• This Week's Trade Ideas:
Bullish: Hartford Financial Services Group > HIG– Buy the March 17th 48 Calls for $1.40 or less with a close or anticipated close above $49.00 in an up market and with an up XLF (financials ETF).
Bearish: Canadian Natural Resources > CNQ – Buy the March 17th Expiration 31 Puts for $1.80 or less with a close or anticipated close below $29.80 in a down market (should that ever occur again).

• Market Overview:
It's quite a busy week for economic data and reports and there's still a respectable number of earnings reports due out to go along with M & A chatter.  Normally this type of information would go a long way in terms of driving market action.  However, we're not focusing on it much and instead we're going to mainly cover a few key technical aspects.  Why?

• Below the Radar:
We're going to let several key graphics that we tracked down across the Internet do a lot of our talking this week!

• Options Academy:
Implied volatilities are extremely low right now.  Thus options are quite cheap in relative terms.  The indices are extremely high right now and have not corrected for some time, they're overdue.  If puts are bought now, their value will rise significantly when the markets correct lower.  Windfall!

Going with one of each (again)

The Trade(s):

Bullish: Hartford Financial Services Group > HIG– Buy the March 17th 48 Calls for $1.40 or less with a close or anticipated close above $49.00 in an up market and with an up XLF (financials ETF).

Bearish: Canadian Natural Resources > CNQ – Buy the March 17th Expiration 31 Puts for $1.80 or less with a close or anticipated close below $29.80 in a down market (should that ever occur again).

Outlook:

Both trade ideas are the result of technical scans and considerations that we elaborate on below.  We feel that having a bull and bear idea at the ready is the way to go right now.  The momentum to the upside remains almost nonstop.  Various metrics we've come across and track ourselves are flashing bright red.  That is, they're showing the S&P 500 at the most euphoric valuations in the past quarter century.  Only the NASDAQ market during the final stages of the Internet Bubble has registered more extreme readings on some metrics.  A reversal doesn't seem imminent but then again it rarely does.  On the other hand, flashing red lights can flash for a while before the markets even seem to notice!

Technicals:

We noticed how the market's players have scooped up stocks that have lagged the indices and other leading stocks of late.  This is very common when manic melt-ups gain steam.  The thought seems to be: “Hey! Look!, this one isn't up 10% in the past week, let's grab some!”  It happened to both TIF and MSFT which were severely lagging and relatively weak to only then get marked up with a vengeance.  We noted that this type of reversal scenario can unfold if certain levels aren't breached and the market is rampaging.  Well, we're partially relying on this type of scenario to play out in HIG.

 HIG is lagging behind other financials significantly in its performance of late.  This could be quality propellant for its stock price.  Additionally, it's not too far from breaking out on it's own.

CNQ is a different story:

CNQ has been weak since about a month after the US presidential election.  The downtrend can clearly be seen in the chart above.  While it is trying to improve as of late, it's still struggling.  The $29.80 level, if breached, would likely send the stock back to recent lows and possibly even lower.  We see much more downside potential for it if it can't hold $28.00 in a correcting market.

As is nearly always the case, we encourage you to attend our weekly webinar or watch the webinar replay for full coverage of these two stocks technically and otherwise.  Time-permitting we will cover additional names that we found of interest.  For example, TEVA was one we spotted late last week but it was up almost 9% at one point today which made entry much more difficult.

Fundamentals:

Once again both trade ideas are almost exclusively driven by technicals but with other considerations.  (see Additional below)

Additional:

Part of our goal was to find low dollar/low implied volatility options contracts to utilize for these trades.  The market is getting quite euphoric by many measures and as much as its momentum cycles still look solid (we've noted this week after week!), we prefer to not risk large amounts of new capital during this type of market phase.  We opted to use the slightly in-the-money options as a result.

(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:

With the melt-up continuing, stock market operators finally spotted MSFT as the nonparticipant that it had been and came after it. Naturally this action eventually moved the stock price away from the $83.75 level where we were looking to act.  Our hunch was that the melt-up need a breather after so many stocks scampered so much higher in a short period of time.  That “breather” may have occurred on Thursday and it may have come in the form of the indices merely sitting still (relatively).  The lack of a sustained breather simply closed the window on potentially more weakness in MSFT for the time being.  As we noted last week, buying aggressively when conditions are extended is simply not our style.  Hopefully things will fall in place for us this week.

(Editor's note: This trade idea may be updated periodically, in keeping
with market conditions. It is intended solely for educational purposes.)

It's quite a busy week for economic data and reports and there's still a respectable number of earnings reports due out to go along with M & A chatter.  Normally this type of information would go a long way in terms of driving market action.  However, we're not focusing on it much and instead we're going to mainly cover a few key technical aspects.  Why?  Well, the markets of late do not seem care greatly about the “news” as everything is being treated positively.  Even the heavy doses of political volatility seems to have had little to no effect on the markets.  They seem to be treating it all as if it will all work out well in the end.  Time will tell but let's move on...

Last week, and so far this week, we've experienced more melt-up.  Many stocks have exploded higher seemingly with nothing but thin air and more hopium propelling them.  As part and parcel of any serious melt-up, several stocks that were on the “technical ropes” were eventually spotted and saved by ravenous buyers looking to snap up nearly any issue that hadn't already jammed higher.  As noted last week, there isn't any technical overhang that can get in the way of the major indices at the moment.  This is why we believed that there was still plenty of room to run, potentially...  The players out there seem to not care that they're paying more today for the same stocks they could have bought more cheaply and so on...  Again, this is indicative of melt-up-style action.

Above we show the S&P 500 represented by the SPY ETF.  This is a chart wherein each candle represents a week of trading activity over the past 2 years.  We note that the grey line with 3 dots on it represents the Long Term weekly trend of the SPY.  As can now be seen, the SPY has reached the point where it's statistically 2.7 standard deviations from that Long Term Mean (trend).  As the SPY represents “the market” very well, we can now say that the market is very stretched from it's Long Term Trend. In fact...

Our percentile calculator informed us that 2.7 standard deviations equates to the 99.31 percentile.  Meaning that 99.31% of the data should be within 2.7 standard deviations above and below our mean.  Thus, an excursion BEYOND them is noteworthy as it is rare and statistically unlikely!  How rare???

Pretty darn rare!  This is the LONE occurrence in the current bull market that began in 2009.  We have to note that the SPY did technically emerge from a period of consolidation but regardless, this excursion remains significant as it occurs on a big picture chart.  As always, we have to keep an open mind about things.  This could be the signal that something historical is on it's way in what would be a second leg of this bull market, or, we should be ready for significant retracement potential if and when this melt-up finally cools off.  This is just another illustration as to why we need to keep rolling as these markets ramble higher.  Please see “Below the Radar” for more related to why we need to keep going with the flow but prudently so...

We're going to let several key graphics that we tracked down across the Internet do a lot of our talking this week!  In our weekly webinars and in this space we've acknowledged that the major indices still have room to run...if they want to.  That remains the case still but the further they run without any consolidation the more likely they are to tire and eventually give back more.  Much of what we include here should help encourage investors to bank and roll as they continue to ride the indices higher.  Let's get started with something familiar:

Yes sir, we're even more deeply into Extreme Greed territory than we were last week.  We're getting up there!  As we noted previously, there are several components that comprise this index and you may find them worth exploring as contrarian-type indicators are worth keeping an eye on in our experience.

A very fresh piece just popped up over at Marketwatch.com from Mark Hulbert.  It's brief and worth the quick read:  http://www.marketwatch.com/story/market-timing-is-out-of-favor-so-is-a-stock-market-top-near-2017-02-21  In a nutshell, Hulbert suggests that market timing is most out of favor when the markets are near or making historic highs and that buy-and-hold is most out of favor near historic market lows.  He believes that market timing has NEVER been more out of favor than at present when measured against other times in his four decades of covering the markets.

The chart below provides us with a good sense of just how participatory the recent run to new highs has been.  The % of S&P 500 stocks above their 50 Day moving average is NOT confirming the current move by the S&P.  This could be resolved positively at a later date but for now it's a red flag and should be categorized as bearish divergence.

The graphic above covers average monthly returns for the market in all years since 1950 with an additional emphasis on the average monthly returns in post-election years.  Clearly, February has been the worst month in post-election years.  Yet, with only a week remaining, this February seems to be a strong exception to a strong rule.  Things are acting quite strangely when we measure them against quite a bit of history.  What could account for this?

A very interesting piece appeared midweek of last week: http://www.zerohedge.com/news/2017-02-16/meet-man-rumored-be-behind-markets-relentless-ramp

The markets, especially the futures players, have an uncanny knack for detecting blood in the water and then exploiting it.

“As we noted previously, the melt-up in the S&P is the result of "a purported / murky melt-down over the past week in a large trade by a multi-billion Dollar (open-ended) futures fund which sells vol on S&P.  Without going into specifics, there is market speculation that the entity is effectively short upwards of ~$17B of SPX (deltas to buy) through selling February expiry upside 1x5 (or 1x4) call spreads."”

The image above along with the snippet in focus are among the more powerful parts of the article that we encourage readers to take a look at.  This is a great example as to the inner-workings of the markets that the financial media spend very little time covering but that actually drive manic movement such as what we've seen of late.  Currently there's no telling exactly how much or how little this situation may be affecting the markets but these types of scenarios unfold regularly and are one of the most glaring examples as to why the charts have the final say in our deliberations.  Naturally, this type of futures movement could be dragging the indices along for what's potentially shaping up to be an even wilder ride.

Finally, have a quick look at this from hussmanfunds.com:

This graphic ABSOLUTELY SPEAKS FOR ITSELF which is another reason why, yet again, we're going to stay with the flow of the markets but we will roll up aggressively as we do.

We've been getting quite a few questions lately related to the idea of buying out-of-the-money puts, essentially inventorying them for a potential rainy day in the not so distant future.  This really isn't a bad idea and it's something that many of us former floor traders would engage in at and near times like these.  If you read the content above, you already realize that we see many warning signs at present but that we're still willing to go with the flow (uptrend) for now.  The idea behind this stockpiling of puts is essentially this:

Implied volatilities are extremely low right now.  Thus options are quite cheap in relative terms.  The indices are extremely high right now and have not corrected for some time, they're overdue.  If puts are bought now, their value will rise significantly when the markets correct lower.  Windfall!

It all makes sense except there are no guarantees.  The indices do not HAVE to correct with respect to our time horizons.  In fact, quite often they do not.  Additionally, stockpiling may be timing-driven in a basic way but the idea of buying puts in expectation of a correction suggests that it's more speculative than reactionary.  The argument made by many against waiting for a correction to begin is that the put options in question will see their values become much more expensive once the fall back to Earth has begun.  That's at least somewhat true which is why so many like the idea of stockpiling before the plunge commences.  The risk there though is that it may never come and those puts can become very costly reminders of that fact!  Let's get some visuals in here:

Above: Various Current Support Levels in the SPX

Above is a chart of the VIX, the CBOE's volatility index that's said to measure the fear-and-greed in the markets.  Greed is indicated by extremely low VIX levels and the converse is true for fear.  As can be seen with the help of our notations, the VIX is very low right now and has been for a while as it has been mired-technically within a long term down-sloping rectangular consolidation.  Is it due for a surge?  Odds are YES (f recent history is a good guide), even if it's just a mini-surge which would lift it and put prices higher across the markets.  This current consolidation appears to be the longest one we've seen recently.    Still though, the consolidation could decide to meander for a good, long while as there's no law requiring not to do so!

That keeps us asking:  Should we buy puts now or wait for a correction to begin in earnest?

It's a tough call.  And, by the way, which type of put should we buy?  What strikes?  What expirations?  In what stocks?  Hint: These are not easy questions either but we'll do our best to cover them time-permitting in this week's Advantage Point Morning Call Webinar.   For now, levels 1, 4 and 5 stick out to us the most...

Have a great week!

The Advantage Point Team