Advantage Point Newsletter - December 26th, 2017
• This Week's Trade Ideas:
Bullish Ideas: None at this time.
Bullish Mentions: None at this time.
Bearish Ideas: Bank of America Corp. > BAC> $29.70 Last. Buy the Jan. 19th 30.50 Puts for $1.15 or less with a close or anticipated close below $29.55 in a down market with expectations for continued weakness in the major indices and the XLF. WARNING: This is a counter-trend trade idea most suitable for the die-hard aggressive players among us or those that just need to trade!
Bearish Mentions: BABA, SWKS, STM, TSM, ON, JBL, LRCX, BBT. – As with last week, take these with grains of courage!
They all have technical problems of some kind (POTENTIALLY). We will cover them in our webinar.
As a reminder, in case we see a break below support, here are last weeks’ bearish mentions again:
ADBE, CRM, PYPL, MA, MON, NFLX, MCD. – We will update the status on these in our webinar if any would like us to do so.
• Market Overview:
We’re still wondering if the gang is “selling on news” or that we’re just taking a breather. The major indices have not been moving higher which is news! The SPYs are enough this week as all major indices are just about sitting right on a support level:
• Below the Radar:
We’ve arrived at the last trading week of the year and as a result, there’s not nearly as much interesting material out there on the Interwebs. Most of what we came across is the usual fare that looks ahead to the new year while reflecting on the highs and lows of this year. Still though, we latched onto a few interesting items…
• Options Academy:
It’s a light week all the way around and that’s even true in Options Academy. We’re sticking with something that we believe to be very important, especially at times like this, when valuation levels appear to be very stretched.
SPECIAL Last Trading Week of the Year Edition!
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.
Bullish Ideas: None at this time. Scans and follow-through analysis produced mainly names at ATHs or too strong of liftoff today (see M as an example (up nearly 5% today))
Bullish Mentions: None at this time.
Bearish Ideas: Bank of America Corp. > BAC> $29.70 Last. Buy the Jan. 19th 30.50 Puts for $1.15 or less with a close or anticipated close below $29.55 in a down market with expectations for continued weakness in the major indices and the XLF. WARNING: This is a counter-trend trade idea most suitable for the die-hard aggressive players among us or those that just need to trade 😊!
Bearish Mentions: BABA, SWKS, STM, TSM, ON, JBL, LRCX, BBT. – As with last week, take these with grains of courage!
They all have technical problems of some kind (POTENTIALLY). We will cover them in our webinar.
As a reminder, in case we see a break below support, here are last weeks’ bearish mentions again:
ADBE, CRM, PYPL, MA, MON, NFLX, MCD. – We will update the status on these in our webinar if any would like us to do so.
Outlook:
Typically, this final week of the year is rather quiet. We expect that to be the case this year, but we can’t forget that the major indices are overbought in a big way. We also can’t forget that there are many support levels lurking about. Additionally, the early trickle of earnings will start just as we get into 2018.
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:
We went from boring and not much happening with our ideas and mentions the prior week, to quite a bit happening quickly in bullish idea SU and the other bullish mentions in the energy space: HAL, SLB, and NBL. All responded to the upside fairly quickly and some with gusto thus our update was sent out late last week to consider rolling etc. They’re still acting well at the moment, but the major indices are sputtering a little to keep you eyes on them as much as possible. Other bullish mentions, GSK and MDLZ, haven’t done much of anything and with the indices at least in “pause mode” for the time being, there’s not much to do in those yet. Perhaps they’ll begin to move if the markets rally…
We also had some nice drop in many of our bearish mentions: ADBE, CRM, PYPL, MA, MON, NFLX, MCD. All have fallen or at the very least not moved higher. Naturally, some have fallen farther than others. We will cover them in our webinar if requested. There are too many downside targets to discuss among them all!
We didn’t have an official bearish idea, but only because the timing wasn’t perfect when we published last Tuesday.
Prior week’s bearish mentions in XEL and DUK have continued to drop nicely and are approaching support levels.
Prior week’s bullish idea in INFY continues to move higher but at a glacial pace. It simply hasn’t thrust up strongly despite clearing a lot of resistance. Again, it hasn’t done anything “wrong”, but, we wouldn’t give this much rope to hang us with if it rolls over below support.
We’re still wondering if the gang is “selling on news” or that we’re just taking a breather. The major indices have not been moving higher which is news! The SPYs are enough this week as all major indices are just about sitting right on a support level:
Last week we wrote:
“We’d be very surprised if the indices succumbed to a significant selloff as there is much in the way of support nearby. However, the degree of overboughtness is truly historic. So…one can never know. There aren’t any problems yet but…”
We’re still there. There’s quite a bit of support and to have things get smashed with only days remaining in the trading year would leave us surprised. On the other hand, we remain very overbought on charts of a larger degree.
Last week FAANG mattered and it is the same this week:
“FAANG, while it is doubtful, COULD be double-topping. If late in the year victim-of-its-own-success selling arrives just in front of the new year, this could roll over hard and let’s not forget that it has gaps galore below. There’s much in the way of support, and we’re not making this call at all (right now), we’re simply saying that a problematic reversal pattern MAY be taking shape….
If the leaders roll over then many other stocks could follow. We shall soon see!”
That blurb above from last week holds true this week. They’ve brought FAANG down even more, and yet they’ve bounced it from a support level as we’d expect. This is something to keep an eye on…
AGAIN, last week’s question was put this way:
“The question is: Will even good news jack us up even higher? “
Given the state of overboughtness, we wondered if even good news could push equity prices higher. It didn’t. That speaks to how overbought we find ourselves and how the Street of Schemes has most stocks priced to perfection. Thus, this week’s calendar may not matter much. It’s very close to, if not officially, the lightest of the year.
We’ve arrived at the last trading week of the year and as a result, there’s not nearly as much interesting material out there on the Interwebs. Most of what we came across is the usual fare that looks ahead to the new year while reflecting on the highs and lows of this year. There’s been so much talk of the yield curve inverting and the possibility of a slow-down on the horizon as result that we’re not going to touch it as this is BTR after all. Still though, we latched onto a few interesting items…
Everyone’s friends at Goldman Sachs chimed in with respect to a reemergence of volatility in 2018:
As can be seen in the graphics above, January is easily the busiest month for preannouncements. So, with that, they’re expecting volatility to leave its dormant state early in the year. We’ll see…Maybe it happens and maybe it doesn’t. If selling does pick up, we could see a repeat of just a few years back:
The Wall St. gang did their best to keep prices elevated through the end of the year but selling kicked in very quickly as many longs were feeling uncomfortable and wanting to book profits in the new tax year. We will see if that’s the case again but with Goldman’s call, FAANG looking “iffy” (at least at this snapshot in time), valuations jacked to near all-time highs, the VIX smashed, everyone on one side of the boat and the SPYs bumping up against big picture resistance, we’re NOT RULING IT OUT.
We’re not the only ones concerned:
Larry McMillan writing for Marketwatch.com is concerned about “masking” as well, you can read about it here: https://www.marketwatch.com/story/technical-charts-warn-stock-market-may-have-a-bumpy-start-to-2018-2017-12-20
The following is material from Sven Henrich which can be found at:
https://northmantrader.com/2017/12/20/as-good-as-it-gets/
That link is worth the full read If you appreciated perspective and things like “talk vs. action”. Here’s what we liked about it the most:
It’s been said that bull markets end on good news and in this regard this may be as good as it gets. 2017 will go down in history as a year where markets got everything beyond their wildest imagination:
The most liquidity injections by central banks ever. (Over $2 trillion). The loosest financial conditions in cycle history:
A Fed that promised a reduction in its balance sheet but actually only delivered noise:
In addition, markets got to enjoy solid earnings growth coming from weakness in the years before. Never mind that most of the price expansion was multiple expansion related:
Other factors favoring asset prices: Negative interest rates across the globe continued to force money into high risk assets (“pushing people“). Central banks such as the SNB kept buying billions of dollars of US stocks. Record inflows of passive ETF inflows chasing returns they can’t find elsewhere. The elimination of organic sellers as part of a normally functioning market place. Buybacks, while not at a record pace, still continuing with billions upon billions of dollars allocated to reduce the float of shares. None of it related to organic growth.
And hence the disconnect of asset valuations from the underlying economy is now larger than during previous market peaks:
My summation here: Things will never be better for bulls. The supply demand equation will never be tilted so uniformly in one direction as they are now.
If you’re one of those folks that just can’t get enough of those year-end reviews and modern markets absurdity, this one’s for you!:
https://www.peakprosperity.com/blog/113568/2017-year-review
This is the mother lode of EOY reviews! It’s incredibly long by any reasonable standard. Good luck and stock a lot of supplies if you plan to take it on!
Finally, if you’re a little concerned or more, here’s a piece from Jim Rickards that will help prep you for what he sees coming next year:
http://bonnerandpartners.com/how-to-survive-todays-bubbly-market/
Happy New Year and Bank and Roll like a Designated Driver!
It’s a light week all the way around and that’s even true in Options Academy. We’re sticking with something that we believe to be very important, especially at times like this, when valuation levels appear to be very stretched.
At a recent weekend workshop that we hosted, one of the most common questions we hear was raised once again:
“Which option is the best to buy?”
This is a very simple but difficult question so we’re going to keep things simple, for now!
Naturally, as this workshop was specifically held for new-to-trading folks, that question garnered a lot of support from the other students in attendance. When new, most people, quite understandably, are looking for “connect the dots” or “follow the steps” type of guidance, and that’s fine. It’s probably how it should be. As the host of the seminar, the last thing we want to do is to leave folks confused. Learning how to practically apply options isn’t easy to start with! HOWEVER, we hate leaving folks to ply away as robots and only robots, so we risked going further and it paid off! We’re going to do that now as we believe that the illustration that follows is near perfect thanks to XEL’s recent action…
Let’s lay out the case. To be perfectly clear, XEL, is actually a “live” bearish mention from not too long ago. So, in fact, we were on the “good side” of its recent decline. However, this chart is ideal for discussing “non-robotic” options selection. So…
- Let’s assume that a month or so ago someone decided to buy a DEEP ITM Call as the stock tried to convert what was resistance into support at the green arrow and appears to want to move higher
- After they’re “in”, as can be seen, the stock price fails to make a new high and treads water above the flat support line several times without breaking below it
- Knowing what we know about new options-based traders, even when the price breaks below support (white arrow), many will elect to expect the 50 SMA (gold line) to hold
- It doesn’t, so they decide to wait for a “bounce” that’s surely coming before exiting the trade in hopes of taking a very “small loss”
- That doesn’t happen and it waterfalls down big with NO BOUNCE (red arrow)
- A deep ITM Call would have likely continued to lose all the way down to this point in time
- A new trader would become dejected and lost quite a bit potentially
And that’s our point! If the player above had opted to go slightly-in-the-money instead of robotically reaching for the 85-90 delta call as they’re typically coached to do (which isn’t really bad 😉), they’d have likely lost much less even with their poor discipline and poor position management skills overwhelming their better judgement!
By anchoring our call strike right at the critical horizontal support level, we add another crucial layer of protection into our trade. Thus, even if we allow the waterfall action to thrash us (or we experience a news-driven downside gap), it’s not nearly as bad as if we insisted on having an extra 15 deltas or so via a DEEP ITM CALL! Yes, we make less if we’re right, to a degree, but we lose less when things don’t turn out well or we mishandle them, or news bites us on the… ☹ Let’s not forget, when we’re on the right side we’re still doing very well!
When new to active trading, this may not be easy to do because “delta rules” do not always apply in a tidy fashion but this can save folks a lot of heartache as they learn to become more disciplined and skilled in position management.
If you have questions, ask away in this week's Advantage Point Morning Call webinar.
Happy New Year! May 2018 bring many blessings to you and yours.