• This Week's Trade Ideas:
NONE AT THIS TIME. 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.

• Market Overview:
Given the reading and research we’ve performed of late, we’re currently more inclined to want to lean to the short side…

• Below the Radar:
This came out late last week but it’s worth noting as it explains just how odd things have become in the markets.  Much higher price levels are delivering far less price movement.

• Options Academy:
We’ve been exploring volatility in a variety of ways over the past few weeks and that’s going to lead us directly into something not only related but something practical.  Many students, after becoming knowledgeable with respect to volatility and its importance, will naturally become very focused on it out of the gates.  Of course, this is really a good thing but we want to caution everyone to avoid losing sight of the forest!

Going NOWHERE…Slowly…So far…BUT WAIT!

The Trade(s):

NONE AT THIS TIME.

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.

Bullish: NKE, SO, DUK, potentially, but all on hold at moment.

Bearish: AMZN, IR, CMCSA, MSFT, GLW, HPE, TEX, CAT, X, AMTD, UNP, and about a dozen names in the energy space.  However, all are on hold at moment.

Outlook:

The difficulty this week is similar to last week’s.  Last week we had the FED and this week it’s the initial vote to overhaul the nation’s healthcare laws etc.  It would be very easy to get started with a directional trade to only then have it “blow up” shortly thereafter on an emotionally-driven/stock operator-driven counter move.  This type of event brings us closer to guessing than intelligently trading.  Keep that in mind should you decide to pull the trigger on any pending trades.  We all know that the markets are long overdue for at least a small pullback but that’s been true for a long time.  We can theorize about the fall out post-vote but that’s pure speculation at this point because we not only do not know the outcome but we don’t have any details, minor or major, to factor in as well.  We’d expect heavier selling to commence should the vote fail to begin to overhaul healthcare as it may be interpreted as a loss of momentum and credibility for Trump.  On the other hand, it could be used to create a serious short squeeze if it passes.  If the markets will still in a strong trend mode and had already corrected, we could more easily remain bullish as we could expect the underlying trend to be there even if messy selling broke out for a while but that’s not the case.

We’ve provided many of the symbols on our scan-driven short list this week but we’re haven’t provided specifics for a reason.  There’s simply too much risk of whipsaws or additional cratering given the healthcare vote that is looming combined the fact that confidence in Trump’s agenda moving along with alacrity is seemingly fading.  We prefer to cover the risks in-depth in our webinar prior to choosing options or isolating key trigger levels.

Technicals:

Will be discussed in the Advantage Point Morning Call due to Tuesday’s volatility and the Healthcare vote on Thursday.

Fundamentals:

These trade ideas are technically-driven.  Researching fundamental information that would support the technicals is always a worthwhile pursuit however.

(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 bearish idea as prior to, and then after the FED, the markets were listless.

On the bullish side, WMT never triggered.  It’s possible that the “quadruple witching” expiration we saw on Friday kept many stocks in check.  If there are strong recoveries this week then we’ll know that was likely the case.  Stocks remained heavy and many got even heavier near the very end of trading on Friday.

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

Given the reading and research we’ve performed of late, we’re currently more inclined to want to lean to the short side.  This chart appeared in last week’s newsletter.

It highlighted 3 possible scenarios that we were contemplating post-FED.  Orange was representative of a strong breakout to the upside.  Green was favoring an immediate break to the downside.  Red was the double topping process that would see a pop towards the prior high followed by a failure and then a more serious fall to lower levels.  With what has transpired post-FED, we’re now leaning towards RED, the double top forecast as it seems to be about to play out and here’s why…

We didn’t quite get a double top but we did get a lower higher as can be seen by the yellow dots.  As of now, we can see that the DOW has broken below initial support and is “resting” on the lower side of channel support, both represented by red lines.  If this break continues, we may see some support near the 50 SMA in yellow near 20,400.  There should also be a band of support just above and below the 20,000 mark represented in green.

Economic reports are relatively light this week and most earnings releases are in the rearview mirror as is the FED, for now.  That means the market must stand on its own for the most part.  We’ve expressed our concerns about a variety of things not the least of which appears to be Trump’s stalled agenda.  Our thoughts are that the markets may have gotten ahead of themselves in terms of when “things get done” but not necessarily “if” things get done.  Trump’s attempt to modify the healthcare system begins in earnest on Thursday with a vote that’s scheduled to begin the process.  The outcome of that vote seems to be in question for now.  Many eyes will be on that outcome but for now we’re starting to see the technicals finally reflect the fundamental issues that have troubled us.  A little more push to the downside could be all it takes to finally bring on more serious selling.  Thursday’s vote could also be an emotional/news flashpoint that the Wall St. gang may use to create additional volatility.

We prefer to be hedged at the very least right now.  We encourage all to be careful out there!

This came out late last week but it’s worth noting as it explains just how odd things have become in the markets.  Much higher price levels are delivering far less price movement.

http://finance.yahoo.com/news/incredible-stat-dow-shows-just-181614660.html

Here are a few key snippets from the link above with emphasis added:

Eighteen years ago, when the Dow Jones industrial average (Dow Jones Global Indexes: .DJI) was trading at half its current level, 100-point daily moves were twice as significant. That's just math.

What's surprising is that they happened much more often.

So far this year, the Dow has only closed higher or lower by more than 100 points on 13 days, including Wednesday— a bit more than a quarter of its sessions. If this pace keeps up, 2017 will be the year with the second least 100-point moves since 2006.

We’ve been expecting the action to pick up because things do not normally remain this consistently calm for long stretches, or in this case, stretch after stretch.  We’ve caught yet another extended consolidation period that’s really kept prices hemmed in.  This has made getting extended runs very hard to come by.  Certainly, some sectors and stocks have made significant moves at times but by and large many stocks seem almost stuck in neutral.  One item that’s not stuck seems to be housing prices…

This piece by March Hanson that we found at ZH is from a few weeks back but we’re finally able to get to it this week.  It picks up and extends on the housing/homebuilders’ discussion we’ve had here in the newsletter over the past several weeks.  This is a good, quick read if you want to dial in to what the FED has been able to accomplish in the housing market and beyond that it makes it clear that the FED’s success has made housing more expensive than ever in terms of income.  So…if a generic homebuyer needs a mortgage, they’ll be paying an all-time-high for their home when measured relative to their income.  This type of analysis seems to be at odds with the better than average technical complexions we’ve seen in the homebuilder’s sector of late.  We’ll see if a breakout, should one come, has staying power or not…  The graphics below are concerning but don’t let that stop you from checking out the entire piece:

If you’d like to get a closer look, check out the Bubble Near You! (above) If you’d like to keep on reading, here’s the link:

http://www.zerohedge.com/news/2017-03-07/marc-hanson-everything-has-changed-housing

Sticking with the inflation or lack of inflation theme (if you want to believe what the government wants you to believe), here are a few more graphs we tracked down that pick up on what’s happened and frankly, explain a lot.

First up, and just above, is a graphic that shows how significantly student and auto loans have recovered/grown over the past decade.  As we’ve noted here quite recently, auto sales have become more and more dependent on creative financing…

Hmmm…so autos are pricier and more loan dependent, and homes are the same.  We can say the same would be fair to say regarding the cost of college, and healthcare.  Stocks of course fall into the same category.  They’re nominally the most expensive they’ve ever been and by some metrics they’re just about as pricey as they’ve ever been.  Shrinking sizes and quantities in consumer products have made it less obvious to some buyers but anyone that’s keeping watch knows that the cost of food and other staples is certainly higher than 10 years ago.  YET, there’s no inflation!  At least as far as the government’s bean-counters see it!  The major outlays in the lives of most folks have become much higher as have the day-to-day expenses and yet there’s no inflation!  Well, as long as wages and income are truly growing there’s really not a problem, right?  OOPS!

Hold on!  Wait a minute!  They’re dramatically underestimating real inflation and overestimating real income growth?  Well…YOU BE THE JUDGE!

As can be seen above, the easy money polices of the past several decades have made the cost of living increasingly more expensive when all items are considered.  Remember, this is from FRED.  FRED is an acronym for Federal Reserve Economic Data.  This, is their own stuff!  Yet, the media consistently reports on the lack of inflation!

We’ll start wrapping up with the is blurb from Kate Elkins writing for CNBC:

The median income of American households decreased significantly from 1999 to 2014 across the lower, middle and upper classes, according to Pew Research Center.

The research group found that "nationwide, the median income of U.S. households in 2014 stood at 8% less than in 1999, a reminder that the economy has yet to fully recover from the effects of the Great Recession of 2007-2009."

In short summary, it’s clear that nearly everything, major and minor has gotten much more expensive and debt-dependent even as real income hasn’t even fully recovered to late 1990’s levels. It baffles us that so many analysts paraded on air by CNBC over the past 8 years remain themselves baffled as to why the economy hasn’t exactly roared back.

At some point, equity prices and the economy will need real support from consumers and workers not just the FED and its co-workers on Wall St.  With the Atlanta FED estimating just over 1% GDP in Q1 and Trump’s agenda on pause it would seem, risks are really ratcheting up with respect to equity levels that appear to have assumed much better growth and much more fiscal and tax policy stimulus sooner rather than later.  The more we research the more we’re compelled to state:

STAY NIMBLE MY FRIENDS!

We’ve been exploring volatility in a variety of ways over the past few weeks and that’s going to lead us directly into something not only related but something practical.  Many students, after becoming knowledgeable with respect to volatility and its importance, will naturally become very focused on it out of the gates.  Of course, this is really a good thing but we want to caution everyone to avoid losing sight of the forest!  Here’s what we mean:  Always keep in mind the bang you’re getting for your buck.  Ideally, we want to own or control the most TIME for the least amount of capital.  Of course, there are other considerations, strike selection, delta, gamma, theta, vega etc.  BUT, it really comes down to, how much time did we get and how much did we spend to get it, all other things being equal.  The best way to illustrate what we’re driving at here is to compare a few expirations to each other and this is shown best with in-the-money options.  So let’s do that!  Intel (INTC) will serve as our example stock.

If one looks closely (literally!), it can be seen that the deep in-the-money/high delta 30 strike call in April is offered at $5.70 which is highlighted in yellow.  With a delta over 90, it will offer us stock-like performance for the next 33 days should we choose to purchase it.  This is a basic way to look at things but just because it’s basic doesn’t mean it’s not important.  Instead of focusing on volatility with our eyes and our scans, we should realize exactly what that option offers us in simple terms.  In other words, we must look below the Implied Volatility Constellation for each expiration and the strikes within it.  Even within April there’s something in place that should interest us.  Naturally, that’s the April 32 strike that highlighted in orange.  It’s offered at $3.70.  Think about that for a moment, and, to be clear, we’re not advocating that one always transact on the ask price, we’re simply using it as a reference point.  When we consider that the ask price on each equates to the same breakeven price it becomes a “no brainer” to opt for the 32 strike if we’re forced to transact on the offer.  For now though, let’s just remember that the 30 strike offers 30 days of control for $5.70.  Now let’s take a look at the May expiration:

May’s options offer us 61 days of control and, if you’ll notice, we can see that the high delta 30 strike, in green, is offered at the exact same price!  $5.70.  This is the exact reason why we have to look beyond just volatility.  The marketplace is allowing us to buy an extra 28 days, should we need them, for the same price as 33 days.  That’s 85% more control time for the same outlay.  Also note that May’s 32 strike, in red, is priced a little more highly than April’s, especially with respect to the May 30 call, so it may not be as easy to make the “no brainer” decision to buy the 32 strike calls in this case.

As May’s IV summary number in the constellation was significantly higher than April’s, this opportunity to acquire 28 more days for “free” may have easily been overlooked if we only focused on volatility information.

This example shows us that diligence is well rewarded at times and as so we'll plan to cover this process, time-permitting, in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team