• This Week's Trade Ideas:
Bullish:
Devon Energy Co. > DVN – Buy the July 21st 30 Calls for $1.45 or less with a close or anticipated close above $31.00 in an up market with expectations for continued strength and support in the sector. (Trend Reversal Trade: VERY SPECULATIVE!)

AND/OR:

Twilio Inc. > TWLO – Buy the July 28th 29 Calls for $1.55 or less with a close or anticipated close above $29.70 in an up market with expectations for continued strength. (Trend Reversal Trade: SPECULATIVE!)

Bearish:
None at this time.  We evaluated several bearish ideas but none from our scans are quite there yet.  We’d like to publish a few as the markets are a “jump ball” at present.  If conditions develop that put bearish ideas in play we will put those names out through updates.

(Editor's note: These trade ideas may be updated periodically, in keeping with market conditions. They are intended solely for educational purposes.)

• Market Overview:
This week gets things started and by August 4th we’ll have seen nearly 90% of the S&P 500 having reported earnings. Could the earnings deluge finally mark the return of volatility?

• Below the Radar:
We covered the massive shift to passive investing last week and specifically focused on Vanguard’s ever-increasing role in this bull market. Well… there’s more this time around.

• Options Academy:
This week we’re going to very briefly delve into “going long volatility” in the form of the VXX. With volatility priced extremely low by historical measures this is as good as any time to cover it. With Yellen speaking, with earnings due out in droves and with economic data hitting big later this week, this may be a better time than many. And finally, with almost a complete lack of fear in the markets and political risk seeping back in to go along with ongoing ICBM development, this may be a very good time to cover this!

Has the time has come, finally?

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.

The fact that we remain in an extended consolidation only reinforces our “singles” oriented / risk-averse mindset.  It’s with that in mind and along with the proximity of key trendlines (covered below in Market Overview) that we’ve generated the following ideas.  We may or may not be quick to take profits, should they develop.  It will depend upon the action in the stocks and markets as we observe them.  The market’s lack of volatility has left us hard-pressed to find “easy” trade ideas yet again.  Virtually no range expansion makes for dull goings-on.  Also, some issues have moved so far already that we’d be late to enter.  It’s for these and other reasons we’re having to delve into counter trend ideas again this week.

Bullish:

Devon Energy Co. > DVN – Buy the July 21st 30 Calls for $1.45 or less with a close or anticipated close above $31.00 in an up market with expectations for continued strength and support in the sector.
(Trend Reversal Trade: VERY SPECULATIVE!)

AND/OR:

Twilio Inc. > TWLO – Buy the July 28th 29 Calls for $1.55 or less with a close or anticipated close above $29.70 in an up market with expectations for continued strength.
(Trend Reversal Trade: SPECULATIVE!)

Bearish:

None at this time.  We evaluated several bearish ideas but none from our scans are quite there yet.  We’d like to publish a few as the markets are a “jump ball” at present.  If conditions develop that put bearish ideas in play we will put those names out through updates.

Outlook:

The DOW continues to melt up fueled by overnight futures jam sessions while the SPYs lag a little behind and the NDX even more so, technically speaking.  Things are mixed up a bit and sector rotations are still grabbing the headlines.  Thus, tech remains heavy (again, technical view not just the past few days), the SPYs subdued and the DOW frothy.  All in all though, there’s no range expansion and we’re very close to levels where June left us!

Technicals:

Will be discussed in-depth in the Advantage Point Morning Call webinar.

Fundamentals:

These trade idea(s) 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 another frustrating one without triggers despite our efforts to include 5 stocks that we’re on the verge of piercing key trendlines.  As we made clear, that’s what you often get when trying to catch a counter trend move and a string of often listless summer sessions don’t off much help either.  We did put out updates for the super aggressive among us with respect to ADM and the prior week’s idea in MSFT.  Quick reminder:  Closing prices of stocks we’re following and the indices are important.  Things often look fine during a day and then close poorly or disappointingly.  It’s mainly for these reasons that we include the conditions of “with a close or anticipated close above $XX.00 in an up market with expectations for continued strength” along with our ideas.  It’s much easier to profit when the markets support your directional bias especially when we’re trying to thread the needle with a counter trend trade.  Relatively “fresh” buy cycles and sell cycles that we cover in our webinars can often be critical for entry timing.  Finally, the nascent bid that we noticed in agriculture was fleeting.  The money seemed to flow back into tech more so than anything else.  It’s becoming repetitive and we recognize that, but it remains a market of short-lived cross currents.

Another Monday, another low volume melt-up.  This time the gang rotated back into tech stocks that had been selling off a little.  Tuesday morning brought more of the same in tech while the DIAs and SPYs just sort of hovered around.  We’re now 1/3^rd of the way through the new month and a new quarter and as we write the SPYs are just a few ticks away from where they closed out in June.  There’s just not much to work with in most stocks unless you can catch a brief ride for a day or two.  All tolled though, the Wall St. players have been able to keep the indices above key technical levels.  The “jobs” number, which in a realistic environment would have been considered “nothing special”, was enough to juice most issues, many in tech, much higher on little actual buying.  This leaves no doubt as to what side is still in control of the markets.

The second half of this week is where the action is, at least on paper, as Janet Yellen will speak in front of congress on Wednesday and Thursday.  Naturally, that spectacle could certainly provide market moving news but so may the economic news that’s scheduled for release on Friday.  (see the economic calendar.)  She’s not alone either as other FED bigwigs will be giving speeches during the week.

And, we’ve arrived at a key period:

As can be seen, this week gets things started and by August 4^th we’ll have seen nearly 90% of the S&P 500 having reported earnings.  Could the earnings deluge finally mark the return of volatility?  We mustn’t forget that many CEOs/CFOs implied that Q2 would show a rebound that would largely erase Q1 lackluster feelings.  With those expectations built in, it would seem that anything less than stellar earnings could lead to disappointment especially with stock prices near all-time highs.  But…let’s not get too far ahead!  Several earnings reports will trickle out during the week but Friday will also bring forth a batch of key earnings reports from major banks.  Bank earnings are highly anticipated this time around and have sparked volatility in the sector and the markets in the recent past.  In short, be prepared for Friday.  It may be just another end of the week summer session but then again…

Last week’s commentary concluded with this line:

“If, rather shockingly, the long-term support line is breached, that’s another matter entirely…”

For the time being, the major indices have moved up and away from key support.  We’re now at 3 days and counting with respect to the lows that were put in prior to the “jobs number”.  This lift off has now helped the “bigger picture” charts as well.  They were still intact near the lows but they look better than they did.  All in all, this leaves us “trapped” technically:

The SPYs are currently between the 20 SMA and 50 SMA.  Both moving averages can trigger movement when crossed, especially the 50.  We also labeled support and resistance lines.  Resistance is nearby and represented by the orange trendline.  Support is the white horizontal line that’s just below the 50 SMA.  To be sure, there are other levels of resistance and support nearby but since those noted are so close to each other, the markets would seem to be primed to leave the consolidation we’ve been mired in for the past several weeks if they can must just a little more movement.  In some ways, the weekly and monthly charts look a little tuckered but their complexion will change back to a positive one should we move higher and put this consolidation behind us.  We also have to remember that the high in the SPYs was put in over a month ago and we’ve been slowly moving lower while consolidating prior gains.  As we’re still in an uptrending stock market, the customary assumption is that we break out to the upside and challenge the all-time-highs.  That’s what “should” happen in the eyes of countless longs that worry about nothing more than how fast they can plow capital into markets at all-time highs.  If what “should” happen doesn’t, be ready should the indices crack below key support.  We’ve seen many bouts of the “second half of the summer blues” during the course of this bull market.  And we’re just about to that point, unofficially of course.

This Week’s Economic Reports

We covered the massive shift to passive investing last week and specifically focused on Vanguard’s ever-increasing role in this bull market.  Well…there’s more this time around:

http://www.marketwatch.com/story/investors-flock-to-vanguard-funds-dump-goldman-wells-fargo-and-others-2017-07-11

“In the world of asset management, it increasingly seems like there’s Vanguard, and then there’s everyone else.

The investment management giant has taken in more than $177.3 billion in inflows across its products thus far in 2017, according to Morningstar data. That’s about as much as its 10 closest competitors—combined.

The losers amid Vanguard’s victory include such Wall Street titans as J.P. Morgan Chase & Co. JPM, -0.35% Wells Fargo & Co. WFC, -0.77% and Goldman Sachs Group Inc. GS, +0.49% all of which have seen notable outflows this year.”

We’ll offer no argument in favor of using active mangers vs. passive investing, the historical results are very clear.  However, this surge is rapidly becoming the mother of all “crowded trades” and it’s happening with stocks at all-time highs with high valuations and the retail investor seems to be driving it.  All are reasons for concern.  Add in the ignoring of GDP misses and the FED about to offload their balance sheet sooner rather than later, and it’s clear that risk is present even if it’s not reflected in the markets or specifically the VIX.  It’s also easy to understand why so many are concerned should the panic to buy in reverse and become a panic to get out.  Moreover, it seems that Vanguard is “Amazoning” the big investment banks.  That wouldn’t seem to portend good things with respect to earnings coming from AUM in the future.  Disruption is everywhere it seems.

Speaking of disruption, no other group may have as many targets on their backs as the middle class.  We’ve covered the lack of recovery in many areas of the country and the march of the machines that’s accelerating directly at the middle class.  But now comes this, mostly courtesy of asset inflation and a lack of real recovery:

http://www.nbcnews.com/business/real-estate/americans-who-can-t-afford-their-homes-146-percent-n774106

“Over 38 million American households can't afford their housing, an increase of 146 percent in the past 16 years, according to a recent Harvard housing report.

Under federal guidelines, households that spend more than 30 percent of their income on housing costs are considered "cost burdened" and will have difficulty affording basic necessities like food, clothing, transportation and medical care.

But the number of Americans struggling with their housing costs has risen from almost 16 million in 2001 to 38 million in 2015, according to the Census data crunched in the report. That's more than double.”

This enormous group largely remains financially stressed to this day which is why we’re seeing more of this:

http://www.zerohedge.com/news/2017-07-10/obamacare-death-spiral-least-2-million-adults-ditch-coverage-2017-amid-soaring-premi

Economic conditions having not materially improved during the “recovery”, many in the middle class are being forced to forego health insurance coverage amid the incessant premium increases we were told would be brought under control.

As we’ve noted in BTR, along with health insurance, autos, homes, tuition, stocks and other asset groups are at or near all-time highs YET there hasn’t been any inflation???  Moreover, should we be shocked that despite heretofore nearly unfathomable amounts of QE, the economy struggles to expand by >2.0% measured by GDP?  Debt levels have ballooned again and terms are being extended like Elastic Man.  The problem remains that tens of millions of former contributors in the middle class are working multiple lower tier jobs if they’re working at all.  Underemployment or lack of employment is still a major drag on things even though we’re over 8 years out from the market bottom of 2009:

This is quite obviously true in general but for men even more so:

Traditionally, men have held positions in production, in manufacturing, in construction etc.  Services have recovered much more than manufacturing.  Services have historically paid far less than manufacturing.  As we’ve noted, food servers, preparers and bartenders have provided many of the new jobs during this recovery.  The rehiring in manufacturing has lagged dramatically.  These labor trends go a long way in explaining the lack of a recovery for many in the middle class and further, they explain why this recovery has been so weak in a historical context.  Too many are not even close to fully participating.

Which brings us to this:

http://www.acting-man.com/?p=50896

“A Great Big Dud

Many of today’s economic troubles are due to a fantastic guess.  That the wealth effect of inflated asset prices would stimulate demand in the economy.

The premise, as we understand it, was that as stock portfolios bubbled up investors would feel better about their lot in life.  Some of them would feel so doggone good they’d go out and buy 72-inch flat screen televisions and brand-new electric cars with computerized dashboards on credit.”

That about sums it up!  “Inflate assets and they will spend and there will be happiness throughout the lands” may be another way to state it.  The problem is, there’s no hiding from this graphic:

Yep!  It’s worked alright.  They’ve certainly raised asset prices and debt levels but what of GDP?  Yes, that black line at the bottom that’s barely nudged higher, that’s GDP.  If we expand our view to cover the developed international scene, we can see that other central banks have worked in harmony with the FED.  And, here are the results.  FROTH:

As is clear, it may not be a stretch to state the froth is back near all-time highs.  But here’s the issue…the FED claim’s that they’re about to embark on finally reversing course by reducing their balance sheet and they’ve even gone out of their way to try to talk down equity prices.  It’s been to no avail as they’ve obviously waited too long in so many ways but certainly with respect to expressing concerns for equity valuations.  The main question becomes:  With economies far from rip-roaring, what happens when central bank support is removed from the equation?  We’re contemplating it and others are but it seems that only a few folks are legitimately concerned at this point despite the stretched state of equity markets.  This philosophy still seems to hold sway 10 years later and 8 years “after”:

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” - Citigroup CEO Chuck Prince - July 2007

In conclusion, how do we make sense of it all?  Dozens of metrics and measures suggest that equities are significantly overvalued.  But judging by its response to disappointing economic data and its level of fear (VIX levels), the markets seem little concerned.  In fact, we’re seeing what can only be described as indiscriminate buying on certain days and on others low volume melt-ups, and those are becoming a regular occurrence.  It’s times like this we need to consider turning to a super computer!:

http://www.financialsense.com/didier-sornette/supercomputer-betting-market-crash

It might be worth the read or the listen (there’s a podcast that accompanies it) even if it’s just to check out something different.  In a nutshell, the “super computer”, which was long during this year, has recently beefed up its short side positions and reduced longs.

We can’t confirm it, but our hunch is that this is one of the only computers, of the kind that dominate the markets these days, that’s going short anything other than volatility!

This week we’re going to very briefly delve into “going long volatility” in the form of the VXX.  With volatility priced extremely low by historical measures this is as good as any time to cover it.  With Yellen speaking, with earnings due out in droves and with economic data hitting big later this week, this may be a better time than many.  And finally, with almost a complete lack of fear in the markets and political risk seeping back in to go along with ongoing ICBM development, this may be a very good time to cover this!  Who knows?

We covered “going long volatility” in the past here in Options Academy as the VIX is often a source of interest for active options traders.  We made it clear that you really have to nail the timing with your options selection to reap the big profits.  If you buy options too far out in time you’ll likely not have the opportunity to benefit nearly as much as those that buy near-term options.  (see our prior “OA” installment for reference.)  As the next month holds nearly all the earnings reports for the S&P 500, going out a month in time to get involved might not be the worst idea.  Additionally, we’re past the Independence Day weekend and Labor Day is still far off and won’t affect an August option.  AND, we can’t forget that the summer’s second half has provided quite a bit of fireworks in the markets in the recent past.

The nice thing about using the VXX is that it is focused on nearer term volatility to begin with.  Its focus is on volatility futures in the front and second month out in terms of time.  It doesn’t get involved in longer term volatility futures; the short term is its concentration. The bad thing about the VXX, and there are many of them, is that you simply can’t hold it.  Its design will allow it to decay over time similarly to the way an option decays.  This is for the quick strike only.  Take a look at the long-term chart to appreciate the decay factor (below.)  But, getting back to our main thrust, if you’re one that insists on trying to trade volatility and don’t want to get trapped in VIX trading due to the fact that other month options focus on outer month VIX futures, then you may want to get trapped in the VXX instead!  Yes, we’re kidding around but not really!

The trend is against you as can clearly be seen.  This chart represents the natural life of the VXX as it’s constructed.  If you think it’s been bad to be a long then check out an even longer-term chart of the VXX then you can you’ll really be blown away!

Playing in the VXX or VIX with capital you can afford to speculate with is one thing but trying to make money in them in the ways we do with regular stocks and ETFs is another thing.  These issues are very difficult to operate in and require near pinpoint precision in timing.  Having said ALL that, there are cheap calls in the VXX about a month out if you absolutely have to play!  OR maybe consider options on some of the leveraged or inverse S&P 500 ETFs (UPRO, SDS, SSO, SPXL ETC.)

And finally, what’s so bad about buying cheap puts on the SPYs?  They’re cheap right now and you won’t have to worry about ETF decay and being tied to VIX futures.  It’s a lot more direct and more easily understood.  If you get swindled with SPY options it’s much more likely that you snookered yourself at the very least!

Forgive us yet another cautionary tale.  We admit that this one was a little more devious but we become concerned when the same question bubbles up in our inbox rather suddenly, and boy has it...

If you have any questions please bring those to our next Advantage Point Morning Call webinar.

Have a great week!

The Advantage Point Team