Advantage Point Newsletter - December 12th, 2017
• This Week's Trade Ideas:
Important Note***: The FED meeting and post-FED fallout could dominate the week’s action and change things radically. We must mention this because trading in front of that announcement and testimony is potentially risky as is waiting too long after the FED news to pull the trigger on an idea. The prudent thing to do is to wait to act after the FED has done their thing. We don’t care much for FED meeting weeks!
Bullish Ideas: International Business Machines. > IBM > $156.74 Last. Buy the Dec. 29th 155 Calls for $3.85 or less with a close or anticipated close above $157.85 in an up market with expectations for continued strength in the major indices.
Bullish Mentions: JNPR, CPB, SPG, SKT, DRI*.
Bearish Ideas: OLIN Corp. > OLN > $34.29 Last. Buy the Jan. 5th 35.5 Puts for $1.90 or less with a close or anticipated close below $34.00 in a down market with expectations for continued weakness in the major indices.
Bearish Mentions: HPQ, XBI, EZU, XEL, DUK.
• Market Overview:
If you read last week’s Market Overview, you know that’s just about what the markets delivered. The selling ceased on Wednesday morning as we held our webinar and the bulls have slowly but consistently marched stocks right back to the highs.
• Below the Radar:
This week will be a little different here in BTR. Since so many interesting items have popped up over the past week, we decided to present a full smorgasbord. Upcoming weeks are likely to be lighter fare as things shift further into Holiday mode. Please choose from the offerings that follow to your heart’s content.
• Options Academy:
This week will be a complete departure for us here in OA. We’ve been all over bullish vertical spreads the past 3 weeks but with the “Holidays Rally” unfolding before our eyes, and Earnings Season just about a month away, we’re getting a jump on things!
Make sure to attend the Advantage Point Morning Call each Wednesday morning at 11:00am Eastern Time. This webinar is included in your Advantage Point subscription so there is no extra charge. If you haven’t registered yet, go to: https://attendee.gotowebinar.com/register/6449584955832188673 now!
Only Three Weeks Away from Booking the Perfect Year! (SEE BTR)
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.
It’s been more of the same more or less! What does that mean? 😊
The past few weeks we’ve led off with comments to the effect “that we’d be very surprised if the market gives the bearish side a real chance to trigger” and that a pause was due. Well, unsurprisingly at this point, the pause was very brief, and they levitated us right back to where we were! In effect, we’ve gone “nowhere” even though we moved! Now, we have to see if there’s even more new all-time highs just around the bend or if we’re double topping. Much more on this type of stuff in Market Overview.
Important Note***: The FED meeting and post-FED fallout could dominate the week’s action and change things radically. We must mention this because trading in front of that announcement and testimony is potentially risky as is waiting too long after the FED news to pull the trigger on an idea. The prudent thing to do is to wait to act after the FED has done their thing. We don’t care much for FED meeting weeks!
Bullish Ideas: International Business Machines. > IBM > $156.74 Last. Buy the Dec. 29th 155 Calls for $3.85 or less with a close or anticipated close above $157.85 in an up market with expectations for continued strength in the major indices.
Bullish Mentions: JNPR, CPB, SPG, SKT, DRI*.
Bearish Ideas: OLIN Corp. > OLN > $34.29 Last. Buy the Jan. 5th 35.5 Puts for $1.90 or less with a close or anticipated close below $34.00 in a down market with expectations for continued weakness in the major indices.
Bearish Mentions: HPQ, XBI, EZU, XEL, DUK.
Outlook:
The strong movement from the prior week left last week to be a combination of selling and buying. We dropped off, found support just about where we’d expect, and then bounced right back to all-time high levels. The FED meeting and fallout could keep us in a holding pattern and then volatility could pick up in the aftermath.
Technicals: Will be discussed in-depth in the Advantage Point Morning Call webinar.
Fundamentals: These trade idea(s) and mentions 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:
After a very active week just prior, last week was a “dud”. INFY, our lone bullish idea or mention, churned until Monday of this week when it finally closed above $15.80 in an up market. We’re keeping an eye on it and our take is that it’s late trigger means that we won’t allow it much rope to hang us with. It needs to move and move soon as the FED announcement is due shortly and that could alter the landscape. Chances are it won’t, but it COULD. The idea is still valid if the markets extend this rally leg but the buy cycle in the indices could be at mid-stream.
Our bearish mentions in RIO, BHP, and RCL didn’t really run higher when the indices bounced and moved back up, but they didn’t sell off either, and that’s to be expected. As noted, we really want the market behind us especially when trading counter-trend to the bullish long-term trend in the indices. We didn’t get that chance so none of these mentions have had a chance, as of yet. We’ll keep an eye on them as best we can.
Last week, this concluded the initial commentary in our Market Overview: “The markets need and should take a breather. We can never know for sure but that’s our best guess as to what happens this week, big news aside. If the markets pull back, we expect it to be mild and we cleaned up our charts a little so that the support lines that reside just a little below current levels, are very clear to be seen.”
AND, that’s just about what the markets delivered. The selling ceased on Wednesday morning as we held our webinar and the bulls have slowly but consistently marched stocks right back to the highs. Our notations “say it all”:
On a side note, the DIAs and SPYs have become interchangeable again and the NDX is close to melding right in with them. The only “thing” again is FAANG…
Last week, FAANG was only concern we could find and they took care of that “right quick”:
FAANG needs only a little more push and it too should again try to join the all-time high club. We shall soon see. So, as you can see, it appears to be full steam ahead and that’s been the case with nearly every FED meeting since 2009…
The economic calendar, as usual, gets heavier mid-week and beyond. There are important numbers due out but the FOMC announcement along with Janet Yellen’s comments are likely to capture the headlines above all other things. Our take this week is the same as the past few weeks: “ We expect the news to be “good” on balance and expect it to further buoy stock prices. “News” would be made if the news did not serve that end.” It would truly be a surprise if Janet the Dove along with the economic data produced a selloff. The Wall St. gang is too close to the “perfect” year (see more on this in BTR) and it would take a real panic to set in to see lower prices. It can happen of course, but it seems unlikely.
This week will be a little different here in BTR. Since so many interesting items have popped up over the past week, we decided to present a full smorgasbord. Upcoming weeks are likely to be lighter fare as things shift further into Holiday mode. Please choose from the offerings that follow to your heart’s content.
As mentioned above and before we get started with this week’s main themes, we just want to mention that we’re only 3 weeks away from the first year in which the market never had a down month!:
And there you have it! Soooooo close…
And now onto inflation, sustainability, and beyond…
Here’s a reasonable read re: 2018’s action, with a curious title:
One of their concerns, apart from “it’s just too good”, is inflation which brings us to:
Just to be clear before moving on, we want to put your fears to rest that the problem isn’t that American workers are earning more:
But now, back to the PPI… Are the years of “liquidity” juicing finally starting to register? Loans are ramping up and things are getting loan-dependent and loose again. Do you hear that echo?
Moody’s, maybe learning a lesson from last time around, is trying to earn back its lost credibility. It’s a long read but if you want to be “early” on knowing if what went around in 2007 is coming around again, check it out.
Before you become too concerned about the US housing bubble err um “market”, keep things in perspective! Homes are cheap here!:
Talk about the US exporting its inflation! In comparison, Canada seems to have perfected housing inflation! Granted, there’s plenty of foreign buyers in that market but how sustainable are things, really?
We don’t want to be guilty of being “North America Centric” so…let’s see how the liquidity party has played out on a global basis:
First Sweden:
And now, the spill over into world stock markets:
If you believe that technical slopes of >85 degrees are sustainable, you’ve got nothing to worry about! In addition to that, here’s another snapshot of “valuations” vis Mish Shedlock:
US large cap stocks are the most overvalued in history. Let's investigate six ways.
Crescat Capital claims US large cap stocks are the most overvalued in history, higher than prior speculative mania market peaks in 1929 and 2000.
Six Ways Socks Most Overvalued in History
- Price to Sales
- Price to Book
- Enterprise Value to Sales
- Enterprise Value to EBITDA
- Price to Earnings
- Enterprise Value to Free Cash Flow
And further speaking of inflation and sustainability, we’ll look liquidity/debt-driven modern madness in a variety of other ways courtesy of one of our faves, Charles Hugh Smith. If this interests you, head to the link for the full read as we’re going to let the graphics shine through simply to show how widespread it all really is:
http://charleshughsmith.blogspot.com/2017/12/the-cost-basis-of-our-economy-is.html
It pays to be an insurer or administrator!
It also pays to be a student loan player!
More on sustainability:
Wages can’t support the madness, but debt serfdom surely can! At least, for a while! Make sure you know what to do when the music stops playing!
Not that anyone will care, until they do, but things are really getting there, and this will only worsen once Q3 and Q4 are updated.
Courtesy of Bloomberg via the Office of Financial Stability:
Speaking of valuations, the OFR was clear to warn that these are "high by historical standards”. The cyclically adjusted price-to-earnings ratio of the S&P 500 is at its 97th percentile relative to the last 130 years. Other equity valuation metrics that the OFR monitors are also elevated.
Just as… what’s supposed to continue to happen with interest rates?:
Where has all the liquidity juicing left us?:
How about…nowhere! And, remember, its much worse than it appears as the CPI is intentionally understating true inflation! Here’s all that’s been accomplished…They’ve goosed up asset prices and left most in a situation of not getting ahead while needing to take on more debt simply to keep up.
Finally, the asset inflation isn’t as limited as we’ve previously believed. We’re now at the stage at which they’ve even managed to inflate people’s brains! Read on…
It’s said that they don’t ring a bell at the top, but the “little guy” is doing just that if you’re an odd lot/contrarian timer. Here’s the dessert portion of this week’s smorgasbord:
Stay NIMBLE my friends! AND…BANK and ROLL like a robot!
This week will be a complete departure for us here in OA. We’ve been all over bullish vertical spreads the past 3 weeks but with the “Holidays Rally” unfolding before our eyes, and Earnings Season just about a month away, we’re getting a jump on things!
Clients have been asking about “earnings plays” and how to handle them with an increasing frequency so we thought “Why not?”
We’re going to let the picture do a lot of our talking for us this week and here it is:
We’re on the record on many things but those that pertain to this week’s discussion follow:
- We aren’t fond of Earnings Season. It introduces more uncertainty into the process. That makes our forecasts less reliable. We like simple, “news-free” trending times.
- It’s simply too risky without being able to “connect the dots” ahead of time (see below). Not only can we be “wrong” about direction, but the options become much more expensive and thus “wrong” produces a negative double-whammy.
- With options being so pricey, we REALLY need to be right about the forecasted move by a lot to overcome that drag when buying pricey options.
- Certainly, we like selling pricey options, but that’s when we believe they’re too expensive and significant movement is unlikely. We can’t feel that way about earnings which tend to produce random fallout. So yes, we’re tempted but…
- You can be “right” about revenues, earnings and even guidance and still LOSE!
- This, we hate with a purple passion!
- We want our time, effort and energy to be spent productively and reliably productively at that!
- You get the idea!
Note on the chart (Yellow Arrows) above how Implied Volatility levels rose significantly into the earnings releases without exception. If you show up late to the party, you end up paying a high price to play the game. Furthermore, note how far it diverges from Historical Volatility levels. This we expect for sure but now let’s look at the payoff…
Yellow Circles denote “DUD” earnings outcomes while Pink Circles indicate significant earnings-fallout. Since we “cherry picked” the chart 😉, naturally, there’s a balance, 4 Duds vs. 4 Movers. This backs up our “coin flip” take on earnings and why we avoid them simply because we do not like to guess. Occasionally, we do play earnings under certain circumstances, but those circumstances always include our belief that we’re “connecting dots”. That means that we believe we have an edge, based on some legitimate research, that the earnings announcement is much more likely to produce an outcome one way vs. the other. THEN, and ONLY THEN do we stay in for the “earnings play” but that’s normally with the “house’s $”, meaning, we’ve made money in the stock prior to the earnings and we’re parlaying that with our earnings bet.
Next week we’ll pick up on this and other observations of ours. Can we have another look at the chart above and approach earnings in other ways to profit? We think so…
If you have questions, ask away in this week's Advantage Point Morning Call webinar.