Advantage Point Newsletter - February 20th, 2018
This week’s Advantage Point Morning Call webinar will be pre-recorded, and a link will be sent out shortly to access the recording. Thank you.
We may be On the Verge of being Right Back in It! Or Not!
Bullish Ideas: None at this time but we are working on it!
Bullish Mentions: SWKS, UUP, DUST*
Bearish Ideas: AstraZeneca PLC ADR > AZN > $33.64 Last. Buy the Mar. 16th 34.5 Puts for $1.55 or less with a close or anticipated close below $33.25 in a down market with expectations for continued weakness in the major indices.
Bearish Mentions: DG, HSBC, FB.
• Market Overview:
We could see a little more retracement from the recent top as we became short-term overbought but could see more push higher after a brief pause as well. That’s yet to be determined and thus we’re watching closely. Our gut remains that THIS isn’t over yet, but the answer is elusive at present and thus we’ll stay open-minded.
• Below the Radar:
This week we begin with a brief interview with one of our favorites, economist John Williams. John Williams literally KEEPS IT REAL. He still maintains economic statistics the way they once were when they more accurately reflected things like REALITY!
• Options Academy:
We’re tackling the Greek known as Rho this week. Why? “Why not!” in the great words of Bluto Plutarsky! The true reason is that Rho is a lesser known Greek that measures the sensitivity of an option’s price due to changes in interest rates or simply, interest rate risk if you prefer. Let’s get into it…
We may be On the Verge of being Right Back in It! Or Not!
The Trade(s):
Several weeks back we noted:
In other words, if you decide to become or remain involved, stay nimble!!!
That continues to apply!
We strongly suggest viewing this week’s Advantage Point Morning Call webinar for full details with respect to these idea(s), last week’s and options education.
Week 3 of our Special Note:
It may be over, but we’re not yet convinced of that despite CNBC’s best efforts. Hopefully it is, but we’re willing to give it a little more time before we leave the edge of our seat.
Realize that you may be operating in a stormy environment should you decide that to enter the markets.
Bullish Ideas: None at this time.
Bullish Mentions: SWKS, UUP, DUST*
Bearish Ideas: AstraZeneca PLC ADR > AZN > $33.64 Last. Buy the Mar. 16th 34.5 Puts for $1.55 or less with a close or anticipated close below $33.25 in a down market with expectations for continued weakness in the major indices.
Bearish Mentions: DG, HSBC, FB.
Outlook:
The indices and naturally the stocks within them are best described as overbought after such a strong rally unfolded post-selloff. Will we briefly pause and go higher? Or will we re-test the recent selloff lows?
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:
Last week the oversoldness in the market quickly became short-term overboughtness. Fortunately, both our bullish idea, MU, and our bullish mention TRIP, rose with the indices. We put out updates as those stocks delivered the action. TRIP was up nearly $10.00 on an earnings reaction while MU ever so slowly worked its way higher. Please refer to the aforementioned updates for specifics. In short, our bearish idea in KMX didn’t truly trigger in the strong market but it FELL to our target on last Thursday regardless! Hopefully, some of the brave among us caught that anyway! Our bearish mentions were a mixed bag but that’s to be expected in a market that is strongly rallying.
Let’s get right to our charts:
This week’s NEW MATERIAL is brief as we seem to be in a holding pattern at the moment. Above is the current snapshot of the SPYs. Many technical factors may be affecting the price action including the tan horizontal resistance line we’ve been working along with several SMAs and Fibonacci levels and other support and resistance that we’ve drawn prior and concurrent with the most recent developments. We could see a little more retracement from the recent top as we became short-term overbought but could see more push higher after a brief pause as well. That’s yet to be determined and thus we’re watching closely. Our gut remains that THIS isn’t over yet, but the answer is elusive at present and thus we’ll stay open-minded.
On a concluding technical note for this week, tech has bounced very strongly and looks like “it wants to go” more so than the SPYs and DIAs at present. So, keep your eyes on that prize for possible leadership cues:
We’re not done! We’re normally fairly-domestic, but the international scene in Euroland and China leaves us concerned technically at this juncture, Euroland first:
And now China:
Both markets look more vulnerable than our domestic markets and that could create a rush to the USA or could eventually trigger selling here if a global equities panic begins. Stay on it!
This week’s calendar is light in its loafers, especially given that it is holiday-shortened, but what it lacks in quantity it could make up for in terms of impact. Wednesday’s PMI and FOMC minutes and Thursdays Leading Economic Indicators have likely gained in stature given the “numbers matter again” (at times 😊) nature of the current market environment. Anyway…they’ve got interest rate/inflation issue material to work with if they want it!
IMPORTANT NOTE:
ONCE AGAIN, we’re leaving the prior weeks’ Market Overview commentary intact below so that folks can revisit how we’ve gotten HERE. With HERE meaning the first real concerning market action we’ve seen in quite a long while.
We’re leaving a full reprint in ITALICS (below) of where things have been the past few weeks for background as we may be at an important juncture.
Our recent thoughts on the market can be summarized as follows:
- It broke below key trendline support.
- There were many support levels below that, but FEAR can trump them all and it did, and very quickly due to extreme stretch and extreme shorts in VOLATILITY, for lack of a perfect description.
- We believed that the indices could fall back to TREND if they cracked further, with trend being the 200 SMA which equated to $253.00ish on the SPYs.
- We alluded to the fact that the PPT may be summoned to stave of further damage. We assert here that they went to work on Friday to save Wall St. once again.
Here’s the current visuals which we will discuss tomorrow. As usual, we’re focusing on the SPYs as the DIAs and QQQs are similar in terms of price action:
Things remain very fluid but our take as we write is that the gang wants to take the SPYs up more than down. Our sense is that they’ll try to push them back into the low $270.00s and that may likely determine if we’re to see another remarkable “V” shaped recovery or if something has truly changed and sellers reassert themselves:
WHAT FOLLOWS IS OUR REPRINT FROM TWO WEEKS BACK FOR PERSPECTIVE
The last few weeks’ we’ve sounded “ONE NOTE” but that’s our job! We’ve got to call it like we see it and then recall it another way if conditions change. Last week we concluded with graphic and comments that follow in italics, but we’ve added BOLD for emphasis:
The SPYs have clearly broken below the orange support line we’ve been working with for the past several weeks (see orange arrow). However, there could be many levels of support all the way down should the SPYs selloff to the point at which they broke out which produced the most recent leg higher. The RED arrow highlights just how many potential support levels are in place. Additionally, it is our experience that major indices will typically take another shot at rallying back to a high before failing. There is no rule that states that a rally must occur, it is more a case of our observations over the past quarter century. With this week set to be news-rich, there’s a good chance that news could provide rally fuel if the powers-that-be should need it. All in all, this juncture remains one to watch and if volatility is likely to make its long overdue return, this would be the week that it could be most easily achieved. In other words, there could be a lot of “back and forth” given how much they’ll have to work with. We’ve got all that and the FED! We can’t leave that flock of doves out of the equation. Obviously, the FED could ignite things in either direction as well. “I gotta tell ya, this is one power-packed week!”
We’ve yet to get that bounce-back attempt and stocks did easily shred their way through multiple would-be support levels. Our best guess is that the sentiment and extreme volatility shorts combined with extreme long exposure of many groups quickly converted into a very strong fear cycle. To wit…
One “PRIME DIRECTIVE” of the Advantage Point Newsletter is to help folks better understand how to operate in the trading markets, mainly the equity markets but with options as our investment vehicle. PLEASE allow the last few months of content to guide you in the future as there will be other phases like this one. We’re not trumpeting anything here, we’re simply noting that when things become very extreme, as we made it a point to note in dozens of ways, that it should guide our risk appetite and advise our trade management. We can still trade during risky times, but we must be even more prudent and less cavalier when most are acting quite the opposite. But now, we’re onto NOW:
We’ve overlaid the yellow arrow line on top of a former support line and please note that if the SPYs fell to that point they’d be right near their 200 SMA. That would bring us near about $253.00ish. We believe that the $249.00 level is key in this market, a little below $253.00 obviously. Should that give way, we believe more selling would be triggered. With the DOW and the Q’s acting in near lock-step, this SPYs chart fits us just fine at present to evaluated “the market”.
If we were to try to “nutshell” the recent develops, we do it this way:
The market is simply falling back to trend, albeit, very rapidly and very fearfully.
This is really a week where the markets must sink or swim on their own accord except for the helping hand they may receive from the President’s Working Group aka the “Plunge Protection Team”. It could be a very interesting week to say the least.
This week we begin with a brief interview with one of our favorites, economist John Williams. John Williams literally KEEPS IT REAL. He still maintains economic statistics the way they once were when they more accurately reflected things like REALITY! John’s site is http://www.shadowstats.com and longtime readers will likely recall our admiration for his work. In our reading, we came across this:
And there’s a video too! It’s ONLY 30 minutes long but it is there if you want it:
Here’s the key passages as we read it with the key points in BOLD:
Do Financial Markets Still Exist?
Do Financial Markets Still Exist?
Paul Craig Roberts, Dave Kranzler, Michael Hudson
For many decades the Federal Reserve has rigged the bond market by its purchases. And for about a century, central banks have set interest rates (mainly to stabilize their currency’s exchange rate) with collateral effects on securities prices. It appears that in May 2010, August 2015, January/February 2016, and currently in February 2018 the Fed is rigging the stock market by purchasing S&P equity index futures in order to arrest stock market declines driven by fundamentals, and to push prices back up in keeping with a decade of money creation.
No one should find this a surprising suggestion. The Bank of Japan has a long tradition of propping up the Japanese equity market with large purchases of equities. The European Central Bank purchases corporate as well as government bonds. In 1989 Fed governor Robert Heller said that as the Fed already rigs the bond market with purchases, the Fed can also rig the stock market to stop price declines. That is the reason the Plunge Protection Team (PPT) was created in 1987.
Looking at the chart of futures activity on the E-mini S&P 500, we see an uptick in activity on February 2 when the market dropped, with higher increases in future activity last Monday and Tuesday placing Tuesday’s futures activity at about four times the daily average of the previous month. Futures activity last Wednesday and Thursday remained above the average daily activity of the previous month, and Friday’s activity was about three times the previous month’s daily average. The result of this futures activity was to send the market up, because the futures activity was purchases, not sales. http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_quotes_volume_voi.html
Who would be purchasing S&P equity futures when the market is collapsing from under them? The most likely answer we can come up with is that the Fed is acting for the PPT. The Fed can actually stop a market decline without purchasing a single futures contract. All that has to happen is that a trader recognized as operating for the Fed or PPT enters a futures bid just below the current price. The traders see the bid as the Fed establishing a floor below which it will not let the market fall. Expecting continuing declines to make the bid effective, they front-run the bid, and the hedge funds algorithms pick it up, and up goes the market.
Is there another explanation for the shift in the market from decline to rise? Are retail investors purchasing dips? Not according to this report in Bloomberg — https://www.bloomberg.com/news/articles/2018-02-12/record-23-billion-flees-world-s-largest-etf-as-panic-reigns — that last week a record $23.6 billion was removed from the world’s largest ETF, the SPDR S& 500 index fund. Here we see retail investors abandoning the market.
If central banks can produce zero interest rates simultaneously with a massive increase in indebtedness, why can’t they keep equity prices far above the values supported by fundamentals? As central banks have learned that they can rig financial asset prices to the delight of everyone in the market, in what sense does capitalism, free markets, and price discovery exist? Have we entered a new kind of economic system?
It's all fun and games until somebody shoots their eye out! As we’ve noted many times, we’re willing to go along for the ride to earn profits, but we can’t help but remain concerned given the degree of collective levitation efforts that could eventually fall apart with little notice. After all, the track record for centrally planned/rigged economies isn’t an illustrious one.
If Williams and Roberts are too sanguine for your taste, allows us to introduce you to this piece from Michael Krieger. He believes that even more than our financial systems are on the verge of coming apart at the seams: https://libertyblitzkrieg.com/2018/02/15/insanity-fatigue/
And now…back to a more directly related tangent with respect to near-term market movement, this cropped up in the news last week, but it wasn’t given much coverage:
If you view the graphic above and interpret it in a way as to believe that producers are paying much higher prices than they were recently, you may be on to something! Some might even proffer than “prices paid” are breaking out! Two of the most populated regions in the country are showing a surge in prices paid. Maybe, just maybe, that tells us something about the interest rate hike plan for balance of the year? One would think so and that wouldn’t seem to be a calming influence for those that are concerned about rates rising and the impact of that on stock prices.
What this means for us is that, as we’ve noted, we’re not so sure that we’re out of the woods yet. Here’s a long piece from Nomura that goes into great detail in making that very case:
Here’s the case it makes in a nutshell for those not willing to undertake a full reading of the piece:
The message here from these analogs?
That I think you’re gonna have another chance to buy stuff lower, before another rally off the back of a “tradeable bottom”…and more importantly, that higher volatility / “chop” is “here to stay.”
That nutshell is enough for us to read it because that means there is more to come! A technical take from writer Bryce Coward arrives at the same conclusion:
Finally, we show the current correction in real time. We see that the market plunged 10% over seven days, rallied 5% over two days, and then made a new low two days hence. We’ve since rallied back nearly 7% over four days to exactly the 65-day moving average. The whole episode has lasted thirteen days, with the low achieved after ten days. Given the above episodes, and many others like them throughout market history, it would be completely normal and indeed expected for this market to test the low put in place on Friday, February 9th one or several more times, and possibly break that level. It would be normal for this back and forth process to take place over the next four to six weeks.
An amazing graphic, as we see it, that we came across this week comes to us courtesy of Lance Roberts. This helps us to circle back to the concerns voiced by Williams, Roberts and Kreiger above in this installment of BTR. Here’s it is:
As can clearly be seen, we clearly have a problem. Our esteemed leaders in DC in the form of the FEDs and the FED, have teamed-up to jam the rate of debt building up like no time before in the modern era. Notice too that our GDP remains in a long-term downtrend. Many know that we’ve been growing less and borrowing more but we’re not too sure that many realize that degree to which that divergence is worsening. It should go without saying but as it may not in all cases, we’re borrowing this cutaway from Lance’s piece because this situation is on its way to becoming critical:
The full read is here and if you need encouragement to Bank & Roll with discipline, please read it if you’ve got the time!:
http://realinvestmentadvice.com/there-will-be-no-economic-boom/
Another great read we spotted is this one: https://www.zerohedge.com/news/2018-02-15/i-think-markets-nuts-toogood-sees-shades-2007-2008-because-everybody-already
We could have written it ourselves but since they did for us here’s the choice cut!:
With stocks erasing their early-day losses and the VIX tumbling once again, CNBC - the go-to resource for retirees and other retail investors - was back to reassuring investors that this month's explosion of volatility was just another dip deserving to be bought.
But Embark Capital CIO Peter Toogood offered an important counterpoint during an appearance this morning where he warned his audience against exactly this kind of credulousness by ignoring the fundamental growth global growth story that seemingly every other portfolio manager has been relying on and instead pointing to one simple fact: "Everybody is already invested".
But even with positioning stretched to such an exaggerated degree, that doesn't necessarily mean a crash is right around the corner. Instead, Toogood foresees a "step bear market" that will continue until the PPT, newly reconstituted under the leadership of Jerome Powell, realizes that they must once again intervene...because with so much systemic debt and myriad other risks - like the dangerously underfunded pensions that we've highlighted again and again - a sustained selloff would be far too risky to countenance.
"I noticed Dudley the other day say 'this is small potatoes' and warning investors not to worry about it. And I would accept that's all true, if everybody wasn't already invested. And I want to know who the marginal buyer of this story is. Everyone is in. Look at consumer sentiment surveys, loo at professional money managers, everyone is in. So who's the buyer? It's very 2007-2008."
He added that hedge fund managers are now "sitting around scratching their heads" because even European high yield bonds - the debt of some of the worst companies on Earth - are yielding a staggeringly low 2%.
Toogood also pointed out that stocks are breaking through important technical levels...
"You're breaking some very major levels in most markets outside of the US still, and that is very, very significant. That is the test of where you'd think a bear market is coming; I still do, just on valuation alone. I think this market is nuts," Toogood said.
Which is leaving asset managers in a bind...
"It's one of those extremely unpleasant moments when people need income but income is expensive and that's the other problem we see … We are forced into high yield (bonds) and we don't want to be there," Toogood said.'
Indeed, just on valuations alone, "I think this market's nuts," Toogood said.
Found this one on ZH:
The little guy and gal are loving their retirement prospects like it’s early 2000!
Finally, we’re closing out with another one of our favorites and frequents, Charles Hugh Smith.
https://usawatchdog.com/financial-markets-definitely-destabilizing-charles-hugh-smith/
There’s another brief 30-minute waitin’ there for ya but in case you’re pressed for time, the kernel:
Financial writer and book author Charles Hugh Smith has been watching the extreme movements in financial markets closely. Is he nervous? Smith says, “Oh yeah, it’s definitely destabilizing. In other words, it’s becoming not just more volatile, the whole underlying structure of our economy is destabilizing. What I mean by that is it’s becoming more brittle or fragile.
Bank and Roll friends!
Last week’s portion of original Options Academy content concluded with this:
With the overflowing cornucopia of news that’s to be made this week, which includes the FED and AAPL’s earnings report, the past two days may only be the start of bigger things! (more volatility) We’ll keep an eye out it to see if we can wring out any more noteworthy items.
What’s that old saw about the visually impaired squirrel or something or other??? It doesn’t matter, we should be talking about his cousin the racoon, aka the “bandit”. Why? Because AAPL straddle buyers made out like one!
We knew that things could really heat up in terms of volatility, but when we embarked on this Apple Trilogy, we didn’t expect AAPL to fall all the way to $160.00ish by the time our theoretical Feb. 2nd ATM straddle expired, but it sure did.
Our trilogy odyssey started a few weeks when we observed that the AAPL earnings straddle (Feb. 2nd expiration) at the $177.50 strike was trading for about $8.00ish and thus we presented this graphic at the time:
Apple’s ATM earning straddle forecasted and $8.00 move away from the $177.50 strike at the time, but it ended up delivering a lot more as the stock price fell nearly all the way to $160.00! A full $8.00 more than the straddle “foretold”!
We’re not big fans of buying ATM earnings straddles especially when they’re expensive, as this one was at the time. However, there’s no denying that this straddle nearly paid off with a 100% return in just a few weeks. But…let’s get back to the “forecasting” abilities of the straddle. In this case, the straddle predicted only half the movement that we observed. That’s not very close to being accurate, is it? The straddle didn’t predict as much movement as what we witnessed. We point this out frequently, but we feel the need to do it again here and now:
There may not be one Silver Bullet!
Reading too much into any one thing can be very dangerous in the financial markets. We believe that every situation is somewhat unique. To wit and on the other hand…
Had we stuck with the Technicals only, we can see that AAPL broke many forms of support and now may be on its way to closing the gap (white circle highlight). Why not just trade the way we normally would and exit just prior to the earnings announcement? What’s so bad about that? 😉
We’ll conclude our coverage of Apple with this, which is simply our preference:
Earnings straddles can be very risky and by owning them and trying to “have it both ways”, we pay a premium of which at least one side, if not two, can work against us. We’d rather stick with the charts, trade with prudence and adjust nimbly. That’s just how we roll, and that approach may not suit all but that’s what works for us and traders need to find what works for them and let it work for them!
We may perform this exercise again next quarter but perhaps in another high-profile stock.
We’re reprinting the prior two weeks of OA below so that folks can follow along or refresh if needed.
If you have questions, ask away in this week's Advantage Point Morning Call webinar.
Last Week’s Options Academy (for reference)
Last week we spent time here in OA covering AAPL’s aka Apple’s Feb. 2nd ATM straddle price (the “earnings straddle”). We did so because the “earnings straddle” is often cited as a means to forecast the magnitude of movement expected by the options markets surrounding the release of that quarter’s earnings. We alluded to following-up on it and thus we’ll do that this week. We’re going to include last week’s OA again this week for reference (far BELOW) but we need this piece to get started:
And now, here’s an update on things from this morning from a weekly perspective:
Please note that AAPL fell as low as $164.70 which is a full $4.30 below the $169.00 level that the straddle was “forecasting” last week. Interestingly, the implied volatility of the straddle was elevated when viewed vs. the prior years implied volatility range, which is to say, market participants were “paying up” to own AAPL options. It seems to have paid off for them as AAPL has already moved far beyond the $8.00ish forecasted move (by the earnings straddle), and, there’s still time to go with earnings due out in a few days.
Last week we noted that a lot can change with that much time remaining until the earnings release and it certainly did. All kinds of stories hit the tape with respect to AAPL’s issues and issues within the markets themselves.
Additionally, political issues crept into the market discussion as well. Other interesting things developed too…
Of technical note, AAPL has broken not one but two support levels as of now and should it close that way, things could become even more dicey. Another interesting technical development is the new high being registered at $180.10 recently, only to be followed by the quick two-week plunge to the mid $160.00’s. That’s fairly volatile movement and one heckuva false-breakout the gang pulled off a few trading weeks back!
With the overflowing cornucopia of news that’s to be made this week, which includes the FED and AAPL’s earnings report, the past two days may only be the start of bigger things! (more volatility) We’ll keep an eye out it to see if we can wring out any more noteworthy items.
Two Weeks Back Options Academy (for reference)
The fascination with earnings releases seems almost limitless so we’re going to tackle a very common question that crops up quite frequently during “the season”.
Earnings reports are in full swing and we know that well as the majority of folks that attend our live weekend events tend to remind us of that fact, albeit, inadvertently. This week brought the ever-popular: “I heard something about a money straddle on TV that can tell you how far a stock will move when the earnings come out. What’s that all about?” Which was quickly followed by: “I’ve heard that before too, can you cover that for us?” We can, and we shall…
Through the software magic of “ThinkBack”, behold Apple’s Feb. 2nd ATM straddle price with the stock closing at $177.00 on the button yesterday:
Now, the ATM strike is actually $177.50, and that ATM’s straddle value is about $8.20, and there’s more than a week’s time to the earnings release in early Feb., however, we’re just going to round things off and summarize things succinctly for those that share this curiosity with respect to earnings moves by way of this graphic:
Well…while intentionally avoiding mathematical precision, look at it this way, the options markets are thought to be forecasting a little over an $8.00 move between now and with the earnings release in AAPL from the $177.50 strike price. We arrive at that conclusion based on the observation that the markets are willing to pay $8.20 for the aforementioned ATM straddle in focus. They wouldn’t pay that much (or so the thinking goes), if they didn’t believe a move of that price magnitude was not only possible but looming. The options markets are presumed to have a “built in intelligence” and ability to forecast such matters.
Anyway, this is how it’s done, but in reality, we should wait until we’re much closer to read into the divinations of the ATM earnings straddle. We’re too far away and much could change between now and then. When we’re right on top of earnings, that’s when the straddle will really be all about the post-earnings release reactions. Until then, let’s see how things play out in AAPL between now and the earnings date which will be upon us shortly.