• This Week's Trade Ideas:
Bullish: Several ideas this week… CF Industries Holding Inc.> CF, CenturyLink Inc.> CTL, American International Group.> AIG – AND…  Last week’s idea in MYL is still viable now that the market has improved since last Wednesday’s drubbing which crushed MYL upside dreams quickly.  Selecting another option should be considered.
Bearish: SPDR S&P Retail ETF.> XRT – Buy the June 16th 41.5 Puts for $1.45 or less with a close or anticipated close below $40.45 in a down market with expectations for continued weakness.  (VERY SPECULATIVE!)

• Market Overview:
As the SPYs have traced out more of an ascending triangle as opposed to a double or triple top, we’re evolving with it.  The SPY has made 5 attempts to move beyond the horizontal resistance line and has failed 5 times.  However, it’s also being bought at higher levels when it comes off, suggesting that buyers (bulls) are becoming more aggressive.  And why shouldn’t they?

• Below the Radar:
This week’s Market Overview attests to the reemergence of Animal Spirits and the robotic assist that they’re being given.  This serves as the backdrop for this week’s slew of graphics and links and we’re going to use this to remind folks that Below the Radar is mainly about knowing what risks may be lying below the surface as opposed to finding reasons to avoid investing.

• Options Academy:
Last week’s Options Academy dealt with options selection once again. The main thrust, aside from using “slightly-in-the-moneys”, focused on picking an option that fits well with respect to the risks seen in the charts.  Buying strikes that are very near to key support or resistance can allow the option to serve as a stop of sorts just in case the opportunity to exit an adversely moving trade does not appear.  It’s another layer of protection that we’re able to build into our trade, at times...  Naturally, folks had questions and a few of them sounded like this: “What if there’s no close by support or resistance, then which “slightly” should I go with?  Let’s see if we can help with this dilemma….

Consolidation building Tension?

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:

CF Industries Holding Inc.> CF – Buy the June 16th 28 Calls for $1.90 or less with a close or anticipated close above $29.35 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

AND/OR:

CenturyLink Inc.> CTL – Buy the June 16th 24 Calls for $1.55 or less with a close or anticipated close above $25.35 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

AND/OR:

American International Group.> AIG – Buy the June 16th 61.5 Calls for $1.40 or less with a close or anticipated close above $62.37 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

AND>

Bullish Side Note: Last week’s idea in MYL is still viable now that the market has improved since last
Wednesday’s drubbing which crushed MYL upside dreams quickly.  Selecting another option should be considered.

Bearish:

SPDR S&P Retail ETF.> XRT – Buy the June 16th 41.5 Puts for $1.45 or less with a close or anticipated close below $40.45 in a down market with expectations for continued weakness.  (VERY SPECULATIVE!)

Outlook:

We’re nearing what seems to be the apex of a consolidating/ascending triangle.  Hopefully that will be the case and the markets will begin to make a sustained move that allows trades to play out beyond a day or two.

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 bull side, MYL never had a chance to fire with last Wednesday’s woosh lower.  On the bear side, PFE triggered with a close below $32.40 and trade as low as $32.07.  As the markets took their cue to rally as the week closed out and as this week began.  PFE rose from the lows but still looks fairly weak.  We put out an update on Friday covering the fact that those with lower conviction could exit the trade unscathed and those with more confidence still had potential as the stock’s bigger picture charts remain vulnerable.

As the SPYs have traced out more of an ascending triangle as opposed to a double or triple top, we’re evolving with it.  The SPY has made 5 attempts (green dots) to move beyond the horizontal resistance line and has failed 5 times.  However, it’s also being bought at higher levels when it comes off, suggesting that buyers (bulls) are becoming more aggressive.  And why shouldn’t they?  Any time the major indices are under pressure and in jeopardy of breeching key support levels, somethings like this “occurs”:  http://www.zerohedge.com/news/2017-05-19/jim-bullard-does-it-again-stocks-spike-hint-future-qe

This has been the case time and time again since QE3 launched.  In fact, it’s now gotten to the point that many are beginning to feel like this:

Lon appears to be both a real estate agent/broker and a trader.  Regardless of his main profession, this type of thinking seems to be spreading which could mean many different things that would include a massive ramp higher.  A dangerous way to think but this is what the FED’s policies have produced.  Small-timers are jumping back into the markets in a big way and collectively creating net positive inflows into popular stocks and the major indices.  Said another way, it may be “Animal Spirits Hour” in the stock market.  Although things can change at any time, it’s becoming very clear that good news is good news and bad news is to be ignored.  With each critical “save” of the indices, that emboldens more and more players to go and stay long which could tip the balance.  Many long-time market watchers would rightfully argue that this is a sign of a market top or at the least late cycle market behavior.  However, there’s often a final burst that seems incomprehensible to most that precedes key tops.  Since we’ve witnessed a consolidation starting in early March, the SPYs, in a way, are well rested and have digested/ignored a good deal of unsettling news.  When in doubt and looking to leave a consolidation, most technicians will lean in the same direction of the incoming trend (which was UP).  Additionally, the bigger picture time frames remain ever so slightly intact for the bulls.  The rescues that took place when they needed to have helped to keep things on-balance positive.

Finally, the roboticization of trading seems to exacerbate the obscuring of historical metrics for valuation of equities.  The robots simply do not care and focus mainly on “what’s working”.  Here’s how things have evolved and despite reservations we need to strive to evolve with them:

At this link: http://www.marketwatch.com/story/heres-why-the-recent-rout-for-stocks-is-only-emboldening-the-bulls-2017-05-23

There is more content relating to the 2 graphics above along with links to delve into the “Quant Quake”.

Wrapping up, we’re in wait mode for now but the bull side, technically, continues to remain intact every so slightly.  After nearly 3 months of sideways action, the markets could be well-rested and if we do see new highs in the DIA and SPY, there should be enough energy left for a decent rally to even higher highs to register.

STAY NIMBLE!

This Week’s Economic Calendar

Much like last week, there’s a fair amount of releases that are slated to hit in the back half of the week.  We’re less concerned about economic releases these days as they simply haven’t mattered much.  Our current take on them is that if they’re positive the market will move up, if they’re negative the market will shake them off.  If bad news begins to matter again, that will likely be a solid “tell” that things have changed.

Last week’s Below the Radar concluded with a link to a piece that full-on embraced money printing and the idea that we shouldn’t worry about tapping that Money Tree in the backyard since it’s working for Japan (after nearly 30+ years of really not working).  This week’s Market Overview contains a few links and a graphic that attest to the reemergence of Animal Spirits and the robotic assist that they’re being given.  These serve as the backdrop for this week’s slew of graphics and links and we’re going to use this to remind folks that BTR is mainly about knowing what risks may be lying below the surface as opposed to finding reasons to avoid investing.  As is the case most often, the fact that we use options properly allows us to participate and potentially benefit from market environments that are “iffy” or worse at times.  Keep that in mind as you read through this section and perhaps move beyond it with the links provided.  The markets are very close to resolving a consolidation pattern that could lead to another leg higher or lower.  If it makes its move higher we still like to participate despite our concerns and reservations.  Also, it shouldn’t shock us if the markets sell off more than most currently anticipate as we’re aware of many problems that exist that are not given much coverage in the mainstream financial media.  Another way to put things in perspective may be this:

1. The Treasury Secretary doesn’t expect to see 3% growth for the US in 2017.
2. The Treasury Secretary doesn’t expect to see 3% growth for the US in 2018.
3. The Treasury Secretary doesn’t expect to see the much-discussed Tax Cut legislation pass before August.
4. Despite those very recent announcements and a very weak start to the year, and all the other uncertainties that have cropped up, we’re within a whisker of all-time highs.

On Friday, we mailed out an update that included a link that covered the market’s reaction that day in light of comments from Bullard of the FED.  Here’s another recent piece that gets into the Bullard comments phenomena for those interested: http://www.zerohedge.com/news/2017-05-19/feds-bullard-slams-recovery-narrative-confirms-fed-top-ticked-economy-hints-fed-poli

In it, Bullard acknowledges that things aren’t really humming along in the economy seems to suggest that the FED’s rate hike plans for the year may be too aggressive given the state of the economy.

Picking up where Bullard left off, let’s have a look at the type of news that this week’s economic releases has produced.  We’ve covered the under-the-surface weakness here as best we can but we certainly have less information at our disposal than Bullard.  Still though, here’s what we’ve learned this week:

As has been the case recently, the S&P 500 continues to hover while manufacturing plumbs new lows although services did bounce up nicely.  They remain far below their early in the year peak however.

Above is a graphic covering the Richmond FED’s manufacturing survey.  The most recent entry shows a significant plunge in manufacturing.  Here’s an accompanying graph that we found that focuses on the expectations within the Richmond FED’s territory:

We can add this to the NY Empire manufacturing survey that hit the tape last week:

One of the bright spots, we’ve been told, could be seen in the housing market.  The auto sector was deteriorating but housing will more than make up for it or so the story went.  Is this a 1 month outlier?

That’s a serious plunge year over year and it’s very close to registering a contraction.  Why?  Why do we see this now?  We’ve been told that everything’s been back on track for a while now and remains there.  The problem is that the “back on track” position isn’t accurate:

It becomes clear yet again, that the FED’s asset inflation program has worked well.  They have driven asset prices back to and through all-time highs but they haven’t kicked the can long enough and strong enough to fix the substantial fundamental problems in the US economy.  Had they done so, new home sales would have rebounded much more than they have, to this point.  Activity in the new home market in terms of sales remains less than half of what it was pre-crisis.  Naturally, the desire to improve this situation isn’t taking the form of improving the fundamentals of the economy and thus the job market, no, it’s more of the same (if you can believe it!):

http://www.zerohedge.com/news/2017-05-19/mortgage-crisis-20-bofa-ceo-wants-slash-down-payments-help-poor-millennials

If you’re thinking that BofA’s CEO is at the leading edge of this kind of thought, think again!:

https://www.bloomberg.com/news/articles/2017-05-22/subprime-auto-giant-checked-income-on-just-8-of-loans-in-abs

Sub-prime, as we’ve noted here, has been BIG in Autoland for the past several years.  BofA’s CEO is actually in catch-up mode.  Also, take note of the spreading white mouse retention syndrome.  Most Americans seem to have forgotten about the crisis in terms of consumption although most remain reminded of it in terms of their income outlook.  But let’s get back to housing…

This “suggestion”, to reduce down payments, comes at a time when we’re near all-time highs in median home price.  If that wasn’t bad enough, we have this piece from Bloomberg that asserts that it’s a better time to be a housing seller than buyer:

https://www.bloombergquint.com/opinion/2017/05/19/the-housing-moment-investors-dread-is-here

It’s been a long climb but it’s gotten there.  What are buyers and sellers seeing?  Our guess is that sellers sense that prices have moved up too far, too fast, given the underlying economic conditions.  Buyers, we’d speculate, realize that things have simply become too pricey with respect to their fairly stagnant wages and future earnings prospects.  They’re backing off as a result.

Sticking with BofA, their guy, Michael Hartnett, is wondering out loud if we’re in the midst of a Tech Bubble, AGAIN.  Here’s a key snippet:

“According to Hartnett, tech disruption is as rampant on Wall Street as it is on Main Street, as the diverging trends in flows to passive and active managers in the past 10 years illustrates.

He believes that this structural shift is "suppressing the typical euphoria normally tangible at great market tops." And yet, since active managers are unhappy because they need the market to go down to show they can outperform passive strategies; and private clients are unhappy as they want the market to go down so they can participate more aggressively in the bull market…so the “pain trade” in risk assets (equities & credit) remains up.”

You read that correctly, the “pain trade” results from things wafting endlessly higher which prevents already beaten-down active fund managers from even matching, let alone beating, passive fund performance:

Here’s the link which is worth visiting for the full read: http://www.zerohedge.com/news/2017-05-22/bofa-finally-asks-tech-bubble-happening-again

It really wouldn’t be proper for BTR to omit some kind of entry from retail land.  We found the graphic just below in our travels across the Internet so take a close look if you want to see what automation is likely to target in the near future:

As can be seen, retails sales positions are projected to be a prime target for the robots.  We found a related link that suggests that robots will devastate retail employment EVEN MORE than the Retail Apocalypse:

“Nearly half of retail workers are at risk of losing their jobs to robots and other automation technology, according to a new report. 

Roughly 6 million to 7.5 million retail jobs "likely will be automated out of existence in the coming years, leaving a large portion of the retail workforce at risk of becoming 'stranded workers,'" according to the 56-page report by investment advisory firm Cornerstone Capital Group.”

Here’s the link that contains all the grisly details:  http://www.businessinsider.com/how-automation-will-impact-the-retail-industry-2017-5

Finally, we provide the links below as a courtesy to those seeking more doom and gloom.  Taleb and Stockman are a couple of high profile commentators that aren’t’ feeling comfortable with things as they stand now.  Taleb would like to see folks hedge while Stockman’s warning of some really rough stuff starting in late summer into the fall.

http://www.zerohedge.com/news/2017-05-18/trump-isnt-trainwreck-nasim-taleb-destroys-media-na

http://www.shtfplan.com/headline-news/david-stockman-sounds-the-alarm-fiscal-blood-bath-and-market-crash-to-occur-between-august-and-november_05182017

Last week’s Options Academy dealt with options selection once again. The main thrust, aside from using “slightly-in-the-moneys”, focused on picking an option that fits well with respect to the risks seen in the charts.  Buying strikes that are very near to key support or resistance can allow the option to serve as a stop of sorts just in case the opportunity to exit an adversely moving trade does not appear.  It’s another layer of protection that we’re able to build into our trade, at times...  Naturally, folks had questions and a few of them sounded like this: “What if there’s no close by support or resistance, then which “slightly” should I go with?  Let’s see if we can help with this dilemma….

There’s another lesser known Greek that’s referred to as “Alpha”.  Alpha is the ratio of Gamma to Theta, or Gamma/Theta.  Utilizing Alpha allows us to see which options provide the best bang for our buck.  That is, we can know which option will provide the most profit from stock movement (greatest gain in option’s value over the next dollar) relative to the daily theta that it costs to own said option.  It depends on where the stock price is and its proximity to specific strikes, but the at-the-moneys will typically have the greatest amount of Gamma but at the highest theta within the expiration.  Still though, they often have the greatest Alpha of all options but remember, they’re almost entirely EXTRINSIC value since they’re not ITM.  Also, they’re very close to 50 Deltas.  With slightlys, we’re able to maintain high Alpha but we can slide into much more intrinsic and much less extrinsic value.  This allows us to lose much less to the effects of Theta should the stock not move much once we’re in the trade.

Let’s use our trusty graphic to highlight things:

We were lucky enough to find MSFT trading right at a strike so we know that we can label the 68.5 strike the ATM.  Notice that it has virtually ZERO Intrinsic value and thus all of its value is Extrinsic value.  This is one reason we tend to favor slightlys.  Notice how the ratio of Intrinsic to Extrinsic value moves sharply in our favor once we’re slightly in the money.  Once we get to the 67.5 strike calls, we can see that Intrinsic overtakes Extrinsic value.  That’s putting us in a good spot relative to the ATMs should the stock’s movement stagnate and also with respect to total risk with respect to Vega risk (Implied Vol falling).  The 67 calls have a little less but a similar level of Alpha (Gamma/Theta), they put us right near 70 Delta, and they have a solid 3 to 1 ratio of Intrinsic vs. Extrinsic value.  Still though, the 67.5 calls have the best Alpha of all the slightlys though their Intrinsic vs. Extrinsic ratio is a little worse.  BUT, they expose to only 13c more of Extrinsic in total.  So, what’s the best pick here?  A very tough call because 64
Delta calls aren’t bad either and they’re less costly on a dollar basis.  It can come down to other factors such as available capital, confidence in the trade (perceived riskiness), etc.  When it’s this close and there aren’t technical factors at work, the higher Alpha option might be the pick which in this case would be the 67.5 calls by a slight margin.  After all, they only have 13c more Theta to lose in the end and within $1 of positive movement they’ll be about 77 Delta.

In stocks that do not offer so many strikes for our consumption, consider calculating Alpha to help narrow down what slightly in the money strike may work best for you.

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

Have a great week!

The Advantage Point Team