike calls there we can see that they are trading at $18.40 with a 90 delta. We’re looking at these because they’ll provide 3 weeks of insurance to us which seems like enough time to watch things develop and, of course, we can take them off at any time we’d like. Getting back to it, how many do we sell to transition into a defensive calendar spread? Good question! If we sell 10 of them, that’s 900 SHORT deltas that will offset our 810 long deltas. That would make us net short 90 deltas in our aggregate position. Thus, if AAPL continues to rise, we’d lose $90.00 per dollar at the moment. Maybe we “over-hedged”? Maybe, so let’s dial it down to sell only 9 of the September 22 145 calls. 9 x 90 delta = 810 short deltas which just so happens to perfectly offset our 10 81 delta November calls that we’re long. We’re now “DELTA NEUTRAL”. Yes, we won’t make any money if the stock price moves up but we’ve done a nice job to hedge ourselves should the stock drop suddenly in a market washout. This is what we call “hitting the pause button”. It’s very important to note that we didn’t “buy protection”. In fact, we actually brought capital into our account by selling the Sept. calls as our hedge. We’re not going to make much nor lose much respectively while this new hedged position stays intact. However, this will buy us time, for very little effort on our part, to further evaluate the market’s next twists and turns with a clear, hedged, head on our shoulders. If the market snaps, so be it, we sidestepped giving a lot of our profits back if AAPL snaps with it. If the market holds together and North Korea et al. recedes, we simply buy back the Sept. calls and proceed as if nothing happened. Once again, we can sleep at night with very little effort if we’re willing to dial back our greed for a few days to a few weeks. Temporary insurance for little to nothing. Think about it…
If you have any questions please bring those to our next Advantage Point Morning Call webinar.
Have a great week!
The Advantage Point Team