• This Week's Trade Ideas:
Bullish: None at this time.
Bearish: Haliburton> HAL – Buy the March 31^st 53.5 Puts for $1.80 or less with a close or anticipated close below $52.50 in a down market.

• Market Overview:
Well...Trump's speech sure did have an effect last week and it brought increased volatility back into the markets.  The reaction post-speech seemed to put the exclamation point on the rally that preceded it, at least for now.

• Below the Radar:
Last week we saw how home sales and mortgage applications were slowing and that the current trend doesn't look very good.  This week we want to make a brief mention of another major expense in most American's lives, their autos...

• Options Academy:
We're following up this week with more on volatilities.  First, let's see how we can get a better look at the same data that we covered last week.  Recall that we went to the Quote page on the Options House platform to locate the past year's implied volatility history in a subgraph below the past year's price action.  That's a quick and handy way to access that data but there's another way...

Have to be prepared!

The Trade(s):

Bullish: None at this time.

Bearish: Haliburton> HAL – Buy the March 31^st 53.5 Puts for $1.80 or less with a close or anticipated close below $52.50 in a down market.

Outlook:

Again, the market remains challenging in the fact that the pullback has extended into 4 days and potentially counting.  The indices look as if they're attempting to close the gap left in the wake of reaction to Trump's speech last week.  Normally after witnessing selling for 4 days in a row in an uptrending market we'd be more inclined to search out bullish opportunities.  Unfortunately though, there weren't many bullish stocks showing up on our scans the past few days.  This is likely to the selling not abating quite yet.    We're becoming more concerned about the index levels at this time.  They're approaching key support levels which means the buyers need to return quite soon to prevent more damaging selling which would beget even more selling from technical players et al.  We've identified weakness in the energy sector and HAL has produced some very sharp drops in the past.

Technicals:

HAL's chart above has had a heavy look to it for nearly a month.  A little more weakness in there, with the sector remaining weak (XLE) in a market that may remain weak for the first time in months, could open the door to a gap fill target that lies down at approximately $48.50.

As can be seen in the chart above, the XLE is very close to breaking below key support that could put the entire uptrend that began in early 2016 in jeopardy.

Fundamentals:

This idea in HAL is driven by its and XLE's sector technicals but with other considerations.

As always we strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these ideas, last weeks 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:

HIG never triggered again due to the extreme pop/shorts squeeze in the market after Trump's speech.  HIG had a great day that day but has slid back with the indices ever since.  In this case, this can serve as a great example as to when to not chase stocks when they're clearly overbought and being squeezed higher.  HIG couldn't hold its gains and eventually came all the way back in with the XLF and the indices.  It still has potential but we will have to keep it on our intermediate term radar should the financials and the indices put together another rally attempt.

LVLT on the other hand, could still be a live holding for some.  We put out a few alerts on both stocks but especially LVLT as the markets were somewhat weak and it cooperated as a result.  Once again the reminder is that is much easier to get cooperation for forecasts when the major indices are moving in that direction.  There's still a good deal of downside in LVLT should the market weakness persist now that it may have broken below $56.00, but shorter-term speculators may look to take profits in the $55.00 and $54.00 areas as they may show a little support in the near future.  Otherwise, the low $50's remain viable longer term.

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

Well...Trump's speech sure did have an effect last week and it brought increased volatility back into the markets.  The reaction post-speech seemed to put the exclamation point on the rally that preceded it, at least for now.  The indices have remained weak in the aftermath of the short-squeeze assist higher.  We've had several days of meandering lower for the first time in a good while but all in all the selling hasn't been excessive and the indices haven't given that much ground back, at least yet.  This combination could make for interesting times in the near-term.

We can't recall a time quite like this one wherein the sitting President is accusing his predecessor of having spied on him and his campaign and new administration potentially.  The “deep state”, as it's now being called, related concerns that we had expressed a few months back seem to be coming to fruition.  Regardless of how one feels about the new President, it's clear that the so-called press and many within the federal government's various departments are working diligently to undermine him and his agenda.  This is very important in our view as the markets have rallied dramatically since early November ostensibly on the belief that this new agenda will be implemented lead to a better economic environment for companies and employees in general.  Additionally, it's now becoming widely accepted that interest rates will rise sooner rather than later.  That combined with the possibility that Trump's agenda could be at risk of not being realized, at least in the short-term, is likely to create more volatility and thus more downside risk potentially as nearly all of this rally has been predicated on it happening.  Earnings are out of the way for the most part at this juncture and while there isn’t “big big” economic release this week, there are a good number of important ones nonetheless.  Our take though is that without a shocker number being published in one of the bigger releases, the main focus will remain on the chaotic war of words, innuendo and sabotage that's engulfed Washington, D.C.  Finally, the preliminary replacement bill for “Obamacare” will likely be a focus of some kind for some duration.  It could be days or weeks or, in this environment, maybe just hours if the spy/sabotage/Russian collusion arguments flare up again as they have many times over.  Stay nimble my friends...

This Week's Reports

Last week we saw how home sales and mortgage applications were slowing and that the current trend doesn't look very good.  This week we want to make a brief mention of another major expense in most American's lives, their autos...

Here's a link to all of the grisly details:

http://www.zerohedge.com/news/2017-03-03/auto-lending-update-someone-please-explain-how-not-bubble

We came across some interesting information related to this commonly held “asset”.  It's been our position that, since many Americans couldn't upgrade into a larger McMansion due to the post 2008 fallout, they instead opted for upgrading their existing homes and also taking advantage of the lax lending standards in the auto-space.  This is backed up by the 21% increase in credit in autoland over the past 2 years.  Terms are being extended to keep monthly payments “reasonable”.  This should excite everyone as it's become quite easy to sign onto $500 monthly payments for ONLY 7 years!  Unsurprisingly, the “spend first figure out how to pay it back later” method is beginning to fail again.  (Shocker right?) The graphic above illustrates how delinquencies are starting to grow.  This, combined with the housing data we uncovered last week, is somewhat unsettling...

But combined with what could become a commercial real estate disaster, it's downright spooky!

Charles Hugh Smith writes a very interesting blog that we frequent regularly.  For more “grisly”, check out the link below that speaks to serious commercial real estate issues.

http://charleshughsmith.blogspot.com/2017/03/the-next-domino-to-fall-commercial-real.html

This snippet really caught our eye:

Commercial real estate is grossly overbuilt in retail and office space. Combine sky-high valuations with cratering demand and billions in short-term CRE loans that must be rolled over into new loans, and we don't have a liquidity crisis, we have a collateral crisis-- the assets supporting the debt are no longer worth the loan balance. 

As did this graphic...What could go wrong???

Given the scale and the enormous fallout potential, Charles' blog entry is most definitely worth the read.  This is the type of “stuff” that was out there prior to the equities markets peaks late in 2007 that most “experts” were dismissing with great assistance and amplification from CNBC.

In our Tuesday and Thursday evening webinars over the course of the Fall and Winter we have discussed the current environment vs. that of the late 90's many times over.  Yours truly has made the case that despite the 90's markets being somewhat bogus, they pale in comparison to the artificiality of the current equities bull run.  Well..., we came across some interesting analysis recently that is well worth checking out in-depth if you'd like to get a sense of where things may really stand.

It's very clear when one studies the graphic below that there was a much healthier relationship between the 90's GDP levels than what we've witnessed during the current bull market:

But it doesn't stop there.  Check out this table from a partner of the writer above.  It's pretty stark folks!

You've got to do some serious scrolling to get into the heart of their argument but for those that would like to take a look, here's the link: https://realinvestmentadvice.com/a-look-back-at-1999-03-03-17/

Finally, and maybe despite all this, it seems like the average American is buying into “Trump” optimism with the purchases of more goods and services and STOCKS!  Americans are “feeling it” like they haven't since 2008.  Confidence is way up and optimism abounds.

And... despite this graphic being a little dated, one can clearly see that the trend of American Investor habits.  They've increasingly become more focused on “jumping in and jumping out”.  As many of you know, PROS tend to believe that the investing public's actions are a reliable contrarian indicator.  Interestingly, there have been several brief stories but many mentions in the press recently that seem to indicate that the “little guy” is jumping in again with gusto!  If true, that's yet another warning sign!

http://www.zerohedge.com/news/2017-03-06/half-americans-cant-write-500-check

Check out the ZH link directly above to really put things in perspective.  Half of Americans say that they couldn't write a $500 check for an unexpected expense.

In conclusion, with Trump's agenda seeming to be stalled somewhat due to him being surrounded by controversy both real and manufactured, we have this:

The Atlanta FED doesn't seem to think much of Q1.  One quarter does not make a year but when viewed in light of the dramatic post-election rally (mainly on optimistic Trump-related assumptions), the looming interest rate increases, the potential stalling of Trump's agenda and the contrarian signs showing up at present, we can only arrive at one conclusion:  

 STAY NIMBLE MY FRIENDS!

We're following up this week with more on volatilities.  First, let's see how we can get a better look at the same data that we covered last week.  Recall that we went to the Quote page on the Options House platform to locate the past year's implied volatility history in a subgraph below the past year's price action.  That's a quick and handy way to access that data but there's another way...

When using the charts tab, look up to the left and click on the “display” box.  Once opened, click to place a check mark in the “volatility chart” box and then click “OK”.

That should add the volatilities subgraph below the price data that will be very similar to the data found under the quote tab.  The difference is that it will have greater visual detail should you care to analyze things with more precision.

As can be seen above, more detail emerges and IV levels can be evaluated more closely.  Now, onto this week's volatility exploration...

Most students eventually get around to asking questions similar to these:

“What option should I buy?”

“How do I know how far to go out in time?”

“How do I pick one expiration vs. another?”

These and other related questions are good questions but the answers aren't always so simple.  It would be great if guidelines or rules of thumb could always be applied but at times it's just not that easy.  One key view of data that can help us decide upon our final selection is directly below:

We've done quite a bit of marking up to make things as clear as we can with economy of space in mind.  The small green circle highlights an “expand” box that can be clicked to reveal what, in the OH platform, is called the “Implied Volatility Constellation”.  Others refer to this plotted data as “tilt” and other similar names but we prefer the “term structure of implied volatility”.  Essentially, the platform is providing a summary IV number for every expiration that's currently trading in the marketplace, that data is represented by the solid white line that connects IV levels together.  This is a basic look at IV levels across time much like bond yields at various maturities.  The platform also provides a dotted line that connects the 30 day average of IV levels together.  This way we can tell if the current IV is cheaper or more expensive than how it's generally been trading over the past 30 days.  Additionally, we can also determine which expirations are cheap or expensive relative to others.  For example, notice that after April's last expiration, the IV levels become greater beginning in May and persisting all the way out to the furthest out LEAP contracts.  May is likely elevated relative to the expirations that precede it due to the fact that Apple's earnings are due out between the final April expiration and the current May expiration.  Earnings releases are typically a source of uncertainty and potentially increase volatility post-release so demand for “insurance” or demand from speculators normally drives options prices higher.  BUT, there's more here than meets the eye.  Another way we can interpret this data would be to conclude that options marketplace doesn't expect much near-term volatility in Apple, but it certainly expects to see greater volatility in the stock's price starting in May and persisting beyond for a good while.  This is at least the snapshot of things at present.

This analysis takes very little time and is well worth performing.  Quite often it can help you get better value in your options selection or help you avoid “reversion to the mean” pitfalls.

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