• This Week's Trade Ideas:
Bullish: Vodafone Group.> VOD – Buy the May 19th 26 Calls for $.92 or less with a close or anticipated close above $26.60 in an up market with expectations for continued strength in the indices. (SPECULATIVE!)
Bearish: Harley Davidson Inc.> HOG – Buy the May 19th 56.5 Puts for $1.75 or less with a close or anticipated close below $55.65 in a down market with expectations for continued weakness.  (SPECULATIVE!)

• Market Overview:
As we write, the SPY is literally trading within 1c (.01, 1 Penny!) of where it had been last week at this time. Thus, it follows that our take hasn’t evolved all that much as a result.  We’re somewhat surprised by the lack of volatility given the number of items up in the air and the deluge of earnings reports released on a daily basis.  Normally, earnings season provides just the right stuff to move the indices around a good deal.

• Below the Radar:
In this week’s edition, we’re going to cover a little of the here and now but we’ve also included a few pieces on the back end that attest to the significant present and long-dated challenges that are mounting for the USA.  Let’s get going…

• Options Academy:
Last week’s Options Academy subject matter, using slightly in-the-money options during these seemingly riskier times, sparked solid discussion and feedback on the approach, nearly all of which was very positive.  We covered this technique towards the end of last weeks’ Advantage Point Morning Call.  This week, as emails were still coming in on the subject, we’re going to lay it out as clearly as we can with graphical assistance.

How long can the lack of volatility last?

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.  Current risks, pending earnings reports and cloudy technicals remain in place.

We’re still maintaining a “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:

Vodafone Group.> VOD – Buy the May 19th 26 Calls for $.92 or less with a close or anticipated close above $26.60 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

Bearish:

Harley Davidson Inc.> HOG – Buy the May 19th 56.5 Puts for $1.75 or less with a close or anticipated close below $55.65 in a down market with expectations for continued weakness.  (SPECULATIVE!)

Outlook:

We find ourselves in the midst of yet another dithering market environment, at least, in the short term.  This one may take the cake however.  Not only are we somewhat trendless at the moment, but even the intraday trading ranges have contracted dramatically.  The past week has felt a lot like holiday-esque trading to us; Open and go virtually nowhere.  With all due respect to Moms and Mother’s Day, we’ve never seen this type of pause at this time of the year before!  What is causing it?  Rumors continue to circulate that a healthcare overhaul vote could be scheduled with little notice.  Is that it?  It certainly could be but we can’t know for sure.  Earnings from a few of the biggest of the big are set to impact the markets imminently.  Will they do the trick for the bulls?  Will those reports launch the next leg higher?  It seems to us that many players may be waiting to key off of Apple and Facebook’s reports.  With so many factors at work, we suggest attending the Advantage Point Morning Call webinar on Wednesday morning for appropriate technical coverage.

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:

Our HAL idea never triggered.  It had a shot just after we covered it as it flirted with trading above $47.25 but it fizzled out later that day along with the energy complex and much of the underlying market for that matter.  We’re fine with that for now as our neutral-ish take on the market has proven to be about right.  The major indices aside from the NASDAQ are virtually unchanged from last week’s levels.

As we write, the SPY is literally trading within 1c (.01, 1 Penny!) of where it had been last week at this time. Thus, it follows that our take hasn’t evolved all that much as a result.  We’re somewhat surprised by the lack of volatility given the number of items up in the air and the deluge of earnings reports released on a daily basis.  Normally, earnings season provides just the right stuff to move the indices around a good deal.

The only new technical data we have to process is that things have been “flat” for a week:

We’ve placed a yellow dot on either side of the action we’re referring to that developed over the past week.  This lack of action after several gaps higher that included many small candles is typically indicative of a short squeeze that just won’t back off and give shorts a chance to cover at lower levels.  Trump’s “first 100” hoopla has come and gone and we have a new bloated budget agreement.  The French election will be held soon and the “calming presence” candidate seems to have the upper hand.  Earnings have been rolling out in a big way and will get REALLY BIG this week with hundreds of reports being released nearly every day.  As earnings typically get spun very positively, we’re forced to ask: “What’s not to like if you’re a bull?”

Q1 GDP was abysmal and a huge disappointment given the original 3%ish forecasts we saw 6 months ago.  The political sphere has delivered more gridlock and many hoped-for Trump policies are derailed for the time being.  Despite all these factors, historically high valuations, interest rate increase threats from the FED, and geopolitical turbulence, the indices have either made new all-time highs or are within a stone’s throw from doing so.  But, why?  Why aren’t all of them higher and breaking out?

Are we seeing a double-top or triple-top(ping) process or will we soon see a burst higher to begin a breakout that will produce another sustained leg higher?  That’s the question we’re asking ourselves right now.  With the “bigger picture” charts being “saved” last week we’re still more inclined to expect more upside but the operators really seem to be drawing things out this time around.  Are bulls tiring of from feasting on debt-fueled stock buy backs and rising dividends?  Has the financial engineering hopium reaction plateaued?  We seriously doubt it!  This may just be a lull them to sleep pause but we can’t be close to certain with VIX threatening to plumb single digits (contrarian) and the aforementioned geopolitical issues still festering.  Normally when stocks are great technical buy it is hard to buy them.  This hasn’t been the case at all.  We can buy mostly anything we’d like, save for a few mainly tech names, at nearly the same prices registered last Tuesday.  This bullish action remains curious in nature for us.

The past week of tedium has likely kept many players on the sidelines waiting for either a failure or a surge higher.  We remain in that camp as well but the lack of action allowed us to dig this graphic up:

This is the time of year where we’re treated to the “Sell in May and go away?” question a few thousand times per week courtesy of the cliché-loving financial media.  The monthly historical performance guidance popularized by the Stock Trader’s Almanac is what it is.  There’s no dispute here as to its accuracy but notice how May’s historical performance, while normally underwhelming, is very strong in Year 1 of a new administration.  Could this be one of the key reasons why bulls are simply biding their time?  We will see soon enough…

This Week’s Economic Calendar

We have a fairly active economic calendar this week that could be used nearly every day to provide thrills and chills for investors but as we’ve noted recently, it’s hasn’t been economic performance that’s moved markets.  Much of the data of late has been on the weak to weaker to weakest side of the equation yet we’re within 1% or less of all-time highs in the main indexes.  We expect economics to remain in the back seat until further notice.  It seems like the bulls have other resources at their disposal that they prefer to use to march higher or to prevent selling of any meaningful degree.

In this week’s edition, we’re going to cover a little of the here and now but we’ve also included a few pieces on the back end that attest to the significant present and long-dated challenges that are mounting for the USA.  Let’s get going…

One key point of discussion that’s only amounted to “talk” since Trump’s election has been the repatriation of overseas dollars that are currently held by US corporations.  The consensus take on this has been that it will dramatically boost growth prospects as this capital finally returns home once the corporate tax rate has been slashed.  It sounds good and sort of makes sense but how good will it be, really?  Do we have precedents that we can analyze to get an idea on what’s likely to occur?

Here are a few key excerpts from a piece we came across late last week.  Unfortunately, it appears that we may have to mute our expectations:

“However, as The Congressional Research Service's detailed study of the last time this was enacted in 2004 shows, the program had little effect. The program was part of the American Jobs Creation Act.

The hope then, as now, was that companies would shovel that money back into the economy in the form of investment and job creation. As CNBC's Jeff Cox notes, it didn't quite work out that way.

Contrary to the intent, the benefits skewed toward a select few companies in a select few industries. Rather than use the money for hiring and capital purchases, companies plowed the cash into share buybacks and dividends, and many of the biggest beneficiaries actually cut American jobs in the years after the repatriation.”

And here’s the not so sanguine conclusion:

“So, to summarize - a yuuge overseas cash repatriation 'deal' is "an ineffective means of increasing economic growth," but will benefit a select few companies in a select few industries who can further lever up their balance sheets, buy back more shares, and transfer wealth to their already wealthy shareholders (and we know how well that has worked out for Main Street in the last 8 years)”

If you’d like to read all the details click here:

http://www.zerohedge.com/news/2017-04-27/what-happened-last-time-companies-got-tax-break-overseas-cash

Here’s yet another “valuations” piece with a slightly different take than what we’ve seen of late.  This one suggests that investors party like it’s 1997 as opposed to 1999.  Some believe there’s 20% more ride to take to the upside before we’re really in the danger zone.  It’s a quick read so we’ll leave you with a graphic and the link just below:

https://mishtalk.com/2017/04/27/dont-worry-its-only-1997-besides-its-different-this-time/

Not that it’s actually mattered, but our Q1 GDP concerns turned out to be well-founded:

http://www.zerohedge.com/news/2017-04-28/us-gdp-tumbles-just-07-lowest-three-years-worst-personal-consumption-2009

Diving into it, this is what we found to be most interesting:

“But the biggest culprit for the atrocious GDP print was the collapse in consumer spending, which rose at just 0.23% annualized, the lowest increase since 2009, and reflected an increase in services offset by a decrease in motor vehicles and parts. In short: for whatever reason, spending in the first quarter imploded.”

As many know, consumer spending is supposedly 2/3rds of the economy.  So how bad was it within historical context?

PRETTY DARN BAD! (As we expected) AND, the trend is very ugly to boot.  So, what gives here?  How can this consumer-ugly Q1 make sense given this?

As can be seen, consumer confidence is raging higher, by some measures it’s now as high as it was in 2001.  We’re seeing the highest high in nearly 16 years yet the consumer almost skipped Q1???  Once again, we have a very stark contrast between soft data/consumer expectations and actual performance and behavior.  Maybe wages are picking up?  That would explain it right?:

NOPE!  Real wage growth, while it rebounded nicely of late, has actually gotten smashed for the past 2 years as the NDX and consumer confidence levels have ramped higher.  We have Bloomberg’s data above so how about using the U of M data vs. Personal Consumption:

It’s just about the same.  Folks are retrenching as they’re building their optimism.  Americans are notorious for having short attention spans.  How long will this optimism last if DC succeeds in being DC and they’re able to continue to stall Trump’s agenda which seems to have many Americans jazzed with respect to their future prospects?

With all the talk of late with respect to Trump’s “First 100 Days”, we thought it would be appropriate to include this graphic just on the heels of the disappointing Q1 performance in the economy.  The indices have remained buoyant but the real economy, it would seem, needs to turn around in a big way and soon:

As can clearly be seen, something has got to give!

We’re going to begin to wrap up here this week with a few “quick hits” that cover the declines we’ve seen but from different perspectives.  We’ll start on Main Street USA.  As we’ve referenced this type of material many times of late, we decided to include this brief snippet and link for those that wish to read on.  This is a rather acerbic piece that laments that deterioration of Main Street USA among other things American.    We warn that some of the language is NSFW and the content is quite bleak:

“I live in a corner of Flyover Red America where you can easily read these conditions on the landscape — the vacant Main Streets, especially after dark, the houses uncared for and decrepitating year by year, the derelict farms with barns falling down, harvesters rusting in the rain, and pastures overgrown with sumacs, the parasitical national chain stores like tumors at the edge of every town.”

Here is the link that we edited to acquire a PG-13 rating: thenationalblues

As a companion to the national blues, compare and contrast the plight of Main Street USA vs. Wall St. Banksters.  One party has rarely had it worse while one party has never had it better.  And remember, this comes after the 2008-2009 crash that Wall St. and the FED helped to bring about.  Is it a coincidence that one street is failing while the other flourishes wildly?  Before reading the following essay do realize that this group is “arguing its book” but that may not make their key points any less valid.  Ask yourself if these actions are ones that would be taken by a neutral, apolitical organization’s members:

“Earlier this month, Richmond Fed President Jeffrey Lacker was forced to resign after admitting that he leaked confidential information to the financial press. And Fed Vice Chairman Stanley Fischer just gave a closed-door meeting to high level industry insiders.

Are Fed officials brokering info under the table? If so, what does that mean for Americans?”

http://www.birchgold.com/news/fed-throwing-main-street-under-bus

On a related note, we’ve also recently discussed “Peak America”.  Our personal estimate as to when things peaked collectively was approximately 50 years ago.  It would seem that our research and intuition may have nailed one for a change (regrettably).  This is a very Detroit/Auto Industry focused essay that uses that city and that sector to make its point:

http://stockboardasset.com/insights-and-research/detroit-reminder-peak-america-50yrs-ago/

If you’d like to get a little deeper into the “whys”, as in, why the reflation game the FED’s been playing for the past 8 years isn’t working for 50% of Americans, we suggest you spend a few minutes visiting this link:

https://mishtalk.com/2017/04/30/economic-reality-bottom-50-of-americans-no-longer-matter/

Finally, and briefly, we’ve discussed the “gaming and capturing” of America a bit in our recent Tuesday and Thursday evening discussions.  This has prompted a lot of feedback since it would seem that many are growing concerned in light of the lack of real progress within the country over the past 25 years or so.  For many it has gotten out of control and can thus be summarized with this line: “The interests of Washington and large corporations have merged so completely they are now inseparable.” For further reading on the subject we’re furnishing this link:

https://straightlinelogic.com/2017/04/28/the-corporatocracy-by-robert-gore/

Last week’s Options Academy subject matter, using slightly in-the-money options during these seemingly riskier times, sparked solid discussion and feedback on the approach, nearly all of which was very positive.  We covered this technique towards the end of last weeks’ Advantage Point Morning Call.  This week, as emails were still coming in on the subject, we’re going to lay it out as clearly as we can with graphical assistance.

As can be seen above, we’re going to use Schlumberger’s May 19^th expiration calls for our example.  The standard approach when switching to options investing from stock investing calls for using stock replacement calls.  We’ve highlighted an idealized stock replacement call on here with the RED overlay, the 67.5 strike.  They provide us with 85 deltas with an outlay of (mark column) $4.20 per share (x 100), so $420.00 per contract to control 100 shares of stock.  This a good way to get stock-like performance but with the smart leverage that options provide.  It should also help a stock investor to feel comfortable using options and helps new-to-options folks largely avoid options pitfalls (theta & vega risk).  This is all well and good when the markets are on very solid footing but when things become riskier, as they seem to have of late, we’ve explored using the slightly in-the-moneys instead.  Our argument for doing so follows.

Notice the 70 strike that we’ve overlaid with a green bar.  It’s marked at $2.10 so it’s exactly half the cost (capital at risk) of the 67.5 strike referenced above.  Remember, we’re trying to stay in a market that we don’t trust as much as we’d like to and by utilizing this type of slightly, we’re able to do that but remain comfortable as we’re risking half of what we normally would.  In this case, we start out with only 67 deltas but notice the gamma too, it’s nearly 11.  This means that all other things being equal, if we get into this idea in SLB with this call option, and we’re right for just $1.00 of upside movement, our gamma will help the delta of our call grow to about 78.  That’s right!  After just $1.00 of being on the right side of this we will nearly be realizing the payout of the oft-mentioned stock replacement (80-90 delta) call.  If we’re right for another dollar of movement then our call will be approaching nearly 90 delta thus we will be receiving a payout from .85 to .90 per dollar movement in the stock price to the upside which is obviously stock-like performance but on the cheap!  We are OK with waiting for gamma to give us the boost to that level of payout in markets we do not trust that are very news driven and thus less predictable.

On the other side of the coin is the downside. We will actually lose less if we have a poor entry on the trade.  We start out with lower delta and higher gamma with our slightly than the stock replacement call player does so we simply lose less and ultimately can only lose half of what they would if all Hades were to break loose.  Remember, we only paid $2.10 to their $4.20 outlay.

With options selection, there are many, many ways one could go but by keying in on the perceived riskiness of the market at a given time, that can serve as good starting point for which options and strategies to evaluate for utilization.

Have a great week!

The Advantage Point Team