Advantage Point Newsletter - July 18th, 2017
• This Week's Trade Ideas:
Bullish: Nektar Therapeutics. > NKTR. We have to caution that this idea is EXTREMELY SPECULATIVE! Read up on the company and recent news. “Pain medication, Opioid Abuse”, that’s the type of stuff you’ll come across…BUT its chart shows, for us anyway, very explosive potential. NKTR - Buy the Aug 18th 21 Calls for $2.05 or less with a close or anticipated close above $22.00. An up market would be more helpful than a down market but widespread stock buying may not matter so much with respect to this EXTREMELY SPECULATIVE idea!
Bullish Mention:
The options on this stock are not as liquid as we’d like them to be which is why we’re not using it as an official idea but Momo Inc. ADR > MOMO has some interesting and potentially bullish qualities.
Bearish: Industrial Select Sector SPDR. > XLI – Buy the Aug 18th 70 Puts for $1.45 or less with a close or anticipated close below $68.95 in a down market with expectations for continued weakness. (Trend Reversal Trade: SPECULATIVE!)
Bearish Mention:
The stock price and ultimately the option prices we prefer for AP ideas are not to be had in this stock but it could be on the verge of serious weakness should it fall just a little more. Take a look at the charts in Exxon Mobil Corp. > XOM
• Market Overview:
This Monday was a little different than what we’ve consistently witnessed over the past several weeks. The indices seem to finally tire after running for a good stretch. However, most the major indices remain perched at or very near all-time highs. Are they vulnerable to earnings season shenanigans as a result or will the much ballyhooed and consistently reliable yet heavily engineered “earnings beat” street game theatrics provide even more propulsion to keep the latest melt up intact? THAT, is the question we’re asking ourselves.
• Below the Radar:
After she and her minions tried to jawbone equities down a little a few weeks back, Janet the Dove reemerged last week, turned up the music, and added a few more seats to Monkey Momentum Bus. The “joiner” algos kicked in and away we went! We’re NEVER, repeat NEVER fully surprised when seemingly hypocritical behavior emerges from the media, DC, Wall St. or especially the FED.
• Options Academy:
With the VIX nearly registering a new low this past Friday, we thought that a brief dip into the “30 Delta Put” discussion might not be a bad idea. The idea flows something like this…
Volatility returned. Earnings reports are likely to see that it stays…
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 SPYs and DIAs finally broke out of the meandering consolidations they were trapped in for weeks. New highs were made pre-earnings deluge. As we noted last week, there’s nothing wrong with the current technicals other than stocks may need a little rest after running as they have. Still though, one can’t help but wonder if earnings really, really need to “beat” to keep us up here or if we’ll simply see more overnight and pre-market “melt up” action as earnings releases come fast and furious.
Bullish:
Nektar Therapeutics. > NKTR. We have to caution that this idea is EXTREMELY SPECULATIVE! Read up on the company and recent news. “Pain medication, Opioid Abuse”, that’s the type of stuff you’ll come across…BUT it’s chart shows, for us anyway, very explosive potential. NKTR - Buy the Aug 18th 21 Calls for $2.05 or less with a close or anticipated close above $22.00. An up market would be more helpful than a down market but widespread stock buying may not matter so much with respect to this EXTREMELY SPECULATIVE idea!
Bullish Mention:
The options on this stock are not as liquid as we’d like them to be which is why we’re not using it as an official idea but Momo Inc. ADR > MOMO has some interesting and potentially bullish qualities.
Bearish:
Industrial Select Sector SPDR. > XLI – Buy the Aug 18th 70 Puts for $1.45 or less with a close or anticipated close below $68.95 in a down market with expectations for continued weakness.
(Trend Reversal Trade: SPECULATIVE!)
Bearish Mention:
The stock price and ultimately the option prices we prefer for AP ideas are not to be had in this stock but it could be on the verge of serious weakness should it fall just a little more. Take a look at the charts in Exxon Mobil Corp. > XOM
Outlook:
Things finally changed in a big way last week and before we knew it we saw new highs in the major indices, except the NDX, but it too made a very nice move back up. Have Wall St. operators finally pushed stocks up too far with respect to the earnings that are on the way? Have they “set the bar” too high on a few levels? The path of least resistance clearly remains UP! However, we did touch the upper Bollinger Band on both the traditional and our proprietary settings. This always raises the: “too far, too fast?” question. AND, obviously with most earnings releases coming after the bell and pre-market, it’s likely our initial fates will be sealed for at least the early part of the day if we hold any positions in earnings sensitive names.
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:
DVN triggered and made a little move up towards the 200 SMA resistance as we noted yesterday in our update. As it’s a counter trend trade and the indices and XLE look a little tuckered, we noted that small profits could be had or reduction etc. could be made by those that are risk averse. True believers though may still want to wait it out if they’re OK with riding out what’s likely to be a volatile stretch. Remember, this is a counter trend idea and it and XLE got stopped in their tracks right where we’d expect at key down-sloping SMAs or resistance lines. TWLO finally, finally did something on Monday. Did it trigger? Well, YES, if you were still watching it but we were not jazzed up about it doing its thing just as new ideas were about to be published and the markets had a strong and long buy cycle already in place for days. $31.75 and $32.75 areas may offer some resistance for those intrepid folks that watched it all week and decided to jump in late in the game yesterday. $34.65ish would likely be the next tier up after those to offer resistance. Reversing and closing below $28.90 would probably doom the idea. FCX also played the game quite shrewdly and did its thing on Monday as well. If any liked this “bonus” idea to get involved, $13.80 may provide resistance. After that, there’s a lot of open room to the upside for a few dollars. Closing below $12.20 would be plain ugly but ideally it holds above $12.60ish to convert that resistance to support, otherwise, be on guard for a false breakout.
This Monday was a little different than what we’ve consistently witnessed over the past several weeks. The indices seem to finally tire after running for a good stretch. However, most the major indices remain perched at or very near all-time highs. Are they vulnerable to earnings season shenanigans as a result or will the much ballyhooed and consistently reliable yet heavily engineered “earnings beat” street game theatrics provide even more propulsion to keep the latest melt up intact? THAT, is the question we’re asking ourselves. With “bigger picture” charts intact and the earnings trick working like a charm for nearly 7 years in a row, it will take something out of the ordinary to change the dynamic. Bettors will go with what’s working until it doesn’t so we shall soon see… At the very least we seem to have moved on from a month’s worth of consolidating tedium and that’s an improvement for directionally oriented yet humble players such as ourselves.
This week is light on economic reports but what is on the way is fairly meaty. Still though, earnings and especially earnings guidance is likely to dominate this week’s action and outcome.
This Week’s Economic Reports
| time (et) | report | period | ACTUAL | MEDIAN forecast |
previous |
|
MONDAY, JULY 17 |
|||||
| 8:30 am | Empire state index | July | 9.8 | -- | 19.8 |
|
TUESDAY, JULY 18 |
|||||
| 8:30 am | Import prices | June | -0.2% | -- | -0.5% |
| 10 am | Home builders' index | July | -- | 67 | |
|
WEDNESDAY, JULY 19 |
|||||
| 8:30 am | Housing starts | June | 1.163mln | 1.092mln | |
| 8:30 am | Building permits | June | -- | 1.168nln | |
|
THURSDAY, JULY 20 |
|||||
| 8:30 am | Weekly jobless claims | 7/15 | 245,000 | 247,000 | |
| 8:30 am | Philly Fed | July | -- | 27.6 | |
| 10 am | Leading economic indicators | June | -- | 0.3% | |
|
FRIDAY, JULY 21 |
|||||
| None scheduled | |||||
We’re reprinting this again this week to reemphasize the fact that this week and the next 2 are IT!:
After she and her minions tried to jawbone equities down a little a few weeks back, Janet the Dove reemerged last week, turned up the music, and added a few more seats to Monkey Momentum Bus. The “joiner” algos kicked in and away we went! We’re NEVER, repeat NEVER fully surprised when seemingly hypocritical behavior emerges from the media, DC, Wall St. or especially the FED. The FED has done one thing consistently over the course of the past 104 years and that’s to see to it that asset prices are inflated while purchasing power is eroded. Works like a charm for those who hold all the assets but not quite as well for John and Jane Doe here in the land of plenty…of stress. In fact, we’d be in a state of shock if this current group of caretakers even remotely reminded us, behaviorally of course, of Paul Volcker. And seriously, why change anything? Asset bubbles have worked so well for US of late, why change anything? So, we’re now left with late-to-the-party-for-prudence central planners yapping incoherently as equities jammed to all-time highs. We should all be so lucky as to stumble and bumble our way to Easy Street…
Our BTR material, as we noted when first launched, is unlikely to ever deliver immediate impact within the markets. This section may be the financial markets version of matter that’s akin to the “background radiation” that cosmologists tell us litters the universe. It’s out there. It’s important. We can learn from it. It “tells” us things. But, it’s not something that’s typically the lead focus of the times. It matters a lot though when it does matter with respect to matter. (Got a little carried away! It happens!). Regardless, this week, and the next and the next may see this type of content even further recede from the forefront. Earnings coverage will likely occupy the financial media to nearly the same degree that all-things-Russian have in the “mainstream” propaganda…err media. However, that could make for a very interesting August. Read on if you prefer to keep your eyes wide open even as the Summer Haze comes on even more strongly.
While the media is obsessed with earnings, we prefer to focus on the state of the consumer as we’re often reminded that consumers are responsible for nearly 70% of US economic activity. If they’re pulling back that normally shows up at the margin.
As can be seen at JPM, charge offs are surging again and credit card default rates are the highest since 2013. http://www.zerohedge.com/news/2017-07-14/missing-slide-jpm-credit-card-charge-offs-jump-four-year-high
On a related note, it’s not surprising that retail sales growth isn’t humming along despite the media’s all-day-long claims that things are moving along swimmingly:
Hawk-eyed readers, on the other hand, may have notice that the retail numbers above are EX-Autos and Gas. Let’s take a peek into auto land just briefly:
Notice at the end of the URL “all-time-low”! This is happening as F and GM bounce higher! It’s the Wall St. way…
Let’s drop into restaurants to check out how food-loving Americans are treating their favorite eateries:
It’s hard to believe but it’s there to be seen, Americans continue to dial it back when even when it comes to their favorite pastime, eating out.
Now we’ll zoom out for the bigger picture state of the consumer stuff:
Late last week we learned via the U of Michigan that sentiment and hope are in the shortest supply with consumers since those pre-election days. “Hope” is cratering the most since 2013. As…
SPY short interest craters to a 10-year low. Virtually no one wants to be short and late-the-party retail players are jumping in with both feet! (Recall our Passive Investment Stampede info)
And here’s another one ratio that we touch on from time to time:
We’re going to start to wind things down now and we’ll start with this link to a good but short read that’s all about perspective:
http://www.zerohedge.com/news/2017-07-16/hedge-fund-cio-we%E2%80%99ve-realized-roughly-3-years-gains-first-6-months-2017 And here’s our favorite line from the piece:
“The S&P 500 is up roughly 10% this year. Which means we’ve realized roughly 3yrs of gains in the first 6mths of 2017. “At some point, you rally so much that your 10yr return forecast turns flat. At which point you could go sideways for a decade.” But roughly speaking, stocks either go up, or down.”
For those that would like to dive deeper and get to the depths of the punch bowl, this wordy piece from Deutsche Bank is pretty darn good:
With the VIX nearly registering a new low this past Friday, we thought that a brief dip into the “30 Delta Put” discussion might not be a bad idea. The idea flows something like this…
After there’s been a long uninterrupted run in the markets and your trading account is flush with profits, maybe you take some of that and start to acquire quantities of outer month OTM puts. You do this because, well at least historically, you sense that markets are due for a correction and you realize that if you wait too long to do so the price of puts could skyrocket. At the juncture we’re at now, earnings season will unofficially begin to wrap up 3 weeks forward, thus this might not be an awful idea. If you could wait it out through earnings season and we don’t experience a pullback, then that’s even better. Why so? Because at that point we’ll be approaching what’s typically been a rough month, September, followed naturally by October which has a history of producing sharp pullbacks. So, timing wise, puts are cheap and we’re near the season of volatility’s historical sweet spot. If we’re honest (see BTR above) about the state of the consumer, and the current valuation levels in this market, and the lack of fear and shorts combined with the over participation of late of taxi-driving laptop-traders entering this market, well, there you have it.
The “30 Delta Put” is often cited because it’s not very dollar expensive vs. other puts and it’s not too far away to help. Additionally, Its likely to be in strong demand should the market roll over thus its implied volatility level could spike in your favor as you’re already making money via its delta and gamma.
To make this a little more concrete we grabbed a snapshot of ABT’s currently daily chart. We placed our crosshairs right at nearby support to show that there is a lot of “air” below that should ABT begin to roll over. It’s had a good run this year and it’s nearly a $50 stock, so it could give some back if we ever witness a lasting selloff.
To try to give you a sense as to how cheaply this can be done, we marked up the options chain for November expiration. Note (top left yellow dot) that there are 122 days of time left. A LOT can happen in 122 days. BUT, as we highlighted with the green dot on the “P” (put side), the 46 strike put (28 delta, pretty close!) can be had for $0.97 right now (green oval). That’s not bad at all. So, for those that have heard a little but have never seen the “30 Delta Put” concept, hopefully you’ve got a better sense as to how it’s done and how cheaply it can be done. There’s nothing wrong either with initiating it as downside calendar to bring the cost down even further. That might not be the worse idea of the dog days of August are uneventful and the fireworks start later this fall if they in fact ever do!
If you have any questions please bring those to our next Advantage Point Morning Call webinar.
Have a great week!
The Advantage Point Team