• This Week's Trade Idea:
Bullish: Hartford Financial Services Group > HIG– Buy the March 17th 48 Calls for $1.30 or less with a close or anticipated close above $49.00 in an up market and with an up XLF (financials ETF).
Bearish: Level 3 Communications > LVLT – Buy the March 17th 57.5 Puts for $1.10 or less with close or anticipated close below $57.00 in a down market.

• Market Overview:
Looking at this week's landscape it would seem that President Trump's speech tonight is likely to be a main focal point.  The markets have rallied, generally speaking, when he's disseminated his main talking-points even with the customary lack of associated details.  We're not expecting many details tonight but one never knows.

• Below the Radar:
It seems that each new day brings out another expert that's quoted or interviewed with respect to the current rally being overdone.  We can't say that we disagree but as usual the markets seem to care not.  Yet, quite a bit of effort is being exerted to keep the ball rolling...

• Options Academy:
As we covered implied volatilities in an indirect way last week, we're going to go ahead and cover a facet of them more directly this week.  A very good and common question that we receive regularly when working with clients sounds a bit like this:  “How can I tell if I'm getting a good buy on the option I'm considering?”

Have to be prepared!

The Trades:

Bullish: Hartford Financial Services Group > HIG– Buy the March 17th 48 Calls for $1.30 or less with a close or anticipated close above $49.00 in an up market and with an up XLF (financials ETF).

Bearish: Level 3 Communications > LVLT – Buy the March 17^th 57.5 Puts for $1.10 or less with close or anticipated close below $57.00 in a down market.

Outlook:

Again, the market remains challenging as it's due to pullback but won't give more than an inch.  This makes things more speculative and less predictable than we prefer which is why we've got both a bull and bear idea again this time around.  We're keeping both the dollar values and the implied volatility levels low (cheap) to try to approach things without large amounts of capital at risk much as we have the past few weeks.  Trump's speech tonight seems to have kept the markets treading water for the day but it's anyone's guess as to what the reaction will be by tomorrow morning's opening.  Since we're not guessers, we're just sticking with the charts and will plan to act accordingly once key levels are breached in the right type of market environment.

Technicals:

Here's our HIG chart and accompanying comments from last week:

“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.”

The LAG is still in place as not much has changed.  Here's an update on HIG NOW:

HIG made a new recent high today but the indices have sold off midday and that's dragged HIG down somewhat.  However, IF the markets continue to rally and IF the financials (XLF) participate, and IF HIG moves accordingly, there is a lot of potential:

Clearing $51.00 could be the start of something bigger!  There just isn't much structural resistance beyond there all the way up to the lower $60s.  This level has proven hard to surmount so if it finally gives way that could be quite good.  If things trigger and begin to work with our March calls, we plan to consider rolling out and up if the indices are still performing.  In other words, we believe there could be a short term pop higher but also a longer ride to be had over time.

LVLT

After yet another bounce from the $57ish level, LVLT seems to have lost its upside momentum for the time being and may be on the verge of moving lower.  A meaningful breach of $57.00 should beget a test of $56.00 and if that doesn't hold heavier selling could commence.  Please see the accompanying chart.

Below $56.00 potentially lies a sizable “Air Pocket”.

Fundamentals:

Once again both trade ideas are almost exclusively driven by technicals but with other considerations.  However, with the LVLT idea, a reading of the news going back into the Fall is probably warranted.  Still though, the technical cycles are flashing weakness again.

As always we strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these ideas, last weeks and options education.

(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 finally had something trigger for us in the form of CNQ.  By the end of the week CNQ was trading in the mid $28.00 level after falling below the support we noted at $29.80 in our webinar.  We spotted a “typo” in the newsletter and sent out a correction on that as quickly as we could.  Our late week update noted that swing type traders should consider closing out for a quick, small winner while longer term traders might consider a roll of the 31 puts down to a lower strike to take in profits and reduce risk.  The earnings are looming in CNQ (March 2^nd), so those that are risk-averse should consider a hedge or closing before then.  Those that are holding profits might consider banking some of those and rolling down in strike in some way while utilizing the “house's money” to maintain a bearish posture if they expect downside after the earnings release.   There may be a band of support from $28.00 to $28.40 and few other spots below $28.00.  However, there isn't much that catches our eye below $28.00 which means that selling could really accelerate in there if the weakness persists.

HIG never triggered for us.  Despite new records, especially in the DOW, many areas of the market seemed to run out of steam last week.  As we write, HIG is showing some signs of finally wanting to try to move higher but the XLF and the Indices are just churning.  Consider it in tandem with what's happening in the Indices.  Despite the fact that it looks “runnerish”, we know that a sharp selloff in the markets would likely undermine HIG's nascent attempt to move higher.

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

Looking at this week's landscape it would seem that President Trump's speech tonight is likely to be a main focal point.  The markets have rallied, generally speaking, when he's disseminated his main talking-points even with the customary lack of associated details.  We're not expecting many details tonight but one never knows.  A general overview on topics that he's discussed many times over wouldn't seem to be the right stuff to launch another leg of the rally given how far the indices have ran, but the lack of a rally based on generalities would actually be the exception to the recent rule!  Details on the other hand, should they be unexpectedly provided, could be just the right stuff to help ratchet things higher.  If the details lean to the optimistic side on tax reform etc., it's not hard to envision the Wall St. gang picking up that ball and running with it with gusto!

Wednesday and Thursday are rich in economic data as well.  Surveys, reports, sales and inventories could and likely will deliver the cover needed for Wall St.'s operators to move stocks around especially if Trump's speech is of the vanilla kind.  Personal Income and Spending are due out along with the ISMs, truck and car sales, the FED's Beige Book, jobs numbers, energy data etc.  That's quite a bit of “big stuff” that can be used to drive volatility of some kind.  So February may end quietly it would seem but March begins with the potential to shake things up!

A glance below the surface of the DOW:

We've provided a 20 day 2 hour candle chart of the DOW's recent action.  Despite the momentum stalling out, along with volatility drying up, the DOW hasn't even touched the 20 period SMA (blue line) in approximately 16 trading days.  We've highlighted a few points where it got close but never actually touched.  This demonstrates how hard it has been to have the support of the index when trading counter-trend.  Why? Because there has barely been any counter-trend action whatsoever!  If this week finishes strongly, it's possible that there will not even be a touch of the 20 SMA in a trading month's time.  Historically, this isn't something that's seen often yet here we are...  Low volatility periods such as this one are typically followed by higher volatility periods.  So...the song remains the same:  In general, we have to keep trading with the trend but we will do so prudently.

Finally, we've discussed it in our webinars but this might be a great visual example as to why it may be a better policy for companies, in general, to avoid political hot-buttons:

Last Friday's “Action” and Hard Reality vs. Soft OptimismIt seems that each new day brings out another expert that's quoted or interviewed with respect to the current rally being overdone.  We can't say that we disagree but as usual the markets seem to care not.  Yet, quite a bit of effort is being exerted to keep the ball rolling... Here's a look inside what it takes to keep the record close streak going.  Take a look at this chart of the DOW that covers last Friday's action in its entirety.

The DOW opened the day lower from the prior close and remained range bound nearly the entire day.  Opening lower and then rallying to new highs has been a recurring theme during this historic run that's lead to 12 record closes in a row for the DOW.  You have to go back several decades to match this type of action.  Anyway, back to Friday...Buyers, that is, real buyers, could have accumulated shares all day given that the weakness persisted.  So, the question becomes:  Would real buyers show up very late in the day and bid prices up and through the day's range aggressively to ensure that the DOW finished at a new record high?  NOT LIKELY.  Some entity(s) decided at about 3:20 PM EST to enter the market aggressively and bid up prices to record levels.  This type of action, from our experience, is a sign of a manic behavior in the markets and it's unsustainable long term.  At some point the underlying economic data needs to support the market's price level.  That really hasn't been the case thus far...

Take, for example, the “soft data” vs. “hard data” argument that's running hot right now in-step with this rally.  Soft data, the type that comes from surveys etc., has registered very well, almost too well.

A few weeks back, the Philly FED Survey delivered something extraordinary, at least, statistically speaking.  Here's a key snippet and the link to the Zerohedge article that covered the survey “beat”.  It's worth a quick perusing:

Against expectations of a 18.0 print, February's Philly Fed exploded higher to 43.3 - the highest since January 1984. This is a 10-standard-deviation beat, led by a surge in new orders and the workweek, despite a decline in 'hope' and the number of employees.

http://www.zerohedge.com/news/2017-02-16/philly-fed-explodes-33-year-highs-10-standard-deviation-beat

While this caught our attention, we were treating it as a “one off” release and didn't expect to see a replay of it for a good long while.  Extremely low probability “beats” just shouldn't happen all that frequently... or so we thought!  Dallas was not to be outdone.  The Dallas FED survey results and associated link as per Zerohedge again:

The Dallas Fed Manufacturing survey soared - for the 6th straight month - to 24.5 in February (smashing expectations of a modest dip to 19.4). This is the highest since April 2006.

This is a 4 standard deviation beat of analysts' expectations, well north of even the highest forecast.

While the headline data soared, we note, however, that wages declined, workweek dropped, prices paid surged, and new orders tumbled.

Another soft survey 'beat' as hard data (core durable goods) misses.

http://www.zerohedge.com/news/2017-02-27/dallas-fed-soars-6th-straight-month-11-year-highs

Yet another major statistical outlier was produced in the face of weak hard data that we highlighted in bold.  Wages declining, workweek hours down, prices up and new orders getting rocked lower somehow added up to another historic “beat”.

The markets are either really ahead of themselves at this juncture or the hard data (actual data!) has a great deal of “catch up” to perform to keep the indices near these elevated levels.  We will soon see what the future holds but it would appear that we shouldn't expect much more help from exceedingly low interest rates:

This is fresh off Reuter's press:

NORMAN, Okla., Feb 27 (Reuters) - The U.S. Federal Reserve might need to raise interest rates in the near future to avoid falling behind the curve on inflation, Dallas Fed President Robert Kaplan said on Monday.  Kaplan, who is a voting member on the central bank's rate-setting committee this year, clarified a point he has made several times in recent weeks that a rate increase should come sooner than later.  "Sooner rather than later means in the near future," Kaplan told journalists after speaking at an event with university students in Norman, Oklahoma.

This wouldn't seem to be welcoming news for home sales.  They're already looking weak along with mortgage applications:

Finally, two last bits.  On the bear side, we came across some data that suggests that short interest has declined significantly.  It would seem that the relentless rally we've witnessed post-election has forced them to cover in a big way at this point.  This is a contrarian piece of information and it suggests that if we should see a selloff, the bears may be able to come out of the Intensive Care Unit with more aggression that otherwise expected.    

On the bull side, February is about to finish well.  January finished well.  The first two months finishing this way bodes well for the markets for the year, historically speaking.  This would fly in the face of Year 1 of a new administration if history is our guide.  Obviously though, this February's performance ran counter to a typical February post-election, so take all of this type of data for what it's worth.   We can't rule out an eventual selloff followed by a recovery that delivers a solid year's performance in the end.

As we covered implied volatilities in an indirect way last week, we're going to go ahead and cover a facet of them more directly this week.  A very good and common question that we receive regularly when working with clients sounds a bit like this:  “How can I tell if I'm getting a good buy on the option I'm considering?”  It really is a great question actually because it gets to the heart of how options are priced.  In our educational materials and videos and 1-on-1 sessions we spend a great deal of time helping clients understand the options pricing model, its various inputs and how various factors can influence option prices as they're quite dynamic.  Before long clients realize that the Volatility Input, aka simply  “volatility”, is the most critical input needed to arrive at an option's value as all other inputs are readily available.  The thing is, as is typical of academic discussions, the pricing model and the volatility input can be rendered all but moot!  Why?  Well...the MARKETPLACE has the final say as to what an option is worth.  Supply and Demand determine option prices as they do so many other prices in a market-based economy.  As the markets have the final say, wouldn't it make sense to take a good look as to how the marketplace has treated the options on a certain stock over the past year?  It would certainly seem so!  More important than what we believe something is worth, it what the markets have somewhat consistently determined it to be worth.  We can access this data on the Options House platform.

To help illustrate things more clearly, we doctored up the graphic above.  This example shows Apple's stock price chart but in the subgraph below it we can see both the historical volatility levels (in Blue, statistical volatility) over the past year along with those of implied volatility (the Orange line).  We're going to focus only on the Orange line for now (IV).  Remember too that this is a summary number.  This summary of the IV level over time may be thought of as the general level of option prices in the marketplace.  Implied Volatility is actually the marketplace determining and option's dollar value and then that dollar value, which is normally the output of the options pricing model, is used to “reverse engineer”, using the pricing formula, to deduce what volatility input would be needed to arrive at that dollar value for the option.  In other words, we're backwards calculating what volatility level the marketplace is implying is using to arrive at the dollar value of the option.  Hopefully that clears that up!

So how do we use this information to inform our decision-making?  Unfortunately it's all relative!  BUT, that's another discussion for another time.  In practical terms, observe where we've labeled the green horizontal lines 99^th and 1^st.  Those are percentiles.  We're pointing out the high of the implied volatility range over the past year (99^th), along with the low (1^st).  This provides us with a solid framework from which we can assess the current level as highlighted by the yellow dot to the far right.  We can see that the current level is much closer to the yellow L for low of the year rather than the yellow H for high of the year.  While there is no guarantee that IV cannot go lower, we can take comfort in the fact that current IV levels are fairly low and naturally that means that options prices in AAPL are on the cheaper side of things relative to the past year.  This is but one way to access volatility information on the platform.  We'll plan to cover other ways in the near future and we'll cover exactly how you can find this data, time-permitting, in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team