• This Week's Trade Ideas:
Bullish: Newmont Mining > NEM – Buy the June 23rd 35 Calls for $1.20 or less with a close or anticipated close above $35.60.  (SPECULATIVE!)
Bearish: SPDR S&P Retail ETF> XRT– Buy the June 23rd 41 Puts for $1.30 or less with a close or anticipated close below $40.14 in a down market with expectations for continued weakness.  (SPECULATIVE!)

• Market Overview:
Like many, we’re wondering: “What, if anything, will matter again and more importantly, WHEN?”  “Bad news” has been ignored for some time while “good news” produces more slow-melt-up.  Long volatility players must REALLY be wondering the same.  The VIX is once again working with a “9 handle” as it currently reads 9.67% and is very close to multi-years lows.

• Below the Radar:
Historically, the market’s focus has shifted as economic conditions changed within a cycle.  That’s why, at times, oil prices, bond yields, the US Dollar, employment levels etc. have served as main “thing” to watch for the market to take its cue.  In BTR we’ve focused on many things ourselves.  We’ll continue to do that because, in the end, the collage we assemble should have some bearing on economy and the markets.  However, this week, we’re leading off with something that runs contra to that.

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

Another week, another weak yet unrelenting move higher?

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:

Newmont Mining > NEM – Buy the June 23rd 35 Calls for $1.20 or less with a close or anticipated close above $35.60.  (SPECULATIVE!)

Bearish:

SPDR S&P Retail ETF> XRT– Buy the June 23rd 41 Puts for $1.30 or less with a close or anticipated close below $40.14 in a down market with expectations for continued weakness.  (SPECULATIVE!)

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 both the bull (GSK) and bear (BAC) ideas triggered but not really.  Yes, the stock prices pushed past our trigger levels but they did so in a big way by the time we could conduct our webinar on Wednesday morning.  In other words, both technical forecasts moved in the expected direction but there wasn’t much we could do about it!  Here’s hoping for easier entries this week.

Last week, with respect to prospects to further levitate higher in the indices, we wrote:

“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.”

We could very well apply those comments to this week’s outlook.

Like many, we’re wondering: “What, if anything, will matter again and more importantly, WHEN?”  “Bad news” has been ignored for some time while “good news” produces more slow-melt-up.  Long volatility players must REALLY be wondering the same.  The VIX is once again working with a “9 handle” as it currently reads 9.67% and is very close to multi-years lows.  Keep in mind that this level is in place despite the following events that are scheduled for this week:

1. Former FBI Director Comey is set to provide testimony.
2. The UK’s general election will be held.
3. ECB meeting is this week and FED follows next week.

And they come after more terror in the UK with growing “chatter” with respect to threats in the western hemisphere.  Also, June is upon us.  We’ve discussed the summer months being rather disappointing historically with the exception being Year 1 of a new administration.  We came across another graphic:

This one seems to reinforce the “Sell in May…” approach.  The last decade has produced some really rough Junes which puts this at odds with the “Year 1” historical performance that we’ve referenced.  In total, there several competing trends in historical that are somewhat at odds with each other.  All of this is why we must stick with the charts even more so:

Monday’s action lacked volatility (again) and with a modest close lower began to look a little less positive overall.  Maybe a breather is in order… With the larger picture time frames still flashing bullishly, we’re contemplating if the next move will be towards the yellow X near our upper Bollinger band or possibly carry further to the upper end of the channel resistance (yellow line at top).  OR, could we see a slight pullback to one of the small red dots?  Since the SPYs broke above resistance (green lines), will they come back to that level to test it and convert it to support?  Could the SPYs fall further towards the lower yellow line support given the persistent divergence in RSI (red line and dots) vs. the green line above connecting the SPYs recent highs made the past several months?  Although the buying has been weak volume-wise, a break might be in order for a few days if for nothing else but draw short sellers into the markets in front of the big news events.  Recall how the shorts were treated post-Brexit and post-Trump!

Not that making sense matters, but it would make sense for a brief breather early this week followed by a recovery into and through the FED meeting next week.  That’s more or less been the pattern ever since the FED opted to take full command over the equity markets.  For our part, you guessed it, we’re staying NIMBLE!

This Week’s Economic Calendar

This week is rather light with respect to economic releases which leads back to the 3 main events noted above (or a wildcard!) as being the most likely drivers of movement this week.  (Should we have any!)  If Monday’s lack of trading range is any indication, we could be in for immediate summer doldrums action until a news driver trips a switch.

Historically, the market’s focus has shifted as economic conditions changed within a cycle.  That’s why, at times, oil prices, bond yields, the US Dollar, employment levels etc. have served as main “thing” to watch for the market to take its cue.  In BTR we’ve focused on many things ourselves.  We’ll continue to do that because, in the end, the collage we assemble should have some bearing on economy and the markets.  However, this week, we’re leading off with something that runs contra to that.  As we’ve witnessed key developments that seem to not matter week after week and month after month, we elected to search for what might matter beyond economic data and financially engineered earnings beats.  Our search yielded this:  http://www.economist.com/news/finance-and-economics/21706278-central-bank-may-exert-strange-sway-over-stockmarket-returns-long-arm

It’s from a little ways back in time but it might be the one key to explaining the detachments that we’ve seen that continue to expand.  A nutshell conclusion to the piece may be that there are patterns that repeat in the market and that ostensibly capitalist money managers maintain great faith in the central planners at the FED maybe with good reason (wink).  Take a look:

We’re going to refer to this snippet from the piece to explain the graphic above with our emphasis:

“It is no surprise that meetings of the Federal Open Market Committee (FOMC), in which Fed governors and regional Fed presidents set interest-rate policy, can trigger rises and falls in the stockmarket. But the study analyses a remarkable correlation. Usually every fortnight between FOMC meetings, fresh information is discussed in a gathering of Fed governors. It finds that all the gains in the stockmarket have occurred, on average, in the weeks of the FOMC meetings and the ones that involve the governors alone. A dollar invested only during those weeks would have grown more than 12-fold over the period. A dollar invested during other weeks would have lost half its value (see chart).”

Although the study traces back to 1994, our guess would be that the correlation and movement from FOMC related action has only grown in the current bull market.  Even though this may be all you need to know, we’re going to trudge on into other data that may yet become relevant again once the age of central bank worship has waxed.

We’ve covered central bank purchases of equities all over the globe.  “CBs” have essentially morphed into hedge funds, albeit strategic ones.  But, to what extent have they “gone long” the bond market?  The answer is: pretty damn long!:  http://www.zerohedge.com/news/2017-06-04/central-banks-now-own-third-entire-54-trillion-global-bond-market

So…if you’d like to get an idea as to how badly the perpetrators broke the world financial system, look no further than this being year 9 of a bull market and yet CBs are still super long bonds and equities.  So much for “free market principles”.  This may be another clue as to why things aren’t allowed to fall.  It’s simple, the FED and their peers would take a bath in equities, and if a true panic set in and metastasized, there could be a loss of faith in sovereign bonds which would produce a double whammy.  “Betting with the house” has maybe never been more accurate!

Naturally, these various forms of required hyper-manipulation have distorted many things, even time-tested investing principles.  What was once a basis for stock market investing has fallen out of favor, that would be the antiquated relationship between risk and reward.  Remember that?  If you do you’re one of the few.  Here’s the take away:

Considering the price-to-sales ratio for the median stock in the S&P 500 is higher than ever before and to a significant degree, you might say investors are taking the greatest amount of risk for the least amount of potential return in history. In other words, if there was ever an example of “reward-free risk” this is it.

Read further here: https://www.thefelderreport.com/2017/05/25/if-there-was-ever-an-example-of-reward-free-risk-this-is-it/

However, despite Felder’s argument of peak risk/negligible reward, here’s why, this new paradigm may stay in place for a good, long while:

http://www.zerohedge.com/news/2017-06-04/hedge-fund-cio-normally-fed-would-end-bubble-it-cant-time-one-reason

The various country and region-based bubbles around the world are intertwined to great degrees.  As a result, it’s not just about the good ole USA when it comes to FED decision making.  Some argue that it’s more about Chinese homeowners!:

To this, Peters' response is that the Fed finds itself in a big "quandary" not so much due to the S&P500, and overall asset levels, which even Yellen now admits "pose risks to financial stability" as per the latest FOMC Minutes, but due to China:

“The real credit excesses haven’t been created here, they’ve formed in China, which leaves the Fed in a quandary.” Much as the Fed would like to have jurisdiction over every corner of global finance, they no longer control China.

There’s a lot to sort out there but if you fight your way through it you’ll see that China has yet to fall while other major economies have fallen dramatically from their peaks.  Given how important this area could be in the end, we’d probably have to become concerned if borrowing was seizing up in China as fresh money flow will certainly be needed to keep their housing market propped up.  Only…:

Almost all you need to know: So why is it so important for China to periodically and consistently reflate this bubble? The answer is simple: a gargantuan wealth effect, to the tune of 24 trillion yuan, or roughly $3.5 trillion.

To delve into this even further visit: http://www.zerohedge.com/news/2017-03-17/why-fate-world-economy-hands-chinas-housing-bubble

Circling back to the USA, despite massive channel stuffing occurring in Q2 and recent talk of 4.5% growth, this picture tells a different story:

We’ve watched it closely and noted it here that things really haven’t been swell in the world of hard data and that Q2 would likely not be the barn burner that it was being touted.  It would seem that maybe, just maybe some of this stuff may be impacting the data:

#1 According to Challenger, the number of job cuts in May was 71 percent higher than it was in May 2016.

#2 We just witnessed the third worst drop in U.S. construction spending in the last six years.

#3 U.S. manufacturing PMI fell to an 8 month low in May.

#4 Financial stocks have lost all of their gains for the year, and some analysts are saying that this is “a terrible sign”.

#5 One new survey has found that 39 percent of all millionaires “plan to avoid investing in the coming month”.  That is the highest that figure has been since December 2013.

#6 Jobless claims just shot up to a five week high of 248,000.

#7 General Motors just reported another sales decline in May, and it is being reported that the company may be preparing for “more job cuts at its American factories”.

#8 After an initial bump after Donald Trump’s surprise election victory, U.S. consumer confidence is starting to fall.

The list is larger than this and it and other concerning commentary can be found here:

http://theeconomiccollapseblog.com/archives/12-signs-the-economic-slowdown-the-experts-have-been-warning-about-is-now-here

By the way, it’s not just GM.  We’ve looked at local anecdotal information in our Wednesday Webinar literally via a few pictures that we took.  Here’s a view from a much higher vantage point:

“The Auto Inventory/Sales Ratio breached new high in March 2017 alluding to more building pressures in inventory. This signals a weak demand pull from US consumers.”

The link to the full piece and the video above:

http://www.zerohedge.com/news/2017-06-04/birds-eye-view-americans-largest-auto-port

Corporations and the GDP bean counters may be able to fudge a nice Q2 number due to channel stuffing but that’s very likely to put big pressure on the second half of the year.  We have to think…what if there is a slowdown?  With the Trump agenda parked alongside countless automobiles, what’s our next recourse?  Do we just go back to borrowing to spend $20 Million to create a new job?  Yes “job” not “jobs”.  Sounds crazy and maybe it is but here’s the argument and it’s not without some merit:

http://www.zerohedge.com/news/2017-06-05/bombshell-us-spent-20-million-job-created-%E2%80%9908-onward

This may be an extreme argument but the past decade doesn’t pass the eye-test when it comes to a recovery.  Too many people remain worse off than they were pre-crisis and the recent trends in debt growth is crashing which is simply not healthy.  Given how debt dependent our leaders have helped to make virtually everything, this issue is clearly a warning sign:

After the peaks of the late 90’s, and pre-2008 crisis, the economy and then stocks began to follow debt growth lower.  It seems that consumers are loaded up once again and are backing away as we’ve noted here in BTR.  This bodes ill for an economy and performance projections based on the growth of debt remaining strong.

As we wrap up, we’re going to include a bit from a piece that might explain, to a significant extent, what’s happening now and why.  If the melt-up continues in the face of across the board deterioration, it’s likely due to what follows below along with the simplest reason of them all: IT HAS TO!

https://finance.yahoo.com/news/el-erian-says-liquidity-trade-145513363.html

Mohamed El-Erian, Allianz SE’s chief economic adviser, said the rally in stocks and high-yield bonds is part of a “liquidity trade,” based on optimism that central bank stimulus efforts and the accumulation of corporate profits will sustain market gains.

“That is what you’re betting on,” El-Erian said Friday in an interview on Bloomberg Television. “You’re not betting on the Trump rally anymore. You’re not betting on the reflation trade anymore.”

U.S. stocks surged in the months after Donald Trump won the presidential election in November, on speculation that tax reform and infrastructure spending would stoke economic growth. Equities extended gains even as progress stalled on those priorities, and are trading near record levels.

El-Erian said monetary policy, corporations and an increasingly wealthy economic elite “means more money to invest back in the market,” bolstering prices. He was asked if there’s reason for investors to limit risk, if they believe market sentiment is being driven more by views about liquidity.  “I think yes,” answered El-Erian, who is also a Bloomberg View columnist. “It’s also a reason to change the way you’re taking risk,” and focus more on areas such as emerging markets.

Finally, El-Erian, in a separate piece, pointed to the signals from the bond market vs. those of the stock market noting the how the divergence continues to grow.  On the one hand the melt-up must continue to fend off any chance of a slowdown which could be far worse than most are contemplating right now due to the hollowness of the recovery.  On the other hand:  BONDS!

For more on El-Erian and how others are concerned and unconcerned: http://www.zerohedge.com/news/2017-06-06/bofa-if-bonds-are-right-stocks-will-drop-20

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