What a Difference a Day Few Hours Make!

• This Week's Trade Ideas:

Bullish Ideas: None at this time.

Bullish Mentions: DUST, JDST, UUP, CREE.

Bearish Ideas:

DR Horton Inc. > DHI > $43.35 Last.  Buy the Mar. 16th 44.5 Puts for $1.85 or less with a close or anticipated close below $43.30 in a down market with expectations for continued weakness in the major indices.

AstraZeneca PLC ADR > AZN > $33.86 Last.  Buy the Mar. 16th 34.5 Puts for $1.30 or less with a close or anticipated close below $33.40 in a down market with expectations for continued weakness in the major indices.

Masco Corp. > MAS > $41.89 Last.  Buy the Mar. 16th 43 Puts for $1.50 or less with a close or anticipated close below $41.85 in a down market with expectations for continued weakness in the major indices.

Bearish Mentions: EEM, FXI, BABA, BIDU, EFA, IWM, GM, XEL, MGM, ITB, PHM, EWW, EWY, DLTR, DG, LOW, HD, HON, ROST, GOOGL.

• Market Overview:
Oh boy!  We really need the Advantage Point Morning Call time to do justice to the current market overview.  Please attend or watch our recording!  There are many, many possible scenarios that are playing out in our minds at the moment.  We’ll do our best to cover at least a few.

• Below the Radar:
We’re starting out with the type of graphics that we LOVE to stumble across here in BTR.  Why? Because they say so much with great economy!  And we need that this week because, rather surprisingly, there’s not much “NEW STUFF” out there of great interest.  It seems as if more commentators paused to watch the markets last week than to produce interesting content.  Fortunately, what we did find was GOOD STUFF.

• Options Academy:
We’re going to dive into TIME this week in OA.  Most new-to-options traders quickly learn or are taught that time matters significantly with respect to options values and success in trading options.  Time factors into the options selection process and into management of trades among other ways.  However, the most common appreciation for time and its effects is most certainly with respect to the Greek, Theta.

What a Difference a Day Few Hours Make!

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 4 of our Special Note:

Last week’s special note read:

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.

It seems we weren’t the only ones feeling that way as the markets rallied and sold off nearly every day and all week until… LATE on Friday afternoon.  Now “It’s all good!”  Anyway, the gang came back with a vengeance, post-expiration, and panic bought/short-squeezed stocks up, up and away!  We believe it was more short-squeezing that gained momentum than real buying and the relatively low volume totals would seem to confirm that.  Regardless, movement…is back in business it would seem.  Act accordingly!

Bullish Ideas: None at this time.

Bullish Mentions: DUST, JDST, UUP, CREE.

Bearish Ideas: DR Horton Inc. > DHI > $43.35 Last.  Buy the Mar. 16th 44.5 Puts for $1.85 or less with a close or anticipated close below $43.30 in a down market with expectations for continued weakness in the major indices.

AstraZeneca PLC ADR > AZN > $33.86 Last.  Buy the Mar. 16th 34.5 Puts for $1.30 or less with a close or anticipated close below $33.40 in a down market with expectations for continued weakness in the major indices.

Masco Corp. > MAS > $41.89 Last.  Buy the Mar. 16th 43 Puts for $1.50 or less with a close or anticipated close below $41.85 in a down market with expectations for continued weakness in the major indices.

Bearish Mentions: EEM, FXI, BABA, BIDU, EFA, IWM, GM, XEL, MGM, ITB, PHM, EWW, EWY, DLTR, DG, LOW, HD, HON, ROST, GOOGL.

Outlook:

After the spike, we’ve become short-term overbought, especially in tech.  Global equities markets aren’t bouncing as we have here in the USA.  Tech has left the other indices behind and volumes were light on the way back up.  That’s indicative of short-squeezing.  This buy cycle may have ran its course for a moment or two.  We’ve got to stay on top of things as movement might finally be back in style.

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 was the most frustrating week of 2018 for us.  We scanned.  We watched.  We repeated the process...again, and again…  The SPYs didn’t make a break from their narrow trading range until late Friday and that COULD have been expiration related.  A very nicely engineered move by the Gang we must concede.  After prepping to issue an official bullish idea or two or three every day of last week, we were ticked that the breakout occurred so late on Friday.  The consolation prize though was to be found in bullish mentions of SWKS, UUP, and DUST.  The latter two didn’t do much but they didn’t fall, but it was and remains SWKS that makes last week and this week, a little more bearable.  Fortunately, for those that got involved in it, SWKS was spotted near $106.00ish last week and as we write it is trading over $112.00ish.  We’ll take that for a week’s time and especially so since the late Friday push in stocks left us stewing!

Bearish idea AZN never triggered and hasn’t really gone anywhere.  Our bearish mentions of DG and HSBC fell despite the markets moving higher.  The lone exception was FB on the bear side, which rallied along with the tech complex.  We’ll take that since we’re looking for cyclical strength and weakness but within the context of what the major indices are doing.

The targets we laid out in recent idea MU, were respected and surpassed.  As we write, it seems to be homing in on our most aggressive target of $49.00ish for anyone that’s still riding that one.

Oh boy!  We really need the Advantage Point Morning Call time to do justice to the current market overview.  Please attend or watch our recording!  There are many, many possible scenarios that are playing out in our minds at the moment.  We’ll do our best to cover at least a few.  Let’s first review our initial and key comments from last week’s 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.

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:

Now let’s look at tech (the Q’s) again now and let’s do it in light of all the indices rallying as they have after the churn concluded:

The tech push continued and as can be seen, they’ve got them virtually back to the ATHs (All-Time-Highs).  The “V” pattern may not be textbook perfect but it sure did play out!  The 100% retracement has effectively occurred. That late break on Friday made it all possible.  But there’s more:

https://www.zerohedge.com/news/2018-02-26/nasdaq-soars-green-february

And then the bid under stocks spread out to the DIA and SPY from there:

But, let’s not forget about the rest of the world since we’re still in the Great Global Melt-Up times:

First, Europe:

And now China:

Things abroad aren’t looking nearly as ebullient as the latest bout of domestic Tech Mania!

So…we’re left thinking this:

EXACTLY!  There’s quite a few things that COULD be happening and that’s just for starters!  Do the SPYs follow the Q’s lead and retrace 100%?  Will that be a double top?  Will they make a new high on a false breakout?  Will they put in a lower high and begin to fail?  Are we in a topping pattern?  What will the USD and 10-year do this week?  There’s a lot folks!  A lot!  Will Euroland and Red/Green China matter? We’ll cover much if it in our webinar.  We promise!  But, to do boil things down…

We see it this way at present:  The bulls have been in control for a while, BUT they also mixed in a nice pause to rest for most of last week.  They should have the energy they need to move the SPYs and DIAs back up even more if they’d like to do so.  The Economic Calendar is very full this week and with choice material that includes new FED Chief Money Printer Jerome Powell’s testimony not once but twice.  It is unlikely that he wants to trigger a selloff since the modern FED is only about bubble fomentation, but…you never know what the Wall St. gang will seize upon to move stocks and then send CNBC’s Bob Pisani out to justify what they’ve just done shortly thereafter!  If numbers and words matter again, (😊) this could be a fun week!

We’re starting out with the type of graphics that we LOVE to stumble across here in BTR.  Why? Because they say so much with great economy!  And we need that this week because, rather surprisingly, there’s not much “NEW STUFF” out there of great interest.  It seems as if more commentators paused to watch the markets last week than to produce interesting content.  Fortunately, what we did find was GOOD STUFF.  Anyway, we’ll press on.

How’s that look to ya’ pardner?  They’ve done it again haven’t they?  Prior to the FED going full-on PermaBubble in 1994, the market cap of stocks consistently registered about 50% of GDP.  Then the FED turned on the SuperPump and 100% has been the number.  Now…well now it’s early 2000 Internet Bubble crazy.  Read the commentary that is associate with the graphic here: http://billblain.wixsite.com/porridge/single-post/2018/02/27/Blains-Morning-Porridge---Feb-27th-2018-February-nearly-behind-us---where-does-that-leave-the-rest-of-the-year

Here’s another reminder of why despite the bounce off the lows, risks remain high:

https://dollarcollapse.com/debt/2018-year-margin-call/

That’s right, more folks are buying more stock and using more debt to do so.  Cascade style selling could be the end result if these players go into panic mode on the next swoon in the markets.  This may be minor compared to other similar items we’ve published but it is merely another reason to continue to take risk seriously!

Even the Wall St. Journal was left concerned and here’s why:

Investors’ Zeal to Buy Stocks With Debt Leaves Markets Vulnerable

Investors borrowing record sums to bet on stocks exacerbated this month’s selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash.

If that debt, known as margin loans, continues to rise at the current pace, analysts warn that big selloffs and sudden bouts of volatility in the stock market could become more commonplace.

Retail and institutional investors have borrowed a record $642.8 billion against their portfolios, according to the Financial Industry Regulatory Authority, as they try to pocket bigger gains by ramping up their exposure to stocks.

So-called net margin debt was worth 1.31% of the total value of the New York Stock Exchange last year, according to Goldman Sachs data stretching back to 1980, eclipsing the previous peak of 1.27% reached in the buildup to the tech bubble in 2000.

Lending against securities is a key profit center for brokerages, as firms charge interest on the money that is used and say they have found they better retain clients who take on the debt. These loans can also factor into brokers’ compensation, incentivizing many to extend money to clients regardless of whether they need it or not.

Margin debt has been on the rise for years and is generally considered a gauge of investor confidence. The long-running stock rally has helped push debt levels higher since investors tend to be more willing to take loans against investments that are rising in value. However, it can also precipitate a steep market downturn as it did before the burst of the dot-com bubble and the financial crisis of 2008.

The growing loan balances have caught the attention of Wall Street’s watchdog. Finra in January published an investor alert after the total value of margin loans broke $600 billion for the first time, saying investors may be underestimating the risks of trading on margin and may not understand how margin calls work.

Moving on…we did find a nice comprehensive review of conditions courtesy of BOA.  It’s a little concerning 😐 :

https://www.zerohedge.com/news/2018-02-26/13-19-bear-market-indicators-have-now-been-triggered-bofa

We’ve highlighted our main concerns:

Exactly one month ago, just as the S&P hit all time high, Bank of America caused a stir when it announced that one of its proprietary "guaranteed bear market" indicators created by the Bank of America quants was just triggered. As we said at the time, what was remarkable about this particular indicator is that it predicted not only the size of the upcoming drop (-12% on average) but also the timing (over the coming three months). Also notable: its uncanny accuracy: it was correct on 11 out of 11 previous occasions after it was triggered.

Of course, the link above will bring you to a full read but here’s what we found to be critical at the moment followed by what they’re still waiting for:

And this is what BofA said now:

In our 2018 Year Ahead, we compiled a list of bear market signposts that generally have occurred ahead of bear markets. No single indicator is perfect, and in this cycle, several will undoubtedly lag or not occur at all. But while single indicators may not be useful for market timing, they can be viewed as conservative preconditions for a bear market. Today, 13 of 19 (68%) have been triggered.

... although the good news is that "historically (since 1968) at least 80% have been signaled ahead of prior market peaks."

Here is the full breakdown:

Specifically, the following indicators have now been triggered, with the latest 2 bolded:

1. Bear markets have always been preceded by the Fed hiking rates by at least 75bp from the cycle trough
2. Minimum returns in the last 12m of a bull market have been 11%
3. Minimum returns in the last 24m of a bull market have been 30%
4. 9m price return (top decile) vs. S&P 500 equalweight index
5. Consensus projected long-term growth (top decile) vs. S&P 500 equalweight index
6. We have yet to see a bear market when the 100 level had not been breached in the prior 24m
7. Similarly, we have yet to see a bear market when the 20 level had not been breached in the prior 6m
8. Companies beating on both EPS & Sales outperformed the S&P 500 by less than 1ppt within the last three quarters
9. While not always a major change, aggregate growth expectations tend to rise within the last 18m of bull markets
10. Trailing PE + CPI y/y% >20 in the prior 12m
11. Based on 1- and 3-month estimate revision trends; see footnote for more detail
12. Trailing PE + CPI (y/y%) >20 within the last 12m
13. In the preceding 12m of all but one (1961) bull market peak, the market has pulled back by 5%+ at least once

And here are the 6 indicators that have yet to ring the proverbial bell.

1. Each of the last three bear markets has started when a net positive % of banks were tightening C&I lending standards
2. Companies with S&P Quality ratings of B or lower outperform stocks rated B+ or higher
3. Forward 12m earnings yield (top decile) vs. S&P 500 equalweight index
4. A contrarian measure of sell side equity optimism; sell signal trigged in the prior 6m
5. A contrarian measure of buy side optimism
6. Does not always lead or catch every peak and all but one inversion (1970) has coincided with a bear market within 24m

And while over two-thirds of BofA's bear market checklists being triggered sound ominous, the following chart shows that on a historical basis, the minimum threshold for a bear market onset was no less than 80% of the signposts "flashing red."

Whoa!  The Percent of Indicators trend looks bullish!  Which…is clearly bearish!  If the blue line reaches 80%, and it’s not far away, that’s when we really need to get defensive.

Wall St.’s professional talkers have been all over the business airwaves the past month discounting rising interest rates and their effects on the bull market.  Consumers on the other hand, seem to be reacting to the affect of higher interest rates.  That’s a disconnect and here it is to be seen in a fairly important space:

The above happened, as the below happened (keep in mind that the mortgage rate line is inverted:

There would seem to be a fairly-strong correlation between existing home sales and mortgage rate despite the Wall St. gang arguing otherwise.  Rates rise, that chokes off things.  Debt…chokes off things too when it becomes too large relative to all other things.

We’re reminded yet again that it takes more and more debt to keep the music playing and now the cost of debt is rising.  We can’t lose sight of this!  And…the biggest buyer of debt of them all is stepping away from the table!:

Finally, we at least have this to cushion things should we begin to fall:

That’s right!  CFO’s plan to buy back more shares than ever measured in dollars at the highest prices of all-time!

In closing, if BTR has left you concerned…GOOD!  That’s what it was designed to do!

Keep on Banking and Rolling!

We’re going to dive into TIME this week in OA.  Most new-to-options traders quickly learn or are taught that time matters significantly with respect to options values and success in trading options.  Time factors into the options selection process and into management of trades among other ways.  However, the most common appreciation for time and its effects is most certainly with respect to the Greek, Theta.  It’s said that with respect to the Greek Theta, the T in it stands for Time and thus Theta.  It informs us as to how much, in dollar terms, we should expect the option in focus’ value to decline per day due to the effects of decay since options are an expiring asset.  However, this will not be our focus this week as time effects options in other ways, one of which is the effect on an option’s Delta.

When folks begin to learn about options trading, they have a lot to learn and a lot to process.  We experience this every weekend in our live weekend seminars.  After we work on Delta and Theta in a direct fashion, we also briefly delve into how time passing will affect Delta and we do it by asking these questions:

1. Let’s assume that we buy an 80 delta call with 30 days to expiration and then we jump ahead in time to 1 day before expiration and the stock price is remarkably trading at the exactly same price as when we bought our call. What will have happened to that call’s delta if anything?
2. Let’s assume that we buy a 20 delta call with 30 days to expiration and then we jump ahead in time to 1 day before expiration and the stock price is remarkably trading at the exactly same price as when we bought our call. What will have happened to that call’s delta if anything?
3. Let’s assume that we buy a 50 delta call with 30 days to expiration and then we jump ahead in time to 1 day before expiration and the stock price is remarkably trading at the exactly same price as when we bought our call. What will have happened to that call’s delta if anything?

The responses to the questions fill the spectrum.  The camps are fairly-balanced.  Some always think that deltas in all options will fall, some always believe all deltas will rise and some believe with all types of deltas that they will remain constant in all 3 cases.  Let’s break it down so this is clear…

We have to think about the contract itself first.  The standard contract is “set” to become or convert into 100 shares if it finishes in the money.  We know that ITM options are > 50 and OTM options are < 50 but that 50 delta ATM options are well…50 delta.  So…if the stock price is at the exact price point 29 days after our purchase, we can reason as follows:

The 80-delta call’s delta will rise to be near 100 delta.  Why?  It’s still deeply ITM and there’s very little time left for it to fall OTM, 1 day!  That means, that very shortly, it is set to convert to 100 shares of the underlying stock.

The 20-delta call’s delta will fall to be near 0 delta.  Why?  It’s still far OTM and there’s very little time left for it to become ITM, 1 day!  That means, that very shortly, it is set to expire worthless and thus it would make little sense to convert it to 100 shares.

The 50-delta call’s delta will, will…will be 50 delta!  Why?  It’s still dead on ATM and has (at least in theory) as good of a chance to finish ITM as OTM with 1 day left!  That means, that very shortly, it could to convert to 100 shares of the underlying stock or not, thus 0 shares!

We must remember that DELTA = Shares! (other things too but shares for sure 😊)

Folks that are very new to options may not realize that time passing can and will change Delta but it most certainly does and we need to stay apprised of that if we hold options for extended periods of time.

If you have questions, ask away in this week's Advantage Point Morning Call webinar.