• This Week's Trade Ideas:
Bullish: None at this time. The cycle in the DOW seems stale to us. SPYs and NDX not confirming yet.

Bearish: Masco Corp. > MAS.  Buy the Aug 18th. 38 Puts for $0.80 or less with a close or anticipated close below $37.50 in a down market with expectations for continued weakness in equities markets.  We need this to trigger soon to stay with this option.  If it triggers late this week we’d prefer the Sept. 15th 38 puts.

Dow Chemical > DOW.  Buy the Aug 18th. 64 Puts for $1.25 or less with a close or anticipated close below $63.10 in a down market with expectations for continued weakness in equities markets.  We need this to trigger soon to stay with this option.  If it triggers late this week we’d prefer the Sept. 1st 64 puts.

• Market Overview:
It’s a relatively light week on the economic news front but earnings remain quite heavy. Our take is that the TV chatterboxes will chat up the CPI number as inflation is a big piece in the FED’s factoring. We can’t take that seriously since we’re consistently told by the same folks that there is no inflation yet we can’t forget paying 25c for a big Snickers bar many summers ago. In short, we expect more of the same.

• Below the Radar:
Last week’s BTR was a summertime “FearFest”, at least that’s how we labeled it. This week’s theme is “what’s old is getting old again” or “oldies but not so goodies”, take your pick.

• Options Academy:
With little beyond the DOW’s daily waft higher occurring on a daily basis, we found ourselves wondering, for an extended period, as to what may be timely to hit on in Options Academy. We settled on the Calendar Spread. This is the “dream a little dream” put calendar variety that we’ve discussed in past webinars. But, we did cover it a little way back here and mainly focused on using it in its OTM form as a low risk way of capturing profits from both directional movement and the passage of time. This week let’s briefly look at timing, placement, delta and volatility but not necessarily in that order.

DOW in “Slo-Mo’ Blowoff – But what of the rest?  It’s Dog Day after Dog Day until further notice…

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 rally in the DOW is stale but remains unrelenting.  The SPYs and NDX are trying to reenergize after a few weeks of virtually nothing.  More than ever, volume and volatility are absent from the equation in ways that few longtime observers fully understand.

(It’s officially historic folks: “A fascinating statistic about the current no-vol state of the market, courtesy of Deutsche's Jim Reid, who points out that the last time we had 13 consecutive days in which the S&P moved less than 0.3% in either direction was... never:”)

http://www.zerohedge.com/news/2017-08-08/market-has-never-done

To put the steady but relentless rally in the S&P in context, it is now 73 trading days since the S&P increased by more than 1% in any one day. Give it another 7 days and we will beat the prior record set back in November 06 and March 07. Although, given the current lull in the activity (VIX now back to below 10), we might even get close to the 100 day record set back in mid-July 1995 to early Dec 1995.

And from BofA:

Earlier this year, the Dow recorded its lowest one-month trading range since 1900, and last summer the S&P traded within a 1.77% range for 42 consecutive days, the tightest such streak in history (the lull was ultimately broken on 9-Sep-16, when the S&P 500 dropped 2.45% on ECB policy, North Korea, and a fear of higher rates in the US).

Bullish:

None at this time.  The cycle in the DOW seems stale to us.  SPYs and NDX not confirming yet.

Bearish:

Masco Corp. > MAS.  Buy the Aug 18th. 38 Puts for $0.80 or less with a close or anticipated close below $37.50 in a down market with expectations for continued weakness in equities markets.  We need this to trigger soon to stay with this option.  If it triggers late this week we’d prefer the Sept. 15th 38 puts.

Dow Chemical > DOW.  Buy the Aug 18th. 64 Puts for $1.25 or less with a close or anticipated close below $63.10 in a down market with expectations for continued weakness in equities markets.  We need this to trigger soon to stay with this option.  If it triggers late this week we’d prefer the Sept. 1st 64 puts.

We’re trying to catch these bearish ideas in the next day so there’s enough time to profit with a short-dated option.  If they should trigger on Thursday, Friday or early next week, further out expirations would be much more suitable.

Outlook:

The song of the past few weeks remains the same.  We could have triple-quoted ourselves from 3 weeks ago but we decided to give it a rest!  The historical levels of disregard for risk and the utter lack of volatility confirm that the mania has nearly everyone drawn in at this point.  The charts remain intact for more bullish action yet the bullishness is a little stale and things are overbought.  Our guess is that this persists a little longer but we don’t expect it to last forever and our hunch is that the next two months will tell a different tale. (See Fred Hickey’s comments below in BTR)  But for now, the bullish cycle seems like it needs a breather and, in some stocks, the bearish cycle seems to want to take over in the short run.

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:

DXJ triggered in a mild way and much like the DOW it has tried to meander higher but it’s not lighting the world on fire by any measure.  It’s little rally attempt is aging and on its way to stale status but it did get within 2c of a new 52-week high.  Summer trading environments are often like this and we just have to deal with the listlessness if you want to be in the game right now.  Maybe with the SPY and NDX trying to emerge from their naps, DXJ will have a chance to breakout a little more???

CSCO… did it again.  Last week it was our Bullish Mention and it did make new recent highs and even did so this week but it has not been able to surmount its 200 SMA and begin the giddy-up process.  It still has potential but aside from a price alert that would need to trigger soon, we’re tired of talking about it!  Earnings are due out in a week so it needs to start to move soon to capture a pre-earnings run.

Bullish Mention MOMO finally made a new high but it hasn’t quite ramped yet.  Bearish Mention IR didn’t do much of anything after initially being weak.  It’s lifted off new lows but the next big move remains to be seen.

The DOW’s string of historic closes are not the only thing historic happening of late.  The low volume (some would say “no volume”), low volatility (some would say “no volatility”, see below) slow-motion melt up has been more historic than most realize (see what we uncovered in BTR).  Perma-bears, shorts and volatility longs are battered and then battered some more with each passing day.  To say that the central banks have pushed everyone to “one side of the boat” is certainly an understatement.  Few seem concerned about the prospects for rising interest rates.  Few seemed concerned with respect to the FED reducing their balance sheet.  Fewer still are troubled by financial engineering on either the micro or macro scale.  Even fewer have the slightest concern with respect to the bogus numbers that are produced by “official sources” that litter “key economic reports”.  “Fake it ‘til you can make it” (see graphic and link: http://www.zerohedge.com/news/2017-08-07/elevated-2018-estimates-widen-gap-between-gaap-non-gaap-earnings ):

…and keep on “kickin’ the can” have worked like a charm and it appears they’ll continue to do so. (hyper engineering is a recurring theme in BTR, check this out if you want a deeper view and to understand why we believe as we do: http://www.zerohedge.com/news/2017-08-07/matt-king-we-are-more-reliant-central-banks-holding-markets-together-ever )

Many measures and conditions have become absurd but they always do before a bull market ends.  We’re a little more than 6 months way from the completion of year 9 of this bull market.  It would seem, at least from a historical perspective, that we’re likely to face a major challenge to the status quo before we can get there.  Two of the months that have been historically challenging for the market lie just ahead in September and October.  February is another but it is a way off.  So…we’ll keep our eyes open in the months ahead but for now, other than being long-in-the-tooth and a little tired, there’s really nothing drastically wrong with the Technicals in this market and thus we’ll treat it as such as much as we can but we’re not comfortable.  Our “spider sense” is telling us we shouldn’t be too comfortable right now!

There’s not a lot we can do when there’s virtually no room (movement) from which to do it!  This year has been like few others.  BTR is littered this week with its statistically historical oddities.

It’s a relatively light week on the economic news front but earnings remain quite heavy.  Our take is that the TV chatterboxes will chat up the CPI number as inflation is a big piece in the FED’s factoring.  We can’t take that seriously since we’re consistently told by the same folks that there is no inflation yet we can’t forget paying 25c for a big Snickers bar many summers ago.  In short, we expect more of the same.  If, at all possible, expect everything to be treated positively in any way possible because we’re not even “there” yet!:

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:

http://www.activistpost.com/2017/07/california-home-prices-skyrocket-faster-than-official-inflation-rate.html

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:

http://www.shtfplan.com/headline-news/the-elites-are-jumping-ship-as-the-financial-collapse-draws-near_07272017

http://www.shtfplan.com/headline-news/they-know-something-that-we-dont-corporate-insiders-are-unloading-their-stocks-like-theres-no-tomorrow_05032017

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.

http://www.marketwatch.com/story/stocks-just-entered-the-danger-zone-as-this-ominous-flag-appears-2017-07-31

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