• This Week's Trade Ideas:
Bullish: ETrade Financial Corp. > ETFC – Buy the June 30th 36.5 Calls for $1.65 or less with a close or anticipated close above $37.70 in an up market with expectations for continued strength.  (SPECULATIVE!)
Halliburton Co. > HAL – Buy the June 30th 45.5 Calls for $1.50 or less with a close or anticipated close above $46.25 in an up market with expectations for continued strength.  (SPECULATIVE!)
Bearish: None at this time.

• Market Overview:
Naturally and with virtually all other market watchers we were focused on Comey’s testimony, the UK election, and the ECB meeting with an eye towards this week’s FED meeting.  The FED meeting withstanding, none of the rest seemed to matter much (as so much hasn’t!) but by the end of the week we were able to witness huge volatility returning to the tech sector just after the VIX registered a new 20 YEAR LOW!

• Below the Radar:
We’re going to get started this week with a few quick hits that we haven’t been able to cram into recent BTR editions.  This isn’t necessarily timely information but it does help us to appreciate the backdrop that remains in place in the economy.

• Options Academy:
This week’s OA will focus on the familiar theme of getting away from “textbook” strategy application.  We don’t often cover or discuss pure premium collection strategies so let’s do a little of that for a change!

Following our script?

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.  We can’t be sure if we’re breaking out or faking it!

Additionally, we’re still maintaining the “singles” oriented / risk-averse mindset and approach as we’ve been for some time and it’s with that in mind 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.

Bullish:

ETrade Financial Corp. > ETFC – Buy the June 30th 36.5 Calls for $1.65 or less with a close or anticipated close above $37.70 in an up market with expectations for continued strength.  (SPECULATIVE!)

Halliburton Co. > HAL – Buy the June 30th 45.5 Calls for $1.50 or less with a close or anticipated close above $46.25 in an up market with expectations for continued strength.  (SPECULATIVE!)

Bearish:

None at this time.

Outlook:

Macroeconomic deterioration and heavy tech stock selling notwithstanding, it appears that permabulls might be rotating into financials and energy with their winnings from the tech melt up.

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:

The strangeness of last week didn’t allow for our ideas to trigger.  In fact, the goings-on in the markets never allowed us to even get close.  Both ideas, NEM and XRT, could resurface in the near future but as of now they’re not close to our original trigger points and we’d likely need more of a widespread selloff of the indices to be in place to take the trades.

Over the past few weeks our thoughts have been:

“We’re going with it for now and the bigger picture charts are still intact and looking just fine but we’re also on guard for a false breakout.”

AND:

“What, if anything, will matter again and more importantly, WHEN?”

Naturally and with virtually all other market watchers we were focused on Comey’s testimony, the UK election, and the ECB meeting with an eye towards this week’s FED meeting.  The FED meeting withstanding, none of the rest seemed to matter much (as so much hasn’t!) but by the end of the week we were able to witness huge volatility returning to the tech sector just after the VIX registered a new 20 YEAR LOW! (Something we considered as a possibility during the upcoming summer months)  The consensus seems to be that a Goldman Sachs released a note to clients that suggested that the most popular tech stocks (“FANG” for some, “FAAAM” or “FAAMG” for others) and many others are in bubble territory with respect to valuations and that it’s a very crowded trade.  We’re onboard with the consensus as the selling most certainly seemed to coincide with Goldman’s release.  So, what’s next?

Well, the past 2 weeks of Market Overview still apply:

1. The bigger picture charts are still fine but not as rosy as they were
2. Something did finally matter (valuations/crowded trade)

With respect to #1, we will have to wait to see what action develops in the markets and how that impacts the bigger picture charts.  Regarding #2, how much longer will it matter?  We have to remember that Wall St. players et al. have not allowed selling to occur in any meaningful way for any length of time for quite a while.  Will this time be an exception?  Again, we must wait.  We can add to this mix the FED meeting this week in which it’s almost 100% (prediction markets) likely to raise interest rates by 25bp as the central planners at the FED continue to try to normalize things after waiting far too long to do so from our perspective.  What if the FED backs off?  Low rates have been wonderful for the market’s performance (aided by QEs of course) so shouldn’t “lower for longer” boost stock prices?  Probably not as that could worry permabulls as it would suggest that the FED is sensing an economy that’s weaker than the consensus holds.  If the FED raises as expected should that really help indices that are still a whisker away from all-time-highs?  It could but maybe it won’t as maybe it’s priced in to the markets already.  There’s a lot of uncertainty right now and it’s typically better to wait and see what happens and then trade it rather than guessing too early.  Other interesting “things” occurred last week…

In years gone by, a rout of the FANG stocks, which have been market leaders for quite some time, would have brought the indices down along with them in a big way.  That didn’t happen.  Once again, we saw historically abnormal levels of stability in this marketplace.  We spotted retail and banking being bid up as popular tech was being crushed so we acknowledge that some sector rotation seemed to be in place.  However, given the weights of the FANG stocks in the indices, it’s still quite remarkable that index prices didn’t deteriorate more as they would have in bull markets of the recent past.

The breather that we speculated about last week may have actually come about.  And now, with the FED looming, the markets could be poised to rally as the FED continues to play the music that Wall St. loves.  This has been the pattern, as we noted last week, and until it doesn’t work we’re inclined to believe that it will!  Nonetheless, we’ll remain especially NIMBLE this week!

There’s actually a good bit of heavy economic data starting midweek and with volatility having picked up it’s possible that we could finally see reactions to data as we once did!  However, it may end up not mattering again because the FED and post-FED reaction pattern may dominate regardless, one never knows for sure…

This Week’s Economic Calendar

The gang was able to hold the indices above some support levels last week despite the tech carnage.  If tech recovers and the FED provides the customary boost, the SPYs are set to challenge the nearby resistance just above and possibly move higher in another wave upward.  We have a few resistance areas noted if a breakout should occur.  The small green dot highlights one line and the solid green line being the other.  Key support is found at the red line and that’s right at the recent lows we registered late last week.  One thing to be on the lookout for this week and next is the market’s behavior.  That’s always the case of course but at this time the focus should be on: “Is the pattern still working?”  Meaning, we’ve seen rally after rally just before and then for a good while after FED meetings and moves.  If the indices do not respond to the usual fare in the usual way THAT would be very interesting and could signal that much like the FANG stocks in Goldman’s eyes, the markets at large have ran “too far, too fast”.

Lastly, for those wondering just how crowded the long tech trade is please check out:

http://www.zerohedge.com/news/2017-06-08/tech-sector-now-more-overweight-its-ever-been

We’re going to get started this week with a few quick hits that we haven’t been able to cram into recent BTR editions.  This isn’t necessarily timely information but it does help us to appreciate the backdrop that remains in place in the economy.  The graphics themselves require little additional commentary:

Wage gains remain in jeopardy of breaking trend and that comes with disposable income growth tailing off…BIG.

And:

S&P 500 companies job growth levels are rolling over back towards crisis levels and thus it shouldn’t surprise anyone that despite the official employment/unemployment claims made by the federal government, labor matters remain historically subdued and subpar.  Many have noted that vast majority of the new jobs the government has found creative ways to count over the course of the recovery have been in the service sector and have been low wage.  The next graphic is offered in that spirit:

Remember that all this is transpiring while the FED continues with their “asset inflation” scheme that’s kept asset holders happy, those without assets not so much, and the surface of government statistics looking fine, just fine… It’s all holding together and may even be approaching a mania-like level but this type of scheming hasn’t ended well over the past few decades as wealth has crashed once the bubbles have popped:

On a quick side note, when we think of manufacturing we often think of “Middle America”.  We’ve discussed the challenges that Middle America has faced over the past two decades in our webinars.  For those interested, of which there seem to be many, we came across an interesting read on the subject that assails both major political parties: http://www.msn.com/en-us/news/opinion/the-great-betrayal-of-middle-america/ar-BBBQs49?li=BBnb7Kz

Refocusing back on current challenges for the economy, we have this:

https://www.bloomberg.com/news/articles/2017-06-06/trump-s-america-is-facing-a-13-trillion-consumer-debt-hangover

We extracted a few key paragraphs with our emphasis added:

Companies may have reason to be concerned. Consumer spending notched its weakest gain in the first quarter since the end of 2009, a problem in an economy where consumers account for 70 percent of spending, though analysts expect the dip to be transitory. And debt delinquencies are rising even as the job market shows signs of strength.

“There are pockets of consumers that are going to be sorely tested,” said Christopher Low, chief economist at FTN Financial. “We’ve conditioned American consumers to use debt to close the gap between their wages and their spending. When the Fed hikes, riskier borrowers are going to get pinched first.”

Rates are heading higher, the “jobs” situation is likely much less rosy than the media would have us believe, and US household debt has jammed back up to excessive highs.  These are simply more headwinds.  We’ve chronicled the signs of slowing for several months and have yet to see any information that suggest that it has run its course.  In fact, several other measures seem to confirm that a slowdown may still be in place:

It’s clear from both graphics above that tax receipts are down and trending lower which obviously reflects on the fact that commercial activity isn’t firing as it had been.

Commercial bank loan creation data above also confirms that an economy that’s heavily dependent on debt is not humming along as it had been for the past several years.  Have a quick look at what’s happening in real estate and auto land in the two graphics below:

This isn’t a USA-Only situation either:

“Steen Jakobsen: 60% Probability Of Recession In The Next 18 Months

The world economic engine is slowing to a standstill”

Jakobsen thinks there’s a good chance we’ll see a global recession starting by the end of 2017.  As you’re about to see, one of his chief concerns is the state of the global credit impulse.  We published a graphic on that subject last week as it had us concerned as well.  Here’s an updated graphic of the same and YES, it’s worsened:

https://www.peakprosperity.com/podcast/109232/steen-jakobsen-60-probability-recession-next-18-months

We’ve mentioned economist Dr. Ed Yardeni a few times recently and as we approach this week’s BTR conclusion we thought it couldn’t hurt to include this recent quote from the man as it echoes our potential melt-up sentiments that we’ve recently shared in Advantage Point:

“So far, the current bull market has marched impressively forward despite 56 anxiety attacks, by my count. They were false alarms. I remain bullish. My long-held concern is that the bull market might end with a melt-up that sets the stage for a meltdown. The latest valuation and flow-of-funds data certainly suggest that the melt-up scenario may be imminent, or underway.”

http://blog.yardeni.com/2017/06/hannibal-spirits-s-500-climbing.html

It’s been over 8 years since the bottom was put in to the stock market in March 2009 and as we’ve seen week after week in AP, the FED has succeeded in goosing asset prices but how much widespread good have their policies really brought about?  8 years later and many long-time observers remain concerned or worried for a variety of reasons.  As can be seen below, wages and full-time employment haven’t benefited much from the FED’s hyper manipulation:

Yet, despite the shortcomings their efforts have produced, that hasn’t stopped them from trying.  They’ve had success but it might not be the kind most people were looking for nor of the lasting variety:

If you look at that table closely, you’ll see that the S&P 500 is expensive 18 of 20 metrics.  Yet, that hasn’t stopped the central bankers from playing on…  In fact, they may have accelerated their efforts this year:

Which is why stock valuations may be up high by historical standards but it may not matter as long as central banks continue to bolster equities prices since there’s very little that’s historical about that!

Be careful out there!

This week’s OA will focus on the familiar theme of getting away from “textbook” strategy application.  We don’t often cover or discuss pure premium collection strategies so let’s do a little of that for a change!

We’re going to make the Iron Condor “IC” our focus in terms of strategy but it’s the secondary focus of our discussion.  The main focus is once again applying our approach within the current environment we’re operating within.  The IC is a fairly popular premium collection strategy with those ravenous for decay for several reasons, some of which follow:

1. It’s a credit spread so it “brings in” cash
2. It’s a hedged strategy that allows for a known max loss
3. It has a high win percentage

It’s construction is fairly straight forward, all within the same expiration:

Sell a vertical Call Spread

Sell a vertical Put Spread

Some like to say “short the double vertical” but we’re not interested in that so much in that type of stuff.  We’re more interested in the placement of our vertical spread in terms of strike prices.  Strike selection is what we’re after.

As we write the SPY is near $245 so an Iron Condor could look like this according to textbook application:

Call Side: Buy the June 30^th 248 Calls and sell the June 30^th 246 Calls for a credit.

Put Side: Buy the June 30^th 242 Puts and sell the June 30^th 244 Puts for a credit.

Prices aren’t important here focused on placement not profit and loss potential.  The point we’re making is that the 2 short vertical spreads have been placed equidistant from the current price of the SPY.  Why?  Typically, new options traders do this because that’s what they’ve been taught to do.  This seems “right” to them.  Ultimately, it may be textbook right but profits-challenged.  There’s nothing wrong with wanting to collect decay “on both sides” (of the current price) but why do that if you have a directional lean?

Why do that if you believe that support is much stouter than resistance? (see chart above) Let’s assume we believe the SPYs have super solid support at $244 but nearby resistance at $248 for whatever reasons.  It would behoove us to sell the closer $244 put since we do not believe that the SPYs are likely to drop below that level easily while we should allow for more cushion on the upside.  Perhaps selling the calls at $248 instead of $246 in our original example would make more sense?  That would allow us to have breathing room before the short call vertical begins to hurt our prospects should the SPYs begin to move up.

Once again, using what we see in the chart to guide us in the options selection process can be of great benefit even with pure premium collection strategies such as the Iron Condor.

Please attend our Advantage Point Morning Call webinar if you have any questions!

Have a great week!

The Advantage Point Team