• This Week's Trade Ideas:
Bullish: Mylan NV Com.> MYL – Buy the June 9th 38.5 Calls for $1.50 or less with a close or anticipated close above $39.40 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)
Bearish: Pfizer Inc.> PFE – Buy the Jun 16th 33 Puts for $0.85 or less with a close or anticipated close below $32.40 in a down market with expectations for continued weakness.  (SPECULATIVE!)

• Market Overview:
While no news mattered at all for weeks, we’re now back to where bad news doesn’t matter and good news does.  That’s indicative of a bull market mindset.  With the bigger picture charts still holding bullish complexions, we’re more inclined to lean that way, if technically only and forced to!

• Below the Radar:
The markets have barely moved in the past several weeks.  NOTHING seems to have mattered including “good” news.  Well, let’s clarify that by saying news that’s normally treated as good, most notably, high-profit earnings releases.  Many of the “biggies” have reported while there were a few significant earnings reactions, there were also many duds.  This period of super-tedium may finally be ending however as Monday’s action produced record highs in the NASDAQ and S&P 500.

• Options Academy:
Options selection is almost always a process that challenges new-to-options investors.  Most folks prefer a blueprint that they can follow to pick the options that will allow them to profit.  Many are quite robotic as they take their first steps into the options markets and will typically stick with the basics as they were presented by their instructor.  They want big profits and they want them now.  Concerns with respect to risk are often secondary at this stage.  This is quite normal and is probably as good a way as any to get started as most investors need to learn by doing in the end.  This week though, we’re going to introduce another key aspect that we personally weigh very heavily in our options selection process but seems to be rarely mentioned.

Up, up, and away?

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.  We can’t be sure if we’re breaking out or faking it!

Additionally, we’re still maintaining the “singles” oriented / risk-averse mindset and approach as we’ve been for some time and it’s with that in mind that we’ve generated the following ideas.

Bullish:

Mylan NV Com.> MYL – Buy the June 9th 38.5 Calls for $1.50 or less with a close or anticipated close above $39.40 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

Bearish:

Pfizer Inc.> PFE – Buy the Jun 16th 33 Puts for $0.85 or less with a close or anticipated close below $32.40 in a down market with expectations for continued weakness.  (SPECULATIVE!)

Outlook:

The outlook is tentative one until we see whether or not this breakout to the upside in the SPYs holds up and extends or fails and fades.

Technicals:

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

Fundamentals:

These trade idea(s) 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:

On the bullish side, DLTR flirted with our trigger but never made it through on a close and it was then thrashed along with most of the retail sector which was sold off in a big way as the news in that space was abysmal.  AZN blasted above the $31.10 trigger on its way to $34.55 and counting.

On the bearish side, GE triggered with a close below $28.80 and trade as low as $27.85.  It has more downside potentially and in a weak market environment it could fall to $25.00ish.

For some that were looking for more and willing to wait for it, both VOD and HOG finally began to move in a serious way after the French Elections.  VOD has traded as high as $28.91 as we type.  HOG traded down to $53.63.  Both could continue but VOD has seemingly closed a gap now while HOG’s downside target remains circa $50.00 for us.

While no news mattered at all for weeks, we’re now back to where bad news doesn’t matter and good news does.  That’s indicative of a bull market mindset.  With the bigger picture charts still holding bullish complexions, we’re more inclined to lean that way, if technically only and forced to!  Here it is: BUT, the Daily chart on the SPYs above just isn’t there yet.  We wafted up on Monday on, on, on…something we suppose.  Tuesday’s opening brought new highs as Home Depot warmed the hearts of CNBC reporters everywhere.  CNBC, along with most of the financial media, seems to think that we will smartphone and social network our way to prosperity with a small remodeling rider attached to the policy for good measure.  We’re going to wait a little longer before declaring victory because we’re just not clear on how kids sharing pics of themselves and adults surfing FB for hours at a time adds to productivity.  But more importantly we’re holding off mainly because the chart above just isn’t there yet.  The “D” and orange and red circles are pointing out the negative divergence the RSI is showing despite a new high in the SPYs.  The “FB?” is referring to a false breakout since we made a new high this morning and the sold off rapidly.  Have “new high” breakout buyers been trapped?  At we double topping?  We shall soon see but the bottom line remains that if we do see a real breakout here, we would not get in its way but would instead attempt to ride the wave diligently.  Charts of larger degrees suggest that another 10% could be tacked on to current levels before things peter out.  For some, it’s difficult to fathom how such a potentially powerful move could occur in the face of news that hasn’t been encouraging with respect to economic performance both here and in China (see Below the Radar).  We’ve seen this before and the news will not matter if a manic run higher begins to unfold.  Having had first row seats for the past 2 bear markets, we KNOW that virtually nothing will matter during a final blow off higher until…it matters.  Also, we have to allow for the possibility that key economies will somehow stop deteriorating on a dime and reverse positively.  It can happen and does.  Additionally, the managers of the economies will pull out all stops to ensure that Q2 shows the sharpest rebound possible?

This Week’s Economic Calendar

At this point, we’ve included the economic calendar out of habit and just to be thorough.  In our view, the numbers haven’t mattered much of late.  They’ll matter again at some point but it’s tough to say when since so many things seem to be acting much differently than they have historically.

We’re considering a name change for Below the Radar.  How does “Stuff that is seemingly important but doesn’t seem to matter” sound?  OR maybe, “Easy things to ignore”?

With a modicum of seriousness, those may not roll off the tongue as easily but they’ve been just as relevant if not more so the past several weeks as the markets have barely moved.  NOTHING seems to have mattered including “good” news.  Well, let’s clarify that by saying news that’s normally treated as good, most notably, high-profit earnings releases.  Many of the “biggies” have reported while there were a few significant earnings reactions, there were also many duds.  This period of super-tedium may finally be ending however as Monday’s action produced record highs in the NASDAQ and S&P 500.  Naturally, there must have been good news driving this outcome, right???  If the usual commentators are to be believed, the markets rallied on news that Russia and Saudi Arabia have extended their cuts in oil output beyond 2017!  That, of course, should keep oil prices and gasoline prices from falling further.  Won’t that excite the consumer!  We seem to recall a time when the news folks were telling us that lower gas prices meant more disposable income which meant higher consumption.  So now, wait, is lower consumption good now???  Hmmm….If that “rally propellant” doesn’t bowl you over you’re not alone but that’s what the news gang is running with for now which, in our humble, further demonstrates the often nonsensical nature of financial news coverage.  We can’t be sure but it seems to us that the “Wall of Worry” keeps building at a similar pace to that of the “Tower of Complacency”.  We may be on the cusp of a historic melt-up/blow-off if the markets continue to be goosed higher and the economic state of affairs fails to follow.  We shall see…

As this isn’t our first rodeo featuring what may be the early stages of a blow-off top, we’re going to do what we do here and keep our eyes on the type of material that’s typically been considered important by serious investors for hundreds of years.  Let’s get our survey started…

Our old stomping ground, the auto space, seems to be more dimly lit and its prospects aren’t shimmering either:

“By the end of 2019, an estimated 12 million low-mileage vehicles are coming off leases inked during a 2014-2016 spurt in new auto sales, according to estimates by Atlanta-based auto auction firm Manheim and Reuters.”

Used car prices fell in 2016 and now even more off-lease vehicle are set to hamper the market.  And, let’s not forget that NEW car inventories are approaching pre-crisis highs.  There’s a lot of supply for sale out there, folks.  NOT TO WORRY, we’ll do what we always do when a problem like this approaches…we’ll use CREDIT!  Oodles and oodles of debt!  The only problem is that we’ve done that already:

Yes sir, subprime simply migrated from housing to autos so that the good times could roll.  Only, this time, remote European banks didn’t buy this debt thinking it was A-Rated quality.  As much as subprime is back so are delinquent payments to afford these assets.  (Ring a bell?)  Putting folks into autos that they’d be hard-pressed to afford isn’t a 20167-2017 “thing”.  In fact, we’ve done it for so long that delinquencies are gunning for 2009 levels!:

http://www.zerohedge.com/news/2017-05-12/flood-lease-vehicles-set-wreak-havoc-new-car-sales

http://www.zerohedge.com/news/2017-05-13/other-shoe-drops-prime-auto-loans-losses-surge-recoveries-tumble

We’ve placed both auto land links just above should you care to read further into the goings-on there.

Here’s another that’s not very reassuring as Reuters is reporting that Ford is looking to slash labor in Asia AND North America:

http://www.reuters.com/article/us-ford-motor-layoffs-idUSKCN18C03P

Readers have kindly informed us that the auto industry isn’t the key cog in the US economy that it once was and is really “small potatoes” at this point.  Frankly, we agree with this view to a large extent but our interest with respect to this data isn’t so much about autos as it is the American Consumer Landscape.  We’ve long held that with the game shutdown in housing, Americans have instead opted to live-large via their automobiles, since, the sub-prime game has been working quite well there.  As can be seen though, that may no longer be the case in the near future as the consumer is at the very least, catching their collective breath:

We heard about the “surprisingly good” retail sales data for April virtually day while listening to CNBC.  We decided to take a look at just how good they were and thus we provide you with the same glimpse above.  We’re not seeing “it” despite Bob Pisani’s best attempts to help us to do so.  Citi and Morgan Stanley aren’t seeing “it” either it appears.  First Citi:

This index from Citi attempts to show how well reality fared vs. expectation, economically of course.  You be the judge as how things have played out…  Speaking of “playing out”, how’d equities fare last time around when a similar decoupling unfolded in 2015:

And now, let’s hear or rather see what Morgan Stanley has to say:

We visited MS’ website to track down the specific definition of their ARIA:

(MS ARIA):

This is a monthly US macro indicator based on data collected through primary research on key US sectors (consumer, autos, housing, employment and business investment).

This isn’t just another acronym that’s flashing red, it’s actually the consumer, autos, housing…etc.  That’s a big drop there in April after many months of post-election jubilation.  Does the sidetracking of the new administration’s agenda have a hand in this???  Is the euphoria finally burning off in the economy yet now in the markets…yet…?

The Empire Manufacturing survey produced the whopper above in the form of new orders.  Yep, they’ve gotten whacked down hard too by coming in well-below expectations much as the results of the survey overall.  It’s not just mall retailers and automakers and big ticket stuff covered by the Empire region survey that’ feeling it.  It’s chain restaurants as well:

http://wolfstreet.com/2017/05/12/chain-restaurant-sales-traffic-worst-since-2009-2010/

Here’s what caught our eye the most from within the piece linked to above:

Worst Restaurant Tailspin since 2009/2010 Crushes Lower End

TDn2K’s economist Joel Naroff blamed the slow growth of the economy in Q1 on “mediocre” consumer spending. And this might be an issue going forward: “The rising household debt load is likely to suppress consumption, including eating out.”

Ah, consumer debt, after years of loading up on it, is now hobbling discretionary spending. Who would have thought? And he goes on:

“The hope that consumer and business spending will surge is probably just that, hope.”

“That said, the economy should rebound this quarter but it looks like we are in for another year of 2.25% growth [by comparison, in 2016, the economy grew only 1.6%]. While that pace is not likely to make anyone happy, it is enough for the labor market to tighten further and the Fed to continue raising rates, possibly as soon as June.”

Maybe things aren’t so swell across the board here in the USA but what about across the Atlantic?

If you look that the above graphic and wonder if investors have bid up Euro Stoxx to higher levels than optimistic analysts had for year-end then wonder no further because that’s exactly what’s happened!  Things are priced for all cylinders to fire and fire and fire everywhere it would seem.  Let’s peer beyond Europe to the powerhouse economy of Asia that has many bullish dreams attached to it, China.  A few snippets, one key graphic, and the link:

... China's National Bureau of Statistics validated the mounting fears, when it reported misses across all key economic categories for the month of April, as follows:

• Retail Sales 10.7% Y/Y, Exp. 10.8%, Last 10.9%
• Fixed Asset Investment 8.9% Y/Y, Exp. 9.1%, Last 9.2%
• Industrial Output 6.5% Y/Y, Exp. 7.0%, Last 7.6%
• Industrial Production YTD 6.7% Y/Y, Exp. 6.9%, Last 6.8%

“…confirming that China is backsliding into its old, "polluting, excess industrial capacity ways…”

http://www.zerohedge.com/news/2017-05-14/peak-china-chinese-data-misses-across-board-housing-bubble-returns

We can’t leave China without taking a look at one more chart that speaks for itself:

To this point we’ve seen even more US weakness, Europe priced “aggressively” and everyone’s great international source of hope, China, potentially on the cusp of a significant slowdown at just the wrong time (as it extends its housing construction bubble).  (Side Note: David Stockman’s recent comments re: China: “I recently came back from a 10-day trip to China and I can tell you that it is the world’s greatest Ponzi scheme. It is going to collapse.”)

Finally, before we leave Asia, If you’re unsure as to how much China may matter in the current scheme of things, consider this read which is not too long but packs a punch.  : http://www.zerohedge.com/news/2017-05-13/why-us-equity-investors-and-vix-sellers-should-care-about-china-1-simple-chart

So where does that leave things?  Quite high actually, full of exuberance and without fear, just as they were only 9 years ago.  It may be that history will begin to repeat itself but at higher RPMs.  The central banks may need to keep the perpetual-motion-money-creation machine going much longer than most expect as the return to “normal” could take a little while as their assets are nowhere near normal:

https://econimica.blogspot.com/2017/05/misconceptions-of-normal.html 

A few quick links re: valuations etc.  First, Goldman on valuations and that link:

The S&P 500 is up 13% since the end of October. Earnings expectations are down 1.2% over the same period.

http://www.marketwatch.com/story/as-profit-expectations-drop-goldman-sachs-says-stock-rally-may-hit-the-brakes-2017-05-15

Where things stand:  http://www.marketwatch.com/story/by-one-measure-stock-valuations-are-at-their-highest-level-since-2004-2017-02-17

And finally, let’s ponder this one.  Wall St. is making it easier for John or Jane Q Investor to buy in every which way possible.  If people want to buy, Wall St. wants to sell.  The number of products just went full on ridiculous:

Read all about it: https://www.bloomberg.com/news/articles/2017-05-12/there-are-now-more-indexes-than-stocks

One more thing and double-secret finally, we have the WAPO waxing on with the respect to money printing and debt.  With this, we may have reached PEAK Euphoria.  Apparently, money printing and debt are really good things so we’re left wondering why he doesn’t advocate for 24/7 printing here so we can all retire and live on Easy Street immediately.  The logic seems to be if we were to borrow $10 million bucks, we’d be wealthy and that debt can never be a drag on an economy…:

https://www.washingtonpost.com/news/wonk/wp/2017/05/16/how-japan-proved-printing-money-can-be-a-great-idea/

Options selection is almost always a process that challenges new-to-options investors.  Most folks prefer a blueprint that they can follow to pick the options that will allow them to profit.  Many are quite robotic as they take their first steps into the options markets and will typically stick with the basics as they were presented by their instructor.  They want big profits and they want them now.  Concerns with respect to risk are often secondary at this stage.  This is quite normal and is probably as good a way as any to get started as most investors need to learn by doing in the end.  This week though, we’re going to introduce another key aspect that we personally weigh very heavily in our options selection process but seems to be rarely mentioned.  This key determining factor for us is often the stock’s chart.  A stock’s chart can be valuable in guiding us to the proper selection as opposed to what we’d LIKE to do.  What we want or like and what we probably should do are often very different things.  Let’s use a recent bullish idea, AZN, to serve as our chart to guide our selections.

Notice that the PSAR (Parabolic Stop and Reverse) indicator flipped to a bearish bias on May 8^th.  Folks that like to key off that indicator could have decided to get bearish and bought a put late on that day.  The stock closed at $30.23 that day and the June 2^nd expiration 35 puts (Deep in the Moneys) went out offered at $4.90.  Many will opt for a put such as this one as it offers very nice payoff potential if the bearish forecast plays out as it will mimic stock profits very well.  But what if the forecast blows up?  Which is exactly what happened to PSAR players charting AZN in this example.  The stock traded just below $35.00 to this point in time.  Most of the option’s value has gone up in smoke as things stand now.  However, if we look at the chart closely, we can see that $31.00 and $32.00 were both areas of horizontal resistance (see the horizontal red lines).  As technicians, we know that once stock prices surpass certain levels, they’re likely to attack the next level of support or resistance beyond that one and so on.  If this were our trade, bearishly instead of bullishly, we would have tied our put purchase to the 31 strike or at worst the 32 strike.  Why?  Because, if those levels are taken out, the stock will typically try to seek the next resistance level on up as we’ve noted.  There was virtually NO resistance beyond the $32.00 level and for that reason it’s very risky to pick a DEEP ITM put especially if a news driver hits the tape causing adverse movement, which was the case here.  News can wreak havoc to both bulls and bears but the question remains: Why take on more dollar risk than you need to IF the chart doesn’t support it?  Options selection can be arrived at much more intelligently when the charts are utilized properly.  Selecting what may make the most sense instead of what we’d prefer often makes perfect sense!

Please attend our Advantage Point Morning Call webinar and ask us about this critical aspect if you have any questions!

Have a great week!

The Advantage Point Team