• This Week's Trade Ideas:
Bullish: None at this time.  We will keep an eye on the markets as this could change.

Bearish:
For various reasons, we revised last week’s ideas and are presenting them again.  We scoured the charts and our scans but couldn’t find other suitable ideas at this time.  We will explain further in the Advantage Point Morning Call webinar.

Microsoft Corp. > MSFT – Buy the July 14th 70 Puts for $1.60 or less with a close or anticipated close below $69.15 in a down market with expectations for continued weakness.
(Trend Reversal Trade: SPECULATIVE!)

CSX Corp. > CSX – Buy the July 14th 54 Puts for $1.65 or less with a close or anticipated close below $52.85 in a down market with expectations for continued weakness.
(Trend Reversal Trade: SPECULATIVE!)

• Market Overview:
Economic reports pick up a little this week and the week ends with several notable reports coming out on Friday. Janet Yellen and other FED members are set to give speeches this week and those can normally be counted on to produce movement of some kind to some degree. As reports haven’t mattered a great deal for a while, it’s likely that reactions to FED speeches will be the main drivers this week but one can never know for sure…

• Below the Radar:
This week we’re going to split BTR into two distinct subsections.

Our main theme in BTR in 2017 has been contrast.  We’ve been beating the drum month after month with respect to the consistent deterioration in GDP growth and earnings expectations.  We’ve tried to show the contrast between those and Equity Price Levels.  Equities have ignored the underlying deterioration quite well to this point but we’re finally being joined by other much more high-profile parties that are acknowledging the very same and they’re doing it for the same reasons.

The second section of BTR is loaded with material that we typically leave on the cutting room floor… Check it out!

• Options Academy:
With the 2nd quarter closing out, a long holiday weekend following just after, and with earnings season around the bend, we decided that this could be a good time to get into earnings related trades. Earnings announcements have become a popular attraction for many options traders both veterans and newbies. Some like to speculate on movement while some like to capitalize on other factors such as vega and theta.

Eerily calm.  Will this week’s end lead to more interesting times?

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 crosscurrents in the markets are moving swiftly despite the fact that not much has happened with respect to the major indices.  We believe that we’re getting close to a resurgence in volatility.  Can it happen before a long holiday period or must we wait just a little longer?

As usual, 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:

None at this time.  We will keep an eye on the markets as this could change.

Bearish:

For various reasons, we revised last week’s ideas and are presenting them again.  We scoured the charts and our scans but couldn’t find other suitable ideas at this time.  We will explain further in the Advantage Point Morning Call webinar.

Microsoft Corp. > MSFT – Buy the July 14th 70 Puts for $1.60 or less with a close or anticipated close below $69.15 in a down market with expectations for continued weakness.
(Trend Reversal Trade: SPECULATIVE!)

CSX Corp. > CSX – Buy the July 14th 54 Puts for $1.65 or less with a close or anticipated close below $52.85 in a down market with expectations for continued weakness.
(Trend Reversal Trade: SPECULATIVE!)

Outlook:

The melt-up has continued much as the larger picture charts suggested it would but we see the warning signs flashing more and more.

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:

As the week wore on, it became clearer and clearer that the window of selling opportunity was passing us by.  The markets were unimpressive last week in that they weren’t able to muster a real rally but weakness wasn’t to be allowed yet again.  The action to either side remains unconvincing with no follow through.  Does it finally break this week, against the odds?  Or, will we have to wait longer?  Regardless, MSFT and CSX both toyed with breaking down a few times but without sustained market weakness the threats to do so were empty in the end.  Trying to make money in a market that simply won’t move (see Market Overview below for more on that) isn’t how we like to spend our summers but we can only take what they’ll give us!  Facts be told and as we’ve noted before, valuations remain stretched according to many historical metrics and GDP and EPS forecasts are being brought down significantly.  How long can the calm last?

Economic reports pick up a little this week and the week ends with several notable reports coming out on Friday.  Janet Yellen and other FED members are set to give speeches this week and those can normally be counted on to produce movement of some kind to some degree.  As reports haven’t mattered a great deal for a while, it’s likely that reactions to FED speeches will be the main drivers this week but one can never know for sure…

This Week’s Economic Reports

Remarkably, last week is this week, AGAIN!:

“The Wall St. gang got stocks off to a great start this week.  “On what?”, some may ask but the “what” matters little these days as the melt-up mindset and algorithms that feed on that mindset continue to help to prevent any meaningful corrections while slowly moving prices higher.”

AND FROM THE PRIOR WEEK OF Advantage Point:

“We must be on guard if the indices cannot break out or if they do but fail to hold above resistance.  With the bigger picture charts still looking fine, we have to continue to lean with them.  Hopefully, only a little more time will tell if a new upside leg is in the making…or if a failure is occurring.  With stock values so far detached from so many things, it wouldn’t be odd at all if we finally witnessed a pullback of some meaningful degree, machines permitting…”

It’s taken quite a while but we’re finally seeing the signs of failure.  For the past two Mondays, we’ve seen overnight futures goosing lead to gap up openings that eventually deteriorated.  The failure we referred to above MAY be happening.  The major indices have, at least at this moment, failed to take out their highs and hold them after trying for quite a while.  The FANG or FAAMNG stocks have mostly tried to get back to the levels which triggered quick breakdowns only to fail to go higher thus far.  The sell side player (if any are left!) should at least try to step back in at this point to see what they can do with things.  In other words, a sell cycle is now due and we’ll see what, if anything, the bears can muster.  It may be expecting too much with several FED speeches planned…we will see…

Once again, we’re including Q2 GDP snapshots from the Atlanta FED followed by the NY FED:

While both are continuing to trend lower, what caught our eye was the NY FED’s Q3 estimate of only 1.5%!  Q1 is in the books as a great disappointment already, Q2, in which as huge rebound from Q1 was expected, is looking lackluster, and Q3 may follow that with a whimper???  Call them whatever you’d like, algos, bots, machines…at some point significant economic underperformance will matter again.  However, we’ll be just about to Independence Day as the week closes out along with Q2.  Major holidays and the ends of quarters are often dominated by window dressing money managers who, with questionable propriety, boost or assist in levitating stock prices as much as they reasonably can in an effort to “book” top performance for the quarter.  Given this rather predictable behavior and the long July 4^th weekend looming, in the absence of a selloff, near term volatility levels could be susceptible to a steep drop.  And, remember that the VIX is barely off a 20-year low that it set a few weeks back!  The complete lack of fear we’re witnessing is downright scary!  See VIX graph below:

Above can be seen the past 20 years of SPYs price action in monthly candles.  We’ve added two red arrows to draw your attention to the High & Low for the month thus far with only a few days of trading remaining.  Depending on how you calculate it the number can vary, but to cut to the chase, the ENTIRE MONTH OF JUNE has a range of barely more than 3 SPY points or less than 1.5% of the SPYs price!  If you’re seeking something to explain the lack of opportunities in June look no further!  Almost nothing has happened!  Not only that but this type of eerie calm is what often sets the table for all Hades to break loose!  There are times to be prudent and there are times to be extremely prudent!

Finally, our chart of the SPYs with a good deal of nearby support:

We’ve drawn a couple of support lines in there at roughly the $242 and just below the $241 levels but there are many other support areas within the price structure in addition to the 50 SMA near the $240.5 area.  Though the cycles are due to roll into the sellers favor on the charts, it may be a big ask for a selloff of a significant degree given the numerous support levels and the behavior we noted above.

This week we’re going to split BTR into two distinct subsections.  Let’s get going with our initial section…

Our main theme in BTR in 2017 has been contrast.  We’ve been beating the drum month after month with respect to the consistent deterioration in GDP growth and earnings expectations.  We’ve tried to show the contrast between those and Equity Price Levels.  Equities have ignored the underlying deterioration quite well to this point but we’re finally being joined by other much more high-profile parties that are acknowledging the very same and they’re doing it for the same reasons.  Read on…

The following graphic, in some form, has been a mainstay of BTR.  Let’s refresh this key image briefly before we proceed:

Note how the economic data began to diverge with the rate hike that was announced back in March.  This graphic, better than all others, reflects are main concerns.  To be thorough, this isn’t the only data series that has historically been highly correlated and now, well now, it’s batty:

As we noted above, many are now joining the ranks and believe it or not, the FED is coming onboard:

They’re being joined by Bank of America:

http://www.zerohedge.com/news/2017-06-23/hope-trade-over-bofa-slashes-its-2017-gdp-forecast-just-21

As BofA's Michelle Meyer writes, "Hopes for a big fiscal stimulus have faded, prompting us to revise our 2018 GDP growth forecast to 2.1%, down from 2.5%.

There are three main reasons for our downward revision to growth next year:

1. The prospects of tax reform have dimmed. While it is still possible that legislation is passed, it seems that it would be later and smaller than previously speculated.
2. Policy uncertainty is high and threatens to remain elevated into next year given tensions in Washington and controversies in the Trump administration. This has contributed to a "wait and see" mode among businesses and consumers.

The auto sector is shifting from a tailwind to a headwind next year. This means that auto output should go from adding a few tenths to annual GDP growth to slicing a tenth or two.

BofA was recently joined by the IMF:

The IMF has cut its US GDP forecast to 2.1% in 2017 from 2.3% projected in April and to 2.1% for 2018 from 2.5% previously, it said in a statement following its U.S. Article IV Consultation, and saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending. Specifically, in giving up on the Trump agenda, the fund said "we have removed the assumed fiscal stimulus from our forecast."

(Notice the forecasts for the years that follow 2017!) Link to the above:

http://www.zerohedge.com/news/2017-06-27/imf-slashes-us-gdp-forecast-says-trumps-growth-target-unrealistic

Citi now thinks things are irrational and as we’ve noted, they along with many others are growing concerned about the central banks backing off and reducing their balance sheets in the near future:

http://www.zerohedge.com/news/2017-06-24/equity-market-irrational-yet-citi-answers-following-chart

The central back unwind causing big problems argument has solid historical foundations:

Relying on several historical sources, we identify the key contributors to each recession. Exhibit 3 summarizes our findings. We draw four lessons.

1. First, the most frequent contributors to modern recessions have been monetary policy tightening and oil price shocks, with the former in response to inflation that often gained momentum from the latter.
2. Second, sentiment-driven swings between over-borrowing and heavy investment followed by deleveraging and investment cutbacks contributed to the two most recent recessions and also played a role in early recessions, especially during boom-and-bust cycles of railroad investment.
3. Third, while the financial sector has not been the origin of as many modern US recessions, it was a very frequent source of early US recessions.
4. Fourth, fiscal policy shocks have sparked US recessions, but only in the context of demobilizations from major wars.

Exhibit 3: Major Contributors to Early and Modern US Recessions

http://www.zerohedge.com/news/2017-06-24/goldman-finds-most-modern-recessions-were-caused-fed

As we wrap up this section, we note that the “deep state”, which Stockman has referenced recently, would find it challenging to hurt Trump’s agenda in the same way and to the same degree that Central Banks could by continuing to raise rates into a slow period with equity prices very near all-time highs.  This is especially true since Trump has hitched his wagon to the stock market via his penchant for late-night tweeting…

This final section of BTR is loaded with material that we typically leave on the cutting room floor.  For some reason, the strange calmness that’s covering the surface of things so thoroughly right now, prompted us to include a few pieces that delve into modern American Economic Dystopia.  Most TV commentators and big media types seem spellbound by the FED’s crushing asset inflation mega-rig but things aren’t as bright as all that if you’re willing to peer below the veneer.

Related Quotes of the Week:

“The US Economy Is a Perverted, Neo-Feudal, Rent-Seeking Abomination” – Michael Krieger

"The real revolution we need in America is a revolution of ethics... It’s the only one that can succeed and make things better." - Michael Krieger

For more from Michael Krieger:

https://libertyblitzkrieg.com/2017/06/21/the-u-s-economy-is-a-perverted-neo-feudal-rent-seeking-abomination/

With the politicians and the media stoking tensions left and right, some believe we’re sitting on a powder keg that’s about to explode this summer:

“Like it or not, divided we stand is the inner workings of the Deep State. America peaked many decades ago called the ‘American High’. Since then, the middle class has been stripped of its wealth via the Federal Reserve and the Top .01%. To cover this great theft, the Deep State has divided the American people into a powder-keg expected to unleash in the ‘summer of rage’.”

http://stockboardasset.com/insights-and-research/america-divided-examples-summer-rage/

To make matters worse and possibly much worse for struggling American workers, the robots are coming.  In fact, at many McDonalds restaurants, they’re already here:

http://www.zerohedge.com/news/2017-06-23/mcdonalds-replacing-2500-human-cashiers-digital-kiosks-here-its-math

The inexorable march of the robots is just starting to ramp up and this comes at a time when the largely-ignored US population cycle is expected to be a net drag on economic expansion:

The above graph and many others can be found at the link below within the essay entitled written by Chris Hamilton.  He’s very bearish on future economic performance after having analyzed critical trends within our aging population:

Why the Next Recession Will Morph into a Decades Long Depressionary Event...Or Worse

https://econimica.blogspot.com/2017/06/why-next-recession-will-morph-into.html

In conclusion, and if you have the constitution to handle it after fighting your way to this point, we can see the end result of all the rigging etc. here:

“The distressing truth of our times is that the Common Man has been abandoned by those elites – in politics, in government, in journalism, in professional associations, in academia”

When the “common man” dies, the America that the world marveled at for 250 years dies with him

It’s a good read if you can take it:

http://www.zerohedge.com/news/2017-06-25/death-americas-common-man

And volatility couldn’t be cheaper… Be careful out there!

This week we’re revisiting options selection as it seems to almost always generate a lot of interest, questions and opposing points of view!

We’re going to refer to the graphic above of AAPL calls to get the wheels churning and the objections flying!  Our assumption is that AAPL is headed for the lower $160.00’s and possibly beyond.  We’ll use $162.00 to pick out a specific target for these purposes.  To get into it, let’s assume that we could buy 1 of the 146 calls or 1 of the 152.5 calls.  If AAPL reaches our target the 152.5 calls will have $9.50 of intrinsic value but the 146 calls will have $16.50 of intrinsic at expiration.  Let’s do the math to compare them.  The 146 call profits = $16.50 final value - $9.90 purchase price = $6.60 in total profit and a 67% return.  The 152.5 call profits = $9.50 final value - $4.70 purchase price = $4.80 in total profit and 102% return.  These results are typical and what often drive those that seek dollar profits to go with the 146 calls and those looking to measure their performance by return % to elect for the 152.5 calls.  We’ve presented an “either or” opportunity in this example but it doesn’t have to be that way nor does it have to be 1 to 1 contract basis.  To explore this further, let’s consider capital at risk and payoff.  Can we put less capital at risk and produce higher profits than in our prior example?  Let’s see…What if we compare a 10 lot of the 146 calls vs. a 20 lot of the 152.5 calls.  That works out to $6,600 in profits on the 146s and $9,600 on the 152.5 calls when we work through the math and mark things out the same way we did in our first example.  However, our initial capital outlay was $9,900 for the 146s but only $9,400 for the 20 lot of 152.5s.  Less capital at risk with much higher profits and greater rate of return.  What about dialing it down just a little to see what that can offer?  Let’s go with the same 10 lot of 146s but this time let’s look at 15 152.5s.  We already know that the 146s produce $6,600 in profits on a $9,900 investment.  The 15 152.5s lead to $7,200 in profits on $7,050 initial investment.  $7,050 is $2,850 less capital at risk vs. the 146s but it compares favorably in dollar profits as well: $7,200 vs. $6,600.

There are many ways to approach the options selection beyond the standards.  Many times, they are worth considering.  In this example, the higher strike with a greater number of contracts would be an ideal way to go for traders that are very good at entries, and also very good and quick at realizing when things aren’t working out.  If that type of trader is able to remain disciplined, and they cut and run quickly, they’ll ultimately perform better with less capital at risk yet with higher profits.

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

Have a great week!

The Advantage Point Team