• This Week's Trade Ideas:
Bullish: Cisco Systems. > CSCO. Buy the Aug. 18th 31.5 Calls for $1.20 or less with a close or anticipated close above $32.30 in an up market with expectations for continued strength and support in tech.

Bullish Mention:
Anadarko Petrol Corp. > APC has intriguing and potentially bullish qualities but ran too much on us today (RATS!) so we went with CSCO.

Bearish: None currently. Earnings releases are squarely in the way of names with ugliest bearish complexions as we see them. We’re avoiding fighting both the dominant market trend and post-earnings-release shenanigans at least for the moment.

• Market Overview:
As predictable as all the clichés you can think of (day following night, the sun rising in the east…), a positive spin and related market response are in place during this earnings season. Earnings, to a significant degree, have largely reflected much of the weakness we’ve been chronicling in Below the Radar the past few months but the music still plays on and thus money managers continue to buy, buy, buy while the futures operates continue to levitate things overnight. Our “old school” thoughts won’t let us gain any sense of real comfort however.

• Below the Radar:
Diving right into it, we have what has long been proffered as a “contrarian” indicator, turning out to actually not being a contrarian indicator but instead a fairly reliable one that’s seen leading up to corrections.

• Options Academy:
Judging by recent interactions we’ve had with the active trading public, it seems that many folks out there are having a hard time adding to long stock or mutual positions at these heights. This is quite understandable. However, although it may be trite, there is a truth to having to be in the game to win it. With that in mind we resolved to put our personal biases aside, figuratively held our noses, and decided to make the lowly vertical spread a focus of this week’s Options Academy.

They keep pushing despite blasé earnings.  How much more can they push it, and for how long?

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.

About 200 S&P 500 companies are set to report this week along with the FED holding their July two-day meeting that will conclude midweek.  Earnings thus far have mostly been “ho-hum” but the major indices are mostly higher regardless.  Last time Janet had the mic she sounded even more dovish than usual and thus we saw rallies.  Will she continue to sing the same inconsistent tune?

Bullish:

Cisco Systems. > CSCO.  Buy the Aug. 18th 31.5 Calls for $1.20 or less with a close or anticipated close above $32.30 in an up market with expectations for continued strength and support in tech.

Bullish Mention:

Anadarko Petrol Corp. > APC has intriguing and potentially bullish qualities but ran too much on us today (RATS!) so we went with CSCO. 

Bearish:

None currently.  Earnings releases are squarely in the way of names with ugliest bearish complexions as we see them.  We’re avoiding fighting both the dominant market trend and post-earnings-release shenanigans at least for the moment.

Outlook:

We’ve gotten some movement in our recent ideas which is better than no movement by far!  We can’t point to anything but positives on the charts, so long as we avoid charts that are centered on market breadth, sentiment and stretched metrics/valuations.  We noted back in the late Spring that the VIX might have a chance to make a historic low and by golly that’s just what happened on Tuesday with a new reading of 9.04%.  Obviously, with nothing wrong whatsoever with the charts and the VIX making a new multi-decade low we shouldn’t be worried (just like everyone else, see F&G below) but of course we are!  Even if it’s just a wee little bit.  This slow-motion melt-up we’ve been sticking with still has room so we approach this week’s ideas with this backdrop fully in mind:

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:

These 2 updates on recent ideas will bring you up to speed if you haven’t had time to read our email updates:

After Monday's interesting market action unfolded, we thought a quick update on recent ideas to be in order.
Our NKTR idea continued to pop higher nicely getting to nearly $24.00 but then ended the day rather disappointingly at $22.95.  We know that one can be volatile and unpredictable so Monday's action is effectively NKTR being NKTR.
Bullish mention MOMO pushed up nicely to $44.75 but it too closed rather somberly back near the $44.00 level.  Another wait and see stock at the moment.
Bearish idea XLI remained weak, as it has been since last week, but not weak enough, as it won't crack the support line we need it to so we can cash in.  XOM, after lifting at the end from being short term oversold, resumed its downward action and made a new recent low.  Again, in line with our overall expectations on it yet it too hasn't cracked below the level it needs to technically for big profits to develop.  It's still worth keeping an eye on for the aggressive players out there.
DVN and TWLO from the previous week seem to be held up.  We got a little decent movement from them but once again nothing extraordinary.  If the short-term cycles look a little tired, and you're still hanging around in those, it may be worth thinking about taking another stab if they take out resistance in some way rather than waiting for the sake of waiting.

AND:

With Tuesday's action unfolding as it has and with the FED meeting underway, we felt compelled to put out another update.
TWLO is threatening to close above its 200 SMA for the first time in a long time.  Remember, we're expecting resistance just below $33.00, assuming follow through and that is if anyone is still riding this one or considering it.
DVN is threatening to close above the 50 SMA for the first time in a long time and it is also very close to one of our targeted resistance areas in the low $33.00s.  Side note:  Energy's strength today has pulled XOM (bearish mention) out of the abyss for the moment.
XLI has an ugly candle at the moment but is still holding the key support line of ours.  Keep an eye on this one as it is a counter-trend trade.
NKTR is doing OK and MOMO (bullish mention) is struggling.  These may need to be watched closely too at the stage of the cycle they are at.

As predictable as all the clichés you can think of (day following night, the sun rising in the east…), a positive spin and related market response are in place during this earnings season.  Earnings, to a significant degree, have largely reflected much of the weakness we’ve been chronicling in Below the Radar the past few months but the music still plays on and thus money managers continue to buy, buy, buy while the futures operates continue to levitate things overnight.  Our “old school” thoughts won’t let us gain any sense of real comfort however.  While nothing at all is wrong with the technicals, we still possess a feeling that we’re not too far away from a technical top of some kind.  This “feeling” also includes a sense that distribution is occurring near this potential top.  In layman’s terms, we have the feeling that the “feel good” earnings coverage is providing good cover for shrewd players that want to sell into the good vibrations.  Only time will tell on that however so let’s look at things more analytically and reliably with our charts:

As can be seen above, we left our trendlines in place from prior work that we’ve done together recently.  The SPYs are making new highs but they’ve also fallen and (to this point) remained below our support line.  We may need to reposition that trendline if they continue to march higher but this could also show a slight weakening of momentum.  We can’t read too much into it yet however as we can also view this action as “fine just fine” because the SPYs used the time inside our white oval to consolidate gains and then push higher.  That’s obviously quite typical behavior to witness during bullish trends.  Some of our channel work suggests that $250.00ish could provide some resistance while other work of the same kind suggests the $253.00 level and another more optimistic level would beyond near $260.00.  We have to conclude yet again that, at this snapshot in time, there is NOTHING wrong with the prima facia technials on the SPYs.  All is working as it should and until something changes that dynamic they’ll try to find any and all ways to waft higher as it remains the path of least resistance.  Could the earnings deluge or the FED upend things?  Of course, but betting on that would be guessing.  For now, and really at all times, we have to go with the flow as that IS the smart way to play the game in Wall St.’s casino.

This Week’s Economic Reports

Diving right into it, we have what has long been proffered as a “contrarian” indicator, turning out to actually not being a contrarian indicator but instead a fairly reliable one that’s seen leading up to corrections.  Given the relentless upward surge in the markets, this is coming at potentially critical time.

Here a few selected nuggets from the piece:

But this contrarian interpretation is wrong, according to a study that appeared recently in the Journal of Financial Economics, a respected academic journal. That study found that short sellers on balance are right more than they’re wrong, and that in turn means it’s worrisome that the volume of short selling has risen so steadily this year.

On the face of it, of course, it seems unlikely that any group of investors should on average be able to beat the market. After all, as everyone knows, stock picking in general is a losing game. Why should those who bet stocks will go lower do better than those who bet they’ll go higher?

The answer, according to Matthew Ringgenberg, is that it’s much harder to sell a stock short than it is to buy it. Ringgenberg is a professor of finance at the University of Utah and one of this new study’s authors. In an interview, he pointed out that the markets place a number of hurdles in front of the short seller that don’t exist for investors on long side: It’s costly to borrow shares in order to sell them short, for example, and it’s not always easy to find borrowable shares in the first place. Short selling is especially risky, since the potential loss is infinite.

The piece isn’t very long if this revealing study captures your interest:

http://www.marketwatch.com/story/this-is-what-should-really-worry-you-about-stocks-2017-07-21

Before getting too deep into any one theme or subject this time around, we thought it would a good idea to check in on the “hard data/soft data” situation:

Obviously, the hard data is STILL trolling along near the lows while soft data remains elevated (just like the major indices!) after having corrected.  How much longer can the stock market rampage last if this data doesn’t change?  “A long time” is the right answer!  Ignoring economic realities and massive structural problems have served the bulls well.  Like much of the material we come across and cover in BTR, these “sub-surface” problems will only matter when they finally matter.  On the other hand, it’s good to know they’re out there because that literally keeps us rolling (up and out).

While we perform our own longer-term oriented technical and sentiment analysis on the stock market, we’re always on the lookout for other perspectives.  Here’s one that caught our eye:

That chart is one that we came across that was published recently by Lance Roberts.  It’s part of a larger piece but this chart really resonated with us as we also like to employ Bollinger Bands in atypical ways to large scale chart movement.  Note the upper right-hand corner and the callout box that details the 3 standard deviations reading above the 3 year monthly moving average.  As Lance notes, that’s’ a rarity but the fact that it’s happening with hard data continuing to languish in the Bastille, while the FED is THEORETICALLY about to raise rates again and unwind their absurdly high dollar amounts of assets purchases that litter their balance sheet still, well…you get the idea.  We won’t even point out that the Trump Agenda remains furiously stalled. (Oops!)

We could drone on with regards to such matters but it’s much easier to let David Rosenberg do our dirty work for us.  This is worth reading if you need encouragement or have gotten lazy when it comes to rolling up!:

http://www.businessinsider.com/david-rosenberg-things-dont-look-too-good-for-us-economy-2017-7

Here’s are favorite passages from David’s piece.  Seems like he may an Advantage Point – Below the Radar fan! 😉

And since 1950, such a stretch of not seeing anything more than a “shallow decline” of 5% has occurred but five other times. Randall Forsyth titled his Barron’s column The Perils of Bliss which isn’t that far off my thoughts of last week when I compared what is happening in the markets to a classic case of Fool’s Paradise.

So we have a sluggish U.S. economy on our hands with growth revisions to the downside.We have a situation where some investors see the softness enduring long enough that Fed funds futures are now pricing in less than 50-50 odds that Yellen et al make another rate move by year-end. Yet the Fed is signaling that it will begin to shrink the balance sheet by the fourth quarter, with no economic liftoff.

The political backdrop is rife with gridlock — unbelievably, there is still hope among investors that tax reform is coming by 2018. At the same time, evidence is mounting that the Dems have a serious shot of taking the House next year. We have a White House that, with the help of inside leaks and the media, continues to find itself embroiled in controversies. And health care reform, which was always pledged to be the first item to be done, is looking more and more like a pipe dream (see Senate’s Revised Health Bill Spurs Divisions in Party on page A4 of the weekend WSJ as well as Governors Shun New Health Bill From Both Sides on the front page of the Saturday NYT). When hasn't governing been complicated? It took the Gipper five years and endless bottles of scotch with Tip to get tax reform legislated in 1986!

We have heightened geopolitical risks from North Korea and China has instructed the U.S. that it will not be pressured to invoke sanctions against its unstable satellite.

We have a central bank chief who looks to be a lame duck...a recent WSJ survey found that economists only peg her odds of staying on past February 2018 at 20.8%. Just more uncertainty to deal with.

And now we have a market-leader, bank stocks which until this past week had rallied 30% since last year’s election, and always and everywhere the proverbial canary in the coalmine, waving the caution flag all of a sudden. For the most part, the big banks that reported last week smashed through their EPS estimates. Yet, JP Morgan, Citigroup and Wells Fargo all closed the week with losses between 1% and 2%. This wasn’t merely the case of “selling the fact” and taking profits.

We pulled the earnings growth graphic above from David Stockman’s most recent rant which will remind you a lot of David Rosenberg’s rant above in some ways.  We’ve featured David Stockman’s pieces here a few times before but if you want to check out his most recent pulls-no-punches missive aimed directly at the usual suspects that inhabit Mordor on the Potomac and the secretive halls of central banking, you can check it out in full here.  It’s a good read:  https://dailyreckoning.com/chuck-prince-market-redux-dangerous/

Here’s just the gist of it for those that don’t have the time with our highlights added:

We are at that moment again. Only this time the danger of a thundering crash is far greater. That’s because the current blow-off top comes after nine years of even more central bank policy than Greenspan’s credit and housing bubble.

The Fed and its crew of traveling central banks around the world have gutted honest price discovery entirely. They have turned global financial markets into outright gambling dens of unchecked speculation.

Central bank policies of massive quantitative easing (QE) and zero interest rates (ZIRP) have been sugar-coated in rhetoric about “stimulus”, “accommodation” and guiding economies toward optimal levels of inflation and full-employment.

The truth of the matter is far different. The combined $15 trillion of central bank balance sheet expansion since 2007 amounts to monetary fraud of epic proportions.

The massive injection of fiat credit has drastically falsified prices in the debt and money markets. Through the channels of cap rates, carry trades and corporate financial engineering, the prices of equities and all other risk assets, have been falsified too.

Following Stockman, we’re ending on even more of a down note this week with an article that’s just been published.  We’ve hit on this theme many times in Advantage Point and although Wall St., courtesy of the FED parties on, and DC rigs the stats to keep them invisible, they’re not forgotten about within our pages as this largely remains a select and engineered recovery:

Millions of families are living in perpetual financial insecurity.

Low-income families are still unable to accrue enough savings to see themselves through a period of joblessness. Some 37% of those households are “liquid asset poor,” based on the latest U.S. Census Bureau data, meaning they don’t have enough money in their bank account or other assets to replace three months of income at the poverty level (that’s just $6,150 for a family of four).

http://www.marketwatch.com/story/one-depressing-reason-millions-of-people-are-locked-out-of-the-american-dream-2017-07-25?mod=MW_story_top_stories

Judging by recent interactions we’ve had with the active trading public, it seems that many folks out there are having a hard time adding to long stock or mutual positions at these heights.  This is quite understandable.  However, although it may be trite, there is a truth to having to be in the game to win it.  With that in mind we resolved to put our personal biases aside, figuratively held our noses, and decided to make the lowly vertical spread a focus of this week’s Options Academy.

We’re going to bypass kicking the vertical spread around due to its shortcomings because some of virtues may be of help at a market juncture such as this one.  So…we’ll know try to sing some of the appropriate praises of the vertical spread:

1. Verticals are probably the simplest form of options spread.
2. Easy to understand and transact and without too much in execution costs.
3. Capital requirements can be low as well.
4. They’re limited risk.
5. They can keep us hedged in terms of certain Greeks to a large extent.
6. They can be flexible and are not hard to “leg” into, getting on one side at a time.

As we made clear above, verticals are not our favorite options strategy.  BUT, when we look at what they can do for us not against other options strategies but against what kind of return they can offer vs. what is offered to us by banks et al., they suddenly look much, much better.

Let’s get into an example to demonstrate how well they fare vs. placing capital in a banking product.

Just above is a chart of the OIH.  We drew a basic channel around the price action of the past few months.  We may not have a technical axe to grind here but in this case, that could be a good thing.  OIH is showing nascent signs of bullishness within a channel will be the assumption we’re going to operate with so that a bullish vertical spread would apply in this example.  Now let’s have a gander at the options chain:

Notice that we’re utilizing options that expire in 10 days so that we stay smart and utilize what we know about options and verticals properly.  To cut to the quick we’re going to focus on buying the Aug. 4^th expiration and we’ll assume we can purchase the 23 calls for $2.30 while selling the 25 calls for $0.61.  Effectively this will have us paying $1.69 for a spread that’s max value can be $2.00.  That means that we can max earn $0.31 on a $1.69 investment.  The rate of return, assuming that things really went well for us at expiration, would $0.31 profit / $1.69 investment outlay = 18.34% in 10 CALENDAR DAYS!  3 times in a month with zero compounding would put us at just about 55%!  To not lose any money on this one we’d need the stock to stay above $24.69 and further, if it holds above $25.00 at expiration we realize the entire profit potential.  It’s already above those levels as we write!  We can see that there seems to be some support near $24.50 given yesterday’s bottom and further support at $23.50 should things begin to really go south on us.  We can hear the grumbling about execution costs now but if we just assume a 10 that largely disappears and only a 10 lot that would tie up $1690.00 for 10 days would produce a $310.00 return for us.

This simple vertical discussion does not mean to suggest that a trade idea is embedded here.  What we are hoping to do is to demonstrate that there can be decent little trades out there that can be had at times like this even while employing simple but lower-tier options strategies like the vertical spread.  So, while the local banking folks may greet us with a smile, the not-even-keep-up-with-real-inflation rates that they offer when contrasted with the vertical spread should leave you, Mr. or Mrs. Options Investor, with a smile on your face.

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

Have a great week!

The Advantage Point Team