• This Week's Trade Ideas:
Bullish Ideas: Infosys LTD ADR. > INFY > $15.69 Last.  Buy the Jan. 19th 14 Calls for $1.95 or less with a close or anticipated close above $15.80 in an up market with strong expectations for continued strength in the major indices. 

Bullish Mentions: None at this time.

Bearish Ideas: None at this time.

Bearish Mentions: RIO, BHP, RCL.

• Market Overview:
The Wall St. operators relentlessly moved up the DIAs, mostly via futures jam-jobs. EOY bonuses, Santa Claus, short-squeezing and manic buying all seemed to contribute to the festivities. NOW, however, we’re sticking with “too far, too fast”. The markets need and should take a breather.

• Below the Radar:
November is in the books and Wall St. Operators marked things out at all-time highs! Those managers at those firms that end their years officially as Nov. 30th, are going to enjoy those bonuses! They’re locked in now. They’ve goosed up quite a year for themselves! So, what happens now?

• Options Academy:
Once again, we’re hitting on vertical spreads to essentially finish up on them, at least for now. Let’s start with where we left off last week…

Even Newer All-Time Highs...but the Snoozefest seems to have finally ended in time for bonuses!

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.

Last week we led off with this:

“We’re off and running again after a holiday pause.  We still see no reason to pick a fight with this market.  However, we’ve put out ideas or mentions on both sides just in case.  We must admit however, that we’d be very surprised if the market gives the bearish side a real chance to trigger.”

We’re very happy to have not picked a fight with this market too soon, especially the DOW!  The relentless jam higher that’s, as has been the case for many years, been achieved with overnight futures rallies has been very sharp and very painful for premature bears.  As our late week update noted, they’ve moved it all too far, too fast, from where we sit so at the very least a pause would seem to be in order hence, our suggestion that profit-taking/rolling be considered.

Bullish Ideas:

Infosys LTD ADR. > INFY > $15.69 Last.  Buy the Jan. 19th 14 Calls for $1.95 or less with a close or anticipated close above $15.80 in an up market with strong expectations for continued strength in the major indices.  We’re not kidding!

Important Note:

THE AIR IS GETTING VERY THIN UP HERE!  We’ve had difficult weeks during this year when there simply wasn’t any volatility and thus very little in the way of ideas that were both ready to move and safe.  After many good signals popping up last week, we most-definitely find ourselves back in idea-challenged times!  If the indices find a way to continue to move up strongly, INFY has a chance to break through resistance and move but this market remains lofty so please remain fully aware of that!

Bullish Mentions: None at this time.

Bearish Ideas: None at this time.

Bearish Mentions: RIO, BHP, RCL.

RCL especially will need a break of a critical support level which we’ll cover in our AP Morning Call but the others will as well. 

Outlook:

Last week we finished out this mini-section with this:

“As of Tuesday morning’s action, we may have finally gotten to the “more”.  Hopefully this nascent bullish uprising is just getting started and we’ll get better movement from the indices.”

Fortunately, we did get that movement but as a result of it being so strong, we have to believe that a pause is in order.  That’s really about it!

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’ll lead off with the bearish mentions this week since there were only 2: ORCL and AZN.  As you’ll recall, we forewent the chance to actually put a bearish idea on last week and thus we kept it to mentions-only on that side.  Interestingly, both stocks are lower from where they were last Tuesday.  The gang tried to lift them at times, using the DOW mania-movement as cover, but both have remained relatively weak and there could be more downside in both if the market actually pulls-back for a few days.

As for the bull side, official idea LOW took off on us quickly on “Day 1” and just kept going.  It was a very strong performer that gave us the type of “resistance-busting” movement we seek out.  Since spotting it near $81.00, with $81.43 as the last officially, it ran up to $88.55.  We can’t complain about that, so we won’t.

To a nice extent, the bullish mentions in the airline stocks, AAL, DAL, and UAL, joined SAVE in moving up with the market itself.  Fellow retailer and bullish mention TSCO, also moved up very well much as LOW did.  Yet another bullish mention, CL, also broke out and moved up in a way that leaves us complaint-less.  Yet another retailer and bullish mention TIF, also moved up late in the week but it has subsequently backed off to about where it was when we covered it.

Finally, recently published bullish ideas in HOLX and SAVE jumped nicely for those still in them or following them.

To summarize, after having a “turkey” of week just prior to last week due to the “nothingness” that was Thanksgiving trading, we probably had our best week of the year with last week’s idea and mentions and it didn’t hurt that prior ideas also began to participate as well, ones we keep our eyes on.  We always try to make the point that our ideas and mentions are likely to work best if the market allows them to do so.  Last week was a case in which the markets allowed our names to move and they all took advantage of it.

We’re going to switch it up this week and present a chart of the DIAs but we want to recycle last week’s comments as we do:

“The SPYs are unique this week in that they appear to be close to a line of resistance.  Normally, this would matter a great deal to us but, at the moment, we’re wondering if it will at all.  And, here’s why:

That there’s a lot more room to run.  The recent pattern in all three was holiday-esque in the sense that things were sleepy and remained sleepy until today.  But after, let’s call it a brief nap, the gang is ready to goose things even higher it would appear.  The SPYs are right up against it, so to speak, but the DIAs and the NDX have room and we expect them to try to use it.  Our guess would be that the SPYs are then tugged higher for the ride which will bring them through the nearby resistance line.  There’s not much we can say in the way of negative technicals, at the moment.  It is possible that the SPYs being stopped could somewhat slow down the other indices but that seems less likely to us.  We’ll close out this section with the same line we used from last week:

“There's no immediate worries on the charts and thus it would take news of a serious kind to cause any serious selling from where we sit.”

There looked to be a lot of room for the DOW and boy did it use it!:

The Wall St. operators relentlessly moved up the DIAs, mostly via futures jam-jobs.  EOY bonuses, Santa Claus, short-squeezing and manic buying all seemed to contribute to the festivities.  NOW, however, we’re sticking with “too far, too fast”.  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.

Our only significant concern, at the moment, which could become a significant issue for the market shortly, is FAANG:

FAANG may be attempting to close a gap (Yellow oval) quite a bit below the current support level.  That could trigger broader-based selling in the markets and bring much more down along with it as FAANG tumbles.  It’s holding so far, but we’ll need to keep an eye on it.  As with other important areas of the market, there’s a good deal of support levels to cushion a fall.  FAANG’s potential descent, and other issues however, could exacerbate a selloff if there is to be one (see Below the Radar).

The economic calendar is consistent throughout the week with each day bringing bits and pieces of key reports.  As EXACTLY like last week:  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.

We’d be surprised if the economic data sent the markets spiraling lower.  If anything, we believe they’re more likely to arrest the natural selling that should occur after rising to such short-term overbought levels.

November is in the books and Wall St. Operators marked things out at all-time highs!  Those managers at those firms that end their years officially as Nov. 30^th, are going to enjoy those bonuses!  They’re locked in now.  They’ve goosed up quite a year for themselves!  So, what happens now?  Tough to say for sure but we’ll keep our eye on the radar screen because that’s simply what we do!  However, this week only a limited amount of content has been picked up by radar thus far…

Here’s a quick link on the state of the yield curve and if you prefer to place your trust in the bond market or stock market:

http://www.zerohedge.com/news/2017-12-05/yield-curve-just-keeps-collapsing

The bond market action vs. the stock market action has been the “big talk” over the past month or so and it’s not likely to fade any time soon unless things change.

If you don’t want to trust bonds, maybe you should trust copper.  Copper is “headin’ the other way” too, as in, heading away from commerce picking up as we’ve all been told it is and not just here, but abroad as well:

Other commodities haven’t joined Copper’s party but it’s looking more and more like they may have been smart to miss it as copper is trending lower.  Will it recouple?  We will see but this doesn’t seem to support the “growth is picking up everywhere” mantra we’ve been hearing.  Copper is considered most critical, but the commodities as a whole are important too.  Energy isn’t jamming up quite the way it was a while back and interest rates are expected to rise.  These are all concerning areas, but they take on greater importance because of where things stand within a historical perspective.  First off, please note “distance” between the S&P 500 and the current VIX level while paying close attention to what has occurred at other times when the spread between the two became extremely wide:

Now, as we work our way to the last bit for the week, we want to present the few graphics that follow so that readers understand where “the rest of the market” is currently.  This is important because things have become too serene it would seem.  Along those lines, we know where FAANG is (see above) and where the S&P 500 is technically, so to speak, and in the blurb below we can see that large caps are trading in their 89^th percentile of their historical valuation range, but what of mid-caps and small-caps?  Rather than charting them, we’re going to look at them in term of historic valuation levels.  Something we haven’t done in quite a while but we want readers to see where “the whole market is”:

Looking at valuation, BofA notes that both small and mid-caps both trade at the 99th percentile of their historical valuation range since 1979 vs. the 89th percentile for large caps.

Despite underperforming the other size segments, small-cap valuations expanded to a new cycle high of 19.3x, the fourth-highest level in data history, and just 3% from the all-time high (19.9x). Putting this in context, Suzuki writes that "small caps are now more expensive than they were at the peak of the Tech Bubble."

We can finally get to our main point of the week.  From time to time we make it a point to note that Below the Radar is not about what’s happening and being thoroughly over-covered by the media, but instead about what’s happening or could happen that the media tends to overlook or downplay.  Yes, we believe in the “be prepared” motto.  With these sentiments in mind we’ll close things out this week with:

If you want to know and appreciate just how rare and historic and to what degree and by what factor the volatility crush of 2017 has been, just take a good look at the graphic above.  In the past quarter century, we’ve never seen anything remotely close to what we’ve seen this year.  DOWNSIDE risk is more under-appreciated by more parties than we have ever seen.  The volatility selling has gotten way beyond carried-away.  Are they all trying to figuratively whistle past the graveyard just until the year is in the books?  Stay NIMBLE my friends! AND…BANK and ROLL like a robot!

Once again, we’re hitting on vertical spreads to essentially finish up on them, at least for now.  Here’s where we left off last week:

We’ll leave off here as we’ve now set the table quite nicely for next week’s OA installment that will focus on the passive approach we alluded to last week.  We may have to switch sides of the fence but who knows?  The grass may look greener for some once we do! 

So, here it is, the passive approach.  As we noted, we must move over to the other side, the put side of the fence, to get this going.  Via the chart and options graphics below, we’re going to travel back to November 21^st to stay consistent with the call side verticals we’ve discussed the previous two weeks.  The date is the same but the closing price we’re working from is slightly different as are the options values.  It’s not much of a difference but we need to note that as we’re working of an AAPL close of $173.14 which is a little lower than in our prior call verticals.  The concept remains valid and that’s what is important.

As highlighted on the chart above, at that point we believed that there was strong, “tested” support just above $168.00 in AAPL and we believed that it was also turning higher for hopefully a move in that direction.  As a result, we decided to hypothetically approach things as discussed just below the options graphic.

With this passive put vertical spread, we’re going to sell the Dec. 8^th 167.5 puts for $0.67 (Red) and buy the Dec. 8^th $165.00 puts for $0.40 (Green).  This will result in us receiving a credit of only $0.27 which on a 1-lot trade would be $27.00 real world dollars and if we do a 10-lot spread it would be a $270.00 credit.  Of course, the most we can make is what we sell the “package” for, which is $27.00 per spread.  The max loss on the other hand is the spread between the strike prices in dollar terms ($167.50 - $165.00 = $2.50) from which we then subtract our $0.27 credit from to arrive at our max loss: ($2.50 - $0.27 = $2.23 max loss)  So, as can be seen, in real world dollars, we’re hoping to make $27.00 per 1 lot but if we’re dead wrong we could lose $223.00 per 1 lot spread we trade!  OUCH!  But that brings us to the rationale and likelihood considerations and for those we need another picture!:

We tweaked and added a few things to make things clearer, hopefully it worked!  The Green shaded box can be thought of as “stock price real estate” that we believe will be worthless.  In other words, we do not believe that AAPL’s stock price will fall into it by Dec. 8^th, our expiration date.  Here’s a few factors to support that:

1. Apple appears to be in a strong uptrend (Dotted Pink Line)
2. It dropped from a recent all-time high (ATH) to just above $168.00 where it found support
3. It “retested” about the same level and held (Yellow Arrows)
4. It now appears to be starting its way back to challenge the ATH (Upturn Candle)
5. All these factors would seem to indicate that AAPL is not likely to fall into the BOX anytime soon

That’s the initial rationale technically, more or less.  The rest goes like this:

1. With AAPL at lofty levels, we’re not sure how much more immediate upside remains
2. BUT, we just don’t see it going down much very soon
3. We “WIN” even if we’re not perfectly right and as long as we’re not “perfectly wrong”

Think about it…If we put on this trade, we’re not asking Apple to do much for us.  All we’re asking is for it NOT to do something.  If it simply doesn’t fall in a big way over the next 2 1/2 weeks, we’re happy 😊!

The graphic above jumps ahead to TODAY at the price that’s trading as we write.  Note that under all outcomes of the rainbow, we’re happy 😊 EXCEPT, for the Red Arrow ☹ If AAPL we’re to plunge below our $167.50 strike, and then below our breakeven point of $167.23, we then begin to lose money.  We’re not naked short of course, but, we can still lose $223.00 for every spread we traded, and we stood to only make $27.00 if it worked out in our favor, which it still may as it is currently above $170.00 last.  People really like the idea that they can win in so many ways except ONE!  In this case, that would be the scenario of a plunge below $167.23.  So, that’s what people like but here’s a few things that we PERSONALLY do NOT like:

1. We’re picking up small $ if we’re right because implied volatility levels are so depressed
2. Our risk, if we’re wrong, is significant in comparison, too significant to our liking
3. We need the passage of time to keep the premium we’re collecting

Let’s look at how that’s going for us:

Apple is still well-above the $168.00ish support level but we still can’t close out the position for a nice win (Yellow box) despite only 3 days remaining until expiration day when today’s trading concludes.  We simply don’t like waiting around to keep our profits (small ones at that!).  There are other variations that we could have traded with the same passive approach but this one is quite realistic, at least in the way we’d approach it from a charting perspective.

In conclusion, we prefer more direct and clear-cut approaches to money-making in the markets.  BUT, what’s good for us may not be what’s good for you.  Additionally, this could be much more enticing in another stock and at another time.  At least, given the past 3 weeks of Advantage Point verticals coverage, we all have much to think about.

If you have questions with respect to this passive Apple bull put spread or last or the prior week’s bull call spreads, ask away in this week's Advantage Point Morning Call webinar.