• This Week's Trade Ideas:
Bullish: Walmart> WMT – Buy the April 21st 69.5 Calls for $1.55 or less with a close or anticipated close above $70.40 in an up market with expectations for continued strength in the indices. AND / OR… Coca Cola Company> KO – Buy the April 21st 42 Calls for $0.92 or less with a close or anticipated close above $42.60 in an up market with expectations for continued strength in the indices.
Bearish: None at this time.  The indices have been heavy for nearly 2 weeks.

• Market Overview:
Last week’s expectations matched up fairly-well with what the markets delivered during the week.  As the drama took a more negative turn, the indices remained heavy and the DOW eventually worked its way down to the 50 SMA…

• Below the Radar:
One of our main focal points in this newsletter and our recent discussions has been the disconnect between the so-called “soft data” and “hard data”.  If unfamiliar, think of soft data as surveys and expectation and think of hard data as actual reported results.  That’s probably not entirely accurate but it’s not a bad starting point.  Just as the Trump-Agenda-Euphoria hasn’t been matched by economic reports, neither has the soft day expectations.  Well… things may finally be about to start coming back into line…

• Options Academy:
We’re going to pick up on something we touched on last week: Simple break-even calculations.

Last week we drew attention to capturing more time for the same or similar prices.  We suggested that a due diligence process that include looking at the same or similar strikes in various expirations around your preferred one can be rewarding.  The same can be true in terms of other strikes.

All Drama, Little Substance – NOW What?

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.

Bullish: Walmart> WMT – Buy the April 21^st 69.5 Calls for $1.55 or less with a close or anticipated close above $70.40 in an up market with expectations for continued strength in the indices.

AND / OR…

Coca Cola Company> KO – Buy the April 21^st 42 Calls for $0.92 or less with a close or anticipated close above $42.60 in an up market with expectations for continued strength in the indices.

Bearish: None at this time.  The indices have been heavy for nearly 2 weeks.

Outlook:

Stay nimble at all times!  Rallies inside of corrections can be sharp and short but that’s the environment we MAY be operating within currently.  Things look pretty good, so far, this week with the markets reversing course off of Monday’s opening and tacking on more gains on Tuesday.  However, the normal/prolonged buy-cycle could be short-circuited abruptly if we’re still in a corrective channel of a lesser degree.

Technicals:

Will be discussed in-depth in the Advantage Point Morning Call webinar.

While these trade ideas are focused on individual stocks, one main factor remains the major indices.  Are we in a channel of a lesser degree (yellow) that will remain corrective?  Or will we need to redraw our Larger Channel lines (green) to reflect the bounce off the recent lows?

Fundamentals:

These trade ideas 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 was a difficult one in which to enter a swing-style trade.  The healthcare law overhaul drama lasted literally all week which means that uncertainty was present all week.  Preferring not to guess, especially when key variables include DC politicians and a dubious-at-best media outlets, we simply kept watch on the markets and news, waiting for developments, or lack thereof, just like everyone else.  Not getting lured into a position and then having to live through every twist and turn of the news cycle is a decision with which we remain comfortable.

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

Here’s where we pegged things last week:

“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.

”…  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.”

Last week’s expectations matched up fairly-well with what the markets delivered during the week.  As the drama took a more negative turn, the indices remained heavy and the DOW eventually worked its way down to the 50 SMA as can be seen below:

As of this writing, the DOW is resting just above the 50 SMA, which it found support at last week, BUT…it’s still below the red support line of the channel it had been trading in since just after the election.  It will be interesting and telling to see if it can works it’s way back into the channel or if it fails.  Failure would likely mean a further plunge down to near the 20,000 mark or possibly a little beyond.  We noted this last week as well but we’ve highlighted that potential band of support in green this week.

Sometimes headlines say it best:

Although, and thus far, the point decline hasn’t been severe, the streak of DOW losses is mildly historic.  More important though might be the “deck” or secondary headline noting the factors that seem to be influencing the decline.  We’ve been covering this for a while as it has been our main concern with respect to the indices holding their post-election gains.  With the healthcare push having failed, doubts are now creeping in with respect to the rest of Trump’s agenda.  As much of the rally was built with “hopium” with respect to tax cuts etc., things are now more uncertain BUT have the markets adequately discounted the new uncertainty factor?  That’s the question of the week…  There’s no doubt that we’re seeing short-term oversold conditions in the wake of this losing streak, but, aside from oversoldness, what’s the next catalyst to spur a significant move higher?  It’s tough to be sure at the moment…

Economic reports are again relatively light this week but we do have Q4 GDP on Thursday and Friday does have a few relatively important releases.

We’d expect the markets to try to alleviate some of the oversoldness in the near-term and then what happens from there is critical.  Back in the channel or breaking below the 50 SMA?  Only time will tell…

If our main focal points in this newsletter and our recent discussions has been the disconnect between the so-called “soft data” and “hard data”.  If unfamiliar, think of soft data as surveys and expectation and think of hard data as actual reported results.  That’s probably not entirely accurate but it’s not a bad starting point.  Just as the Trump-Agenda-Euphoria hasn’t been matched by economic reports, neither has the soft day expectations.  Well… things may finally be about to start coming back into line:

We pulled this graphic from this piece at ZH that we came across on Monday and here’s the link if you’d like to read further: http://www.zerohedge.com/news/2017-03-27/soft-data-slump-continues-dallas-fed-misses-tumbles-most-14-months

We haven’t spent a great deal of space and time focusing on healthcare aside from the political outcomes and what they may mean for the near term.  However, it may be the right time do so.  Charles Hugh Smith’s latest offering is not only incredibly informative and a great read, but it is also a much needed break from the posturing and posing in DC in favor of a sober view of healthcare realities.  So…even though the federal government has repeatedly informed us that there’s no inflation and there apparently hasn’t been since the early 1980’s, it would seem that by venturing out on our own we’ve encountered an entirely different reality, much as we have with every other area we’ve investigated these past few months.  These graphics tell the tale:

So it’s no wonder that…:

If you’d like to leave the inanity behind but still care enough to be better informed, a trip here is worth the effort: http://charleshughsmith.blogspot.com/2017/03/forget-obamacare-ryancare-and-any.html

In Below the Radar we’ve primarily covered potential issues percolating below the surface.  Smith’s healthcare discussion certainly adds to that but unfortunately that’s not where things end.  We recently referenced Shiller’s CAPE in a graphic in our Tuesday and Thursday evening webinars.  Rather than go into details here, we politely suggest that you take a good, long look at the piece that can be found at the link below and, if so inclined, the associated piece that preceded this one as this is “Part 2”: https://realinvestmentadvice.com/shillers-cape-is-there-a-better-measure/

The author, Lance Roberts, takes on Shiller’s CAPE, essentially one of many market valuation measures, and goes far beyond, but in a good way!  This was a mini-treasure trove for us as it covered a few subjects dear to us, most notably, legalized accounting shenanigans! (aka a major ingredient used for the past 8 years of fomentation!).  Have a look:

Sure, the off-balance sheet comments and FASB rule changes are tasty enough but the reported earnings jumps from share buy backs is the succulent entree in this case.  Reported EPS is up 221% since ’09 while Sales Per Share are up…wait for it…a WHOPPING 28%!  Yes, you read that correctly!  NOT 280% but rather 28%, a FULL 28%!  So…despite the media and DC trying to convince folks that the economy has been “just swell”, the feeling that many have had that the recovery wasn’t much of one, seems to be

As can be seen in the graphic, there’s quite a few tricks that have been employed but even just the top 5 are interesting enough and the top 5 motivations are equally notable.  Earnings manipulation may be as old as time but the ramping-up of it and the widespread adoption of it are what stands out in this cycle.  Where are the Feds you may be wondering…???  Well they are there, helping the cause of course!  Look at the last line!  Oh right, central banks are independent of…  If rabbit holes are your thing, this is nice little crash course into one of them so here’s the link again: https://realinvestmentadvice.com/shillers-cape-is-there-a-better-measure/

As many readers know, we’re extremely technically-oriented in our approach to trading and investing.  The concerning research that turns up here in Below the Radar colors our approach somewhat however but it is more in the form of options selection and position management as opposed to just sitting on our hands at all times!  It’s fair to state that last week’s conclusion has only added to the uncertainty, although you’d be hard pressed to prove that given the current VIX levels (11.74%).  The song remains the same:  STAY NIMBLE!

We’re going to pick up on something we touched on last week: Simple break-even calculations.

Last week we drew attention to capturing more time for the same or similar prices.  We suggested that a due diligence process that include looking at the same or similar strikes in various expirations around your preferred one can be rewarding.  The same can be true in terms of other strikes.

As examples work best, let’s grab one on Walmart (WMT) June Calls:

Many folks begin to get a handle on options and then they fall into a routine because it’s comforting.  The stock replacement routine is a very popular one.  Being comfortable is important but being diligent is often more important!  Take a look at the at the offer on the June 57.5 calls.  They’re offered at $13.60 and they’re 100 delta which many know is a stock replacement call that will act nearly identically to shares of stock.  There’s no argument that the June 57.5 call is indeed a solid stock replacement call, after all, it doesn’t get much higher than 100 delta very often! So…what’s not to like?  Here’s the thing, look just below them at the June 60 calls.  The offer on those is $10.30.  Aren’t they worth a look too?  They’re also a very good stock replacement selection as they’re over 90 delta, 93 delta to be exact.  That’s not the issue we’re driving at however.  Let’s consider, as we always should, the break-even points of our potential purchases.

If we were forced or elected to pay $13.60 for the 57.5 strike calls, that would equate to a “BE Point” of $71.10 in WMT’s stock price if we held them until June’s expiration.  ON THE OTHER HAND, if we took the offer of $10.30 on the 60 strike calls, that would produce a BE Point of $70.30!  This is a no brainer!  Realistically, if WMT maintains the expected bullish course the small delta differential between the two will matter very little.  However, by buying the 60’s, we will have put out less capital, still gotten a very high delta call, and significantly lowered our BE Point which is something we always welcome when we’re long-side options players.  These types of inefficiencies/opportunities are out in the marketplace quite frequently.  One only need to be thorough in their evaluation process to consistently uncover these “money-saving-risk-reducers”.

We'll plan to cover this process and last week’s options content, time-permitting, in this week's Advantage Point Morning Call Webinar.

Have a great week!

The Advantage Point Team