• This Week's Trade Ideas: Second Half of the Week could be Feisty!
Bullish: Walmart> WMT – Buy the April 21st 70 Calls and Sell the March 31st 72 Calls (Long Diagonal) for $1.50 or less with a close or anticipated close above $71.10.  We can’t overemphasize that prudent investors should wait until potential whipsawing from the FED’s announcement is in the rearview mirror if possible.  We urge you to attend Wednesday morning’s Advantage Point Morning Call.
Bearish: None at this time, but several being evaluated closely.

• Market Overview:
This FED’s rate hike decision will likely be the main focus of the week.  BUT, things could become interesting, at least in terms of the reaction, should the FED not opt to raise rates.  Perceptions have changed quite a bit over the past month!

• Below the Radar:
We often mention tax and accounting shenanigans in our webinars and commentary and it seems some folks are skeptical as to how this type of conduct can be allowed...

• Options Academy:
Once again, we're sticking with volatility coverage this week.  We’re doing this because volatility is such a critical concept to fully understand.  We’re going to get into what’s commonly referred to as “skew” a little this time around.

Make sure to attend the Advantage Point Morning Call each Wednesday morning at 11:00am Eastern Time. This webinar is included in your Advantage Point subscription so there is no extra charge. If you haven’t registered yet, go to: https://attendee.gotowebinar.com/register/6449584955832188673 now!

Second Half of the Week could be Feisty!

The Trade(s):

The idea(s) that follow are just that, ideas.  Of course, they’re always just ideas but this week even more so.  Everything could change late Wednesday into Thursday morning post-FED.  See Outlook below.

Bullish:

Walmart> WMT – Buy the April 21^st 70 Calls and Sell the March 31^st 72 Calls (Long Diagonal) for $1.50 or less with a close or anticipated close above $71.10.  We can’t overemphasize that prudent investors should wait until potential whipsawing from the FED’s announcement is in the rearview mirror if possible.  We urge you to attend Wednesday morning’s Advantage Point Morning Call.

Bearish:

None at this time, but several being evaluated closely.

Outlook:

We want to start out with a few words of caution.  The FED meeting, the announcement after and then Yellen’s Q&A that follows could potentially ignite volatility, unpredictable volatility.  There hasn’t been all that much really since the day following Trump’s speech, so, we’re due probably for a pickup.  Trading in front of all things FED can be very risky.  In the current bull market, most things FED have been treated bullishly.  NOW however, some watchers believe that the FED could signal that rate increases will be coming more fast and furious than previously believed.  The market’s reaction, if that should be the case, is anyone’s guess but at the very least we expect “whipsaw” potential to ratchet up.  Although volatility has been subdued, generally, and for some time now, it doesn’t take much for the futures operators to get the ball rolling overnight and early on until the algo gangs can snatch the baton and run with it, and run with it, and run with it…

All in all, this is a tough week to trade on a Tuesday evening or Wednesday morning given that the FED is likely to determine the market’s fate starting on Wednesday afternoon.  We’re from the keep your powder dry school just to be clear.  Therefore, these ideas could be blown up very easily after the FED-driven news hits the tape.

Technicals:

Will be discussed in the Advantage Point Morning Call due to the FED meeting.

Fundamentals:

This idea in WMT is driven by technical mainly, but we plan to touch on a key fundamental factor that could be behind a WMT liftoff should one transpire.

As always, we strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these ideas, last week’s and options education.

(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:

We never locked on to a new bullish idea.  The markets remained subdued for most of the week.

We put out updates on recently mentioned names such as HIG and LVLT so please see your email if you have missed those.

As for HAL, it was another instant plunge the morning after publishing.  As we conducted our webinar we noted that the entry was then in the eye of the beholder because HAL became weaker and weaker.  We tracked it as we saw volume show up in our preferred option series and then put out a timely roll or take profits reminder on it and it’s bounced ever since.  We’ll keep an eye on it and answer any questions about it in this week’s Advantage Point Morning Call webinar on Wednesday morning.

(Editor's note: This trade idea may be updated periodically, in keeping
with market conditions. It is intended solely for educational purposes.)

This FED’s rate hike decision will likely be the main focus of the week.  BUT, things could become interesting, at least in terms of the reaction, should the FED not opt to raise rates.  Check out the current odds in the graphic below.  Perceptions have changed quite a bit over the past month!

The potential for blizzard conditions across the Northeast this week may not receive a warm embrace from the adult denizens of the corridor, but given Q1 GDP expectations of 1.2%, as per last week’s Below the Radar, it may just be exactly what CEOs will need to explain away weaker than expected results from Q1 and buy them some time to for a Q2 rebound.  They’ve used the same excuse several times over the past few winters and it’s worked out fairly-well for them.  We expect more of the same.  There’s quite a few important reports due to hit the markets this week.  “Winter Storm Stella” or “Blizzard Stella” or whatever it’s being called, is arriving just a little too late for this week’s retail, housing starts, building permits etc. Things really heat up news-wise starting on Wednesday as we’ll not only have the FOMC rate decision and Yellen’s press conference, but that’s also the day when the more important reports will be revealed and it will continue for the balance of the week.  We’d expect that volatility would pick up at that point naturally.  Typically, the markets tend to tread water in the early part of the week when FED decisions are set for midweek.  We’d expect that to be the case absent significant international news.

IN OTHER NON-NEWS…the Deep State/Media Complex vs. All Things Trump continues to rage.  From where we sit, the “outrage card” has already become tattered and is wearing increasingly thin.  The lack of discretion or put another way, the outrage at everything has become boring.  Partisans may yet be consumed by it but more importantly, the markets seem not to care, as of NOW…  If something legitimate is uncovered and proven, it could be a different story.  Something MATERIAL could alter the trajectory of the indices as so much seems to ride on Trump’s agenda be moved along.

As for now, we’re sticking with the Technicals.  Anything can happen but here are 3 scenarios that we’re contemplating at present:

In green on the chart above “BN” represents “break now”, that would simply mean that we have continued weakness and that DOW (and other indices) break below trend quite soon with more selling to follow.  “DT” in red, is another scenario which we’re contemplating which could produce a technical “double top”.  That would allow for the index to pop back up to the recent all-time-high, or nearby, and then fail from there and naturally more selling would kick in at some point to produce more of a correction.  Finally, in orange with the arrow and “?” of the same color, we allude to one more push up and through the current all-time-high to near 22,000 in the DOW.  While it may not seem likely at the moment, and we are certainly seeing concerns build, we have to remember that the DOW is only about 2% removed from the highest high despite being weak for over a week!  That’s not much of a pullback which means that it’s still showing strength to this point DESPITE the daily DC movie marathon featuring “Maelstrom” on constant replay.  With the FED outcome late on Wednesday, we could be in a holding pattern until the.  Remain vigilant!!!

Here’s a little old news that we’ll get out of the way here at the start, just in case it was missed:

http://www.zerohedge.com/news/2017-03-08/caterpillar-accused-tax-accounting-fraud-report-stock-slides

We often mention tax and accounting shenanigans in our webinars and commentary and it seems some folks are skeptical as to how this type of conduct can be allowed.  CAT deserves the benefit of the doubt until if and when they’re proven to be guilty.  If that is indeed the case, please realize that we’re talking about CAT here and if it can happen DOW component CAT, it can happen virtually anywhere.  Here’s the key takeaway if you’d prefer to skip reading the entire article:

"Caterpillar did not comply with either U.S. tax law or U.S. financial reporting rules," wrote Leslie A. Robinson, an accounting professor at the Tuck School of Business at Dartmouth College and the author of the report. "I believe that the company's noncompliance with these rules was deliberate and primarily with the intention of maintaining a higher share price. These actions were fraudulent rather than negligent."

It’s all about the share price!  It always is and unfortunately the FEDs have mostly turned a blind-eye towards this type of stuff for the past quarter century.  Maybe they’re just too busy faking all their own numbers to get to it…

In last week’s Below the Radar we provided a link and blurb from Charles Hugh Smith’s recent essay focusing on a looming Commercial Real Estate fiasco.

As can be seen on the chart above, the markets are starting to hit North American REITs and hit them hard.  As this is the stuff that big problems followed by big selloffs are made of, we’re providing several topic-related links to scare the Dickens out of you!  Well, maybe that’s a little bit of an exaggeration.  Here’s a few links that would seem prudent to visit for a spell or two:

http://www.zerohedge.com/news/2017-02-03/are-cmbs-ghosts-past-reviving

https://www.wsj.com/articles/short-sellers-target-mall-reits-1488888004

http://www.zerohedge.com/news/2017-03-07/third-all-shopping-malls-are-projected-close-space-available-signs-go-all-over-ameri

http://www.zerohedge.com/news/2017-03-07/next-domino-fall-commercial-real-estate

To us, this really is a serious issue with serious fallout potential.  Not only are failing retailers shuttering but a disconnect still exists between the trend of transactions and mall lease rates:

What could make “rent matters” worse, much worse, would be an oversupply of space.  Well…

One look at the chart below and it’s easy to see how this could be just the start of something much bigger, technically speaking:

Here’s a cutaway and link from Gordon Long to finish up this week’s commercial real estate focus:

https://matasii.com/the-coming-financial-implosion-is-not-going-to-be-about-the-banks/

• Since 1995, the number of shopping centers in the U.S. has grown by more than 23% and GLA (total gross leasable area) by almost 30%, while the population has grown by less than 14%
• According to Forbes , currently there is close to 25 square feet of retail space per capita (roughly 50 square feet, if small shopping centers and independent retailers are added). In contrast, Europe has about 2.5 square feet per capita. (10-20 times)
• According to the real estate consulting firm of J. Rogers Kniffen Worldwide Enterprises, about 400 of America's 1,100 enclosed malls will fail in the coming years. Of the survivors, about 250 will thrive and the rest will struggle. Likewise as an example, "Macy's probably needs 500 of its roughly 800 existing stores" -  Jan Kniffen ,

 “In my opinion, the housing bubble of the mid 2000s allowed consumers to take out tons of cash from their homes and spend robustly even though incomes were stagnant. This masked the over-stored nature of the retail landscape“.

Bill Gross seems to be taking note of the mounting issues that could derail the markets, but instead of excess retail space as a focus, he’s concerned about excess credit issuance and excess debt levels:

“But our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault. It happened in 2008, and central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system. Today, central bank flexibility is not what it was back then. Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce.”

Here’s the full read if you find yourself intrigued:

https://www.janus.com/insights/bill-gross-investment-outlook/

Bill Gross isn’t alone and the over-indebtedness issue is not only national but a global plague:

It's a well-known risk, perhaps the biggest to the global financial system: China's debt is too high, with estimates ranging from 250% to 300% of GDP per the IIF:

"Non-financial corporate leverage is too high," PBOC Governor Zhou Xiaochuan told reporters at a news conference on the sidelines of the annual parliament session.

China “re-flating” and ratcheting up growth is one of the key international assumptions the Bulls have seized to justify the market’s optimism.  In fact, a few pieces we read that were published over the weekend and today noted that the markets may focus more on China this week and next week than they have in a good while.  Timing-wise that may not be very fortuitous.  Few things can weigh down performance for long stretches like too much debt.  China being heavy could be the stone the drags quite a bit with it, especially with many eyes, maybe too many eyes, gazing upon it hopefully…

STAY NIMBLE MY FRIENDS!

Once again, we're sticking with volatility coverage this week.  We’re doing this because volatility is such a critical concept to fully understand.  We’re going to get into what’s commonly referred to as “skew” a little this time around.

Most students, having been foresighted enough to educate themselves properly in options theory, leave the “classroom” with a solid foundation as to how to make sense of options prices.  The only thing is, the dynamics in real world options pricing often differ from what the theory would lead one to expect.  Let’s take a simple example…

Students of our program know that there are 6 inputs that are used by the OPM (Options Pricing Model) to calculate an option’s value, 5 of which are known or easily ascertained.  The only one that isn’t easy is the volatility input.

We’ll cover them in a basic but methodical way to be thorough.  Remember, the first 5 are essentially known or givens…  Here they are:

1. Current Price of the Underlying Stock
2. Option Strike Price in focus
3. Days until Expiration of the Option
4. Current Interest Rate
5. Dividend Stream
6. Volatility Input

We do not want to get to deep into the Vol Input at this time, but instead want to focus on it in a basic way to reveal skew.  Consider this example… let’s assume that all the first 5 inputs are the same and that we’re focused on what are known as the corresponding call and put.  The corresponding call and put are options at the same strike price within the same expiration.  Essentially, they’re a pair.  Now let’s think back to what implied volatility really is. (see our recent coverage) If we assume that dividends will not factor into our calculations, and that the interest rate we used for the corresponding call and put calculation would be the same, then we should arrive at the same value for each if we also assume that they are directly at-the-money.  Give this a good think before moving on.  However, they’re not always valued at exactly the same price even under these assumptions.  Why? Implied Volatility (IV), well, sort of.  In the real-world it comes down to how the marketplace treats each option’s price, which is how we arrive at IV in the first place.  Sometimes the IV differs somewhat even within the tight relationship of the corresponding call and put.  When there’s a difference in IV levels from one option to another, that’s typically referred to as “skew”.

To further hit on this and to begin to wrap things up for now, think of a downside put that’s 3% out of the money vs. an upside call that’s 3% out of the money.  All things be equal (same assumptions we used above except their both OTM instead of ATM), these options should trade at similar prices based on theory.  They have identical 4 out of the first 5 inputs and their strike prices, the only one that’s different, are equidistant from the current stock price.  The normal distribution-based pricing theory that we learn would argue that they should be priced very similarly.  In practice, they rarely are priced identically.  This is much easier seen and understood rather than read and understood.  So… once again, we'll plan to cover and expand on this a little, time-permitting, in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team