Advantage Point Newsletter - March 27th, 2018
A News Driven Market Spirals Onward
The Death Knell for Big Data could be Big Trouble
Trading in the Age of Tweet and Data Risk
Holiday-Shortened week adds to everything, even decay, by subtraction!
Bullish Ideas: (View Webinar) Canadian Natural Resources. > CNQ > $30.66 Last. Buy the April 20th 30 Calls for $1.60 or less with a close or anticipated close above $31.12 in an up market with expectations for continued strength in the energy sector and the major indices.
Bullish Mentions: (View Webinar for All*) DUK, EXC, CNQ, XEL, HCP, AEP, AGG, CMS, PEG.
Bearish Ideas: (View Webinar) IShares MSCI EAFE ETF > EFA > $68.65 Last. Buy the April 13th 69 Puts for $1.37 or less with a close or anticipated close below $68.29 in a down market with expectations for continued weakness in the major indices.
(View Webinar) IShares China LG Cap ETF > FXI > $47.06 Last. Buy the April 13th 48 Puts for $1.95 or less with a close or anticipated close below $46.70 in a down market with expectations for continued weakness in the major indices.
Bearish Mentions: (View Webinar for All*) XLF, BAC, C, USB, HSBC, SCHF, EEM, PYPL, CSCO*, GM, WMT, TGT, TWX, RH*, HUN, LULU*, CSX, AABA
• Market Overview:
Last week we wrote (with bold emphasis added this week):
Last week the Gang opened the major indices higher nearly every day and then sold into them. That’s distribution, plain and simple. That’s not a very good sign. Not a very good sign at all. However… the selling is no longer fresh. The cycle is maturing. How much more can we expect for now? Downside that is.
Interestingly, we did have a mature bear cycle as the bulls took the baton and rallied into and post-FED announcement, but they weren’t bold enough to hold it beyond that!
• Below the Radar:
First off, as we’re thinking the same thing, we’re including this from Bill Blain. This is just part of the centrally planned stock market theme we’ve been chronicling for over a decade in print:
• Options Academy:Open Interest is the number of Open Contracts in an Options Series. What does that mean? Well…think of it like a running total of outstanding options inventory. If that doesn’t work for you, think of it as a number that tracks the number of contracts that are opened and closed by traders.
Holiday-Shortened week adds to everything, even decay, by subtraction!
Bullish Ideas: (View Webinar) Canadian Natural Resources. > CNQ > $30.66 Last. Buy the April 20th 30 Calls for $1.60 or less with a close or anticipated close above $31.12 in an up market with expectations for continued strength in the energy sector and the major indices.
Bullish Mentions: (View Webinar for All*) DUK, EXC, CNQ, XEL, HCP, AEP, AGG, CMS, PEG.
Bearish Ideas: IShares MSCI EAFE ETF > EFA > $68.65 Last. Buy the April 13th 69 Puts for $1.37 or less with a close or anticipated close below $68.29 in a down market with expectations for continued weakness in the major indices.
(View Webinar) IShares China LG Cap ETF > FXI > $47.06 Last. Buy the April 13th 48 Puts for $1.95 or less with a close or anticipated close below $46.70 in a down market with expectations for continued weakness in the major indices.
Bearish Mentions: (View Webinar for All*) XLF, BAC, C, USB, HSBC, SCHF, EEM, PYPL, CSCO*, GM, WMT, TGT, TWX, RH*, HUN, LULU*, CSX, AABA,
Outlook:
The markets became short-term oversold and the Gang conveniently had the weekend to game plan Monday’s defense of the 200 SMA in the SPYs (Other SMAs in the Other Indices). News was coordinated to help the cause with tweets and comments emanating from the administration that investors should think “negotiation tactics” instead of full blown trade war. That produced the best day for the DOW in about 10 years. What other tricks are in store for us from the news cycle this week?
Last week in outlook we wrote “Our hands should be tied until that affair is in the history books” as we concluded. That was in reference to the FED announcement, the Q&A that followed and the fallout that can result. To be clear, traders trade and we like to trade too but AT TIMES, it pays to be patient and avoid unpredictable outcomes. That’s exactly why, after having a good start to the year, which was followed by great cyclical turns over the past month, we elected to play it safe. We’re content with that decision.
Technicals:
Will be discussed in-depth in the Advantage Point Morning Call webinar.
Fundamentals:
These trade idea(s) and mentions 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 produced…well… a lot. A lot of stuff came out of last week. We were happy that we avoided a serious setback. In short, the cycle was set for a bullish run, hence, our overloading Advantage Point with bullish mentions. However, we included ZERO ideas bullish or bearish, as we strongly suggested that would-be traders remain patient and prudent due to all things FED. We know, and long-time readers and webinar attendees know, that fallout from the FED meetings can be both dramatic and protracted. Many of our bullish mentions were working extremely well early on Wednesday but, as we mentioned in the webinar, players would likely need to be out of them or hedged in them in time for the FED announcement etc. Why? There’s simply too much risk. The FED announcement isn’t typically the surprise, but the fallout trading afterwards can be, and it certainly was this time around and was likely aided by other major negative news that we mentioned at the time. The DOW soared as Powell began to speak but it then experienced a massive selloff by the end of Wednesday as did the SPYs et al. HOWEVER, the SPYs did not break below any key support levels AT THAT POINT. Only on Thursday morning did we experience the break, which happened on the opening and things deteriorated from there very quickly and effectively for the rest of the week as we all now know. We contemplated issuing some bearish mentions at the time but please recall that we’ve seen many down openings reversed quickly and turned positive at some point of those types of trading days. We elected not to “guess” on that as day trading isn’t our focus while swing trading is. We were concerned about intraday shenanigans because the markets had been in seller control for quite a while at that point. There was a rally attempt on Thursday, but it didn’t have much gusto to it.
As readers will recall, we thought they might “square up” in front of the FED and they did. Stocks began to levitate higher and through the FED times but that simply removed very short term oversoldness from the markets. All in all, we sidestepped getting hit hard by being prudent and not taking the bate of what looked like a bullish resurgence just in front of the FED as we suspected. We’d have liked to have gotten some bearish trades on when they reasserted themselves on Thursday but the whoosh lower began on the opening and the rally back to unchanged followed by a failure from that point never materialized.
In the future, if you’re hankering for a hunk of names to play, quite often ideas and mentions from week’s prior will fill the bill. Many stocks we’d been bearish on just prior to last week, took on a very ugly complexion as the second half of the week’s selling unfolded. The financials we’d targeted as bears really had a rough week.
Last week we wrote (with bold emphasis added this week):
Last week the Gang opened the major indices higher nearly every day and then sold into them. That’s distribution, plain and simple. That’s not a very good sign. Not a very good sign at all. However… the selling is no longer fresh. The cycle is maturing. How much more can we expect for now? Downside that is.
Interestingly, we did have a mature bear cycle as the bulls took the baton and rallied into and post-FED announcement, but they weren’t bold enough to hold it beyond that!
We noted how many and what forms of support resided just below where we were last week but we did allow for the possibility of more downside mainly due to all the risk items that were floating around out there: “A retest of the lowest lows would be quite a drop even from Monday’s lows. However, stranger things have happened. When we add Tweet Risk, “You’re Fired” Risk and “Investigation Risk” into the equation, things become even more difficult to predict moment to moment!”
Here’s where we are now:
We’ve dropped down to the lesser charts to get a good look at the SPYs. The sub-daily 2 Hour look above is necessary because the Daily charts do not show enough yet and with so much movement compressed into shorter periods of time, this time frame can be helpful. We reached 20 SMA resistance with the highs of today and sold off. The bulls have only been back in control for just over a day’s time and theoretically they should have more time to shine and thus we’d expect that they try to lift things beyond today’s highs and into one of our purple resistance lines above. With news due out tomorrow and pre-opening futures goosing the order of the day, it’s possible that those lines (red arrows) could bet approached some time tomorrow or on Thursday. A drop and especially a close below today’s lows could trigger another selloff which would possibly lead to a retest, a higher low, a double bottom, another leg of selling and so on. Things are obviously fluid, so we must be even more nimble than in normal times. Finally, a closing of the gap (yellow oval), can’t be ruled out if the Gang keeps getting their jam on!
The QQQs and DIAs are tracking just about the same way so there’s not much to gain from those on a bigger picture chart basis but there is on the less picture basis:
Today’s intraday turn is concerning but not just technically. The reason being is that we may have to contemplate the End of Big Data or at least a beat down of Big Data. And that could be very problematic for commerce as we know it today. We’ll see where things go but big tech being shut off from super-valuable personal data could really alter the landscape and not for the better as far as corporate America goes.
Europe and China ETFs, much like domestic indices, have serious technical issues but they too are rallying at the moment:
All is well at this snapshot in time but how much room is left to run to the upside? There would appear to be various forms of resistance in the way, but our gut tells us they’ll try to push these in very aggressive ways (if at all possible) because the calendar demands it!
We must consider how the month of March and thus Q1 are about to finish out. The money manager Gang will likely want to keep March from being a month that technically triggers bearishness on the big picture charts. Additionally, they won’t want to show a quarterly loss for Q1 to investors. We can’t rule out extraordinary window dressing efforts to close out the week in front of a major American holiday to boot. This is direct from their playbook, so we shouldn’t be caught off guard by it. And that’s not all…
We haven’t published this in a while but there you have it. We reached deep extreme fear levels and as many readers know, this is a contrarian indicator. It would only be natural for a little rise to occur here anyway. If it doesn’t, that will be news! Real news! And Real News is distinct possibility for a change and in the form of the End of Big Data (see above).
GDP on Wednesday and various releases on Thursday could be market movers. The dulcet days of 2017 are behind us and news is once again being reacted to by market players. If GDP is “hot” midweek does that bring on rate hike worries? Does that worry bond market players? What about Core Inflation and PMI etc. on Thursday? And not to belabor it but this Big Data problem could become a really big problem that could cut out the legs from under the darlings of Tech, which in turn would could spell Big Trouble for this market. Thus, the news cycle could once again trigger movement of a significant kind.
First off, as we’re thinking the same thing, we’re including this from Bill Blain. This is just part of the centrally planned stock market theme we’ve been chronicling for over a decade in print:
Moving on…
As the major indices reflexively rally from oversold the territories of last week, we’ll get started in BTR this week with a recent contribution from on of our “go tos”, Lance Roberts. http://realinvestmentadvice.com/this-cycle-will-end-the-simple-math-of-forward-returns/
The above link will bring you to a very interesting read. The graphics are great, just great, so let’s get to them!:
First up, time. The clock is ticking on us is history is to be a guide:
And, as is normally the case, stocks are really ratcheted up vs. disposable personal income levels. That hasn’t ended well the prior two times and we were recently at what appears to be an all-time high:
Of course, as has been the case in the past as well, investors aren’t embracing cash but rather stocks once they’ve been marked up to extreme highs:
There’s much more to the piece than this but the conclusion is that to expect super performance from the markets in the near future given where they are now, is not something that history has supported:
Other “big picture”-concerning items that we came across begin here:
As we can see above, we’re only 4 to 5 months away from experiencing the longest bull market of all-time. It’s “E Commerce” this time or again depending on how you view things. Regardless, the perspective of relativity is the key on this one:
As can be seen with a quick glimpse, the aftermath of recent bubbles hasn’t been pretty. There’s a long way we can fall. Given how much the valuation-ignoring-masses have driven up prices of key stocks, a rollover downward would really hurt as stocks such as Amazon are huge components weight-wise aside from being leadership stocks that are watched and followed for trading guidance:
You read that right. The leadership bubble is set to become the greatest of all-time in a few months! Obviously, the background to this marketplace remains very concerning even as the here and now presents new challenges…
Moving on to current goings on, rising rates seem to be an issue:
This is simply not a positive development for the consumer side of things which is said to account for 70% of US GDP.
To sum up, we’ve got a super-concerning background that’s ripe to fall but maybe not at this moment. We also have interest rate-related developments that are concerning at the very least and rates are set to rise even further if the FED is to be believed. Tread lightly!
Tread Lightly! & Bank and Roll!
This week’s OA will focus on clearing up a few misconceptions regarding Open Interest and Volume in the options markets because, for whatever reason, we’ve received those questions at an increasing rate over the past few weeks at our live weekend events.
Open Interest is the number of Open Contracts in an Options Series. What does that mean? Well…think of it like a running total of outstanding options inventory. If that doesn’t work for you, think of it as a number that tracks the number of contracts that are opened and closed by traders. Open Interest grows when traders open or expand new positions (growing inventory) and declines when traders close or reduce existing positions. It is NOT volume! Volume is simply the number of contracts traded over a period of time. Typically, it is daily when you’re viewing and options chain. Volume and Open Interest are thought to be two indicators liquidity in an options series (an individual call or put) or book (all options listed on one stock). A series is an option listed at as a call or put with a specific strike price within a specific expiration on a specific stock. Since volume is more straightforward, we’re going to focus on further clarifying open interest.
Let’s walk through a simple example to properly explain how Open Interest works. We’ll assume that an option was just listed and has no prior trading in it. If I buy 10 calls and the trading crowd sells them to me, there is an Open Interest of 10. I didn’t own any calls prior and I opened a position by buying 10. The crowd didn’t have an existing position either and opened one by selling/shorting 10 calls to me. After that day but not at the end of that day, Open Interest would read as “10”. Why the next day? Because OI is not calculated and reflected until the trading day has ended. It does not update intraday although volume does update to be clear! Let’s get back to Open Interest. Ok, so, the next day I buy 10 more calls of the same series and the crowd sells them to me. Open Interest will now grow to “20”. Even though they are selling more they keep expanding their positions as do I. The next day I buy 10 more from another private non-pro trader. Once updated, Open Interest will now read “30”. Why? Well, I expanded my position and another trader outside of the trading crowd opened a new one by shorting 10 to go along with the 20 shorted by the crowd. As we move to the next day, we’ll assume that I have a Mint Julep. Why? Because it’s a Saturday!
Jumping ahead to the next trading day, let’s assume that I sell all 30 calls to a mysterious Buyer X. What happens to Open Interest? It remains the stuck at 30! Yes, I sold 30 to Close but Buyer X bought 30 to Open and those balance out against the 20 the crowd shorted and the 10 the private non-pro trader sold. Finally, Buyer X sells his 30 calls and the trading crowd buys 20 from him and 10 are bought by the private non-pro trader. Open Interest is back to ZERO! Why? Because everyone CLOSED OUT their existing positions. NO ONE was OPENING or EXPANDING! That’s the key to remember when it comes to Open Interest.
Perhaps next week, since Open Interest and Volume are normally viewed as parts of the liquidity equation, we’ll dig a little deeper into that subject matter.
If you have questions, ask away in this week's Advantage Point Morning Call webinar.