• This Week's Trade Ideas:
Bullish: Glaxo SmithKline PLC ADR > GSK – Buy the June 23rd 42.5 Calls for $1.55 or less with a close or anticipated close above $43.70 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)
Bearish: Bank of America Corp> BAC– Buy the June 23rd 23.5 Puts for $1.00 or less with a close or anticipated close below $22.80 in a down market with expectations for continued weakness.  (SPECULATIVE!)

• Market Overview:
Last week unfolded just about the way we speculated that it could/would.  Normally, we see rallies into major American holidays and this week was no exception.  “But, now what?” – is the question were asking ourselves…

• Below the Radar:
Let’s get started on the bright side!  30-year mortgage rates are at 6 month lows after dropping in the wake of rather poor news in the housing markets last week. With rates lower, that should make it easier for the increasingly fewer folks that are chasing home prices higher to continue to push price levels up even as things deteriorate below the surface in housing (sound familiar?).

• Options Academy:
Thoughts on Rolling in AIG… AIG was our lone idea that triggered last week.  We sent an update on Friday that may have left some wondering why we didn’t mention rolling up or possibly up and out, especially since we discuss how important it is quite regularly.  A lot can be involved when it comes to deciding to roll.  We’re going to go somewhat in-depth with respect to this non-rolling example in AIG in hopes of shedding some light on our thought process. We’ll discuss why we didn't roll and what would prompt us to roll.

Technical breakout or fake out?

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:

Glaxo SmithKline PLC ADR > GSK – Buy the June 23rd 42.5 Calls for $1.55 or less with a close or anticipated close above $43.70 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

Bearish:

Bank of America Corp> BAC– Buy the June 23rd 23.5 Puts for $1.00 or less with a close or anticipated close below $22.80 in a down market with expectations for continued weakness.  (SPECULATIVE!)

Outlook:

We’ve moved slightly above the top of the ascending triangle we spoke of last week.  With the indices in day 7 or 8 of rallying, can it sustain?  Banking sector looking vulnerable.

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, CF and CTL were disappointing as they never triggered even though the indices moved higher.  AIG triggered and moved up solidly but unspectacularly.  It needed more push from the indices we’d assume and that simply didn’t materialize.  It touched just under $64.00 and we’ll have to see if it can continue.  We sent out an update on it last Friday.

XRT, our bear idea, never triggered.  It lifted somewhat from the support level that we identified as potentially very strong.  It could be interesting again if it rolls over again in tandem with the markets.

Last week unfolded just about the way we speculated that it could/would.  Normally, we see rallies into major American holidays and this week was no exception.  “But, now what?” – is the question were asking ourselves:

As can be seen on the chart of the SPYs above, we finally witnessed a breakout/new highs in the SPYs but it was on extremely low volume and with little push behind it.  We’re now many days “UP” in our time count as well and due for a little consolidation…or more.  “Not exactly full of conviction” – that’s the conclusion at least at this stage.  We’re going with it for now and the bigger picture charts are still intact and looking just fine but we’re also on guard for a false breakout.  Volume analysis isn’t what it used to be but it’s becoming absurd in a way.  Very little new buying accompanies the moves higher on the charts these days.  Prices just levitate higher absent strong demand in the form of significant volume totals.  You can’t always get what you want however!  Which is why we “go with it” yet are prepared to roll, hedge or close when the situation calls for it.  We’re committed to remaining NIMBLE!

This Week’s Economic Calendar

Quite a bit of what are usually important releases this week.  Tuesday is heavy but the rest of the shortened holiday week is power-packed too.  Will the markets once again pay attention to economic news?  It’s been a while since it seemed to matter but we have a hunch that this week could shift the focus back to news and away from whatever has been the focus for the past month or so.  We’re supposed to “go away” now if we listen to the “Sell in May, go away” crowd but we found a graphic that purports to show post-presidential-election year monthly returns and…:

Well, as is clear, the summer months which are normally “nothing special” to say the least, are actually quite good in Year 1 of a new administration.  Is this historical seasonality helping to keep hope alive?  We’ll soon see as summer is unofficially here…

There’s quite a bit of international data set to come out this week as well.  As much of the current hype has been built on European and Asian improvement (as Q1 USA was poor), look for those areas to receive attention from the media especially if the news is “surprisingly good”.

Let’s get started on the bright side!  30-year mortgage rates are at 6 month lows after dropping in the wake of rather poor news in the housing markets last week.

With rates lower, that should make it easier for the increasingly fewer folks that are chasing home prices higher to continue to push price levels up even as things deteriorate below the surface in housing (sound familiar?).

Say… that looks a lot like equities markets vs. macro-economic performance!  Moving on…

Personal income and spending were recently spun as positives since April came in better then March.  What about viewing things with a little more perspective…how are they say compared to a year ago?:

Much like other measurables (just below), personal spening and income are both retreating from their post-election pop highs.  But hey, why bother reporting on that since all it will do will be to provide proper perspective!

Folks have reined themselves in a little in terms of spending likely due to their incomes dropping.  Naturally, as these are not positive developments, this would seem to be on point:

Confidence remains high but is it starting to give way?  Consumers are fickle lot…

Hard macro data is much less fickle.  It never really launched with the “Trump Pump” and now, as can be seen above, the Soft macro (survey-type) data is dumping hard.  It’s already more than half way back towards closing the gap with the hard data.  Although we’ve continued to discuss the hard vs. soft dilemma for some time, we felt compelled to update it with the most recently published graphs we could find.

We’ve covered the retail apocalypse quite regularly as well.  BTR readers are well-aware of the retailers that are in heavy closure mode and to what extent.  But there’s always a yang for a yin and in this case that “yang” is Dollar General and that’s just about it in terms of “bricks and mortar” hope:

http://www.zerohedge.com/news/2017-05-27/dollar-general-accounts-80-all-new-store-openings-us-year

Hey, at least something is growing!  Unfortunately, this is a good place to pause to contemplate what this may mean.  DG must envision growth, one would think, if they’re about to ramp up their build out.  Things may be looking good for DG but what does that portend for the US worker/consumer?:

http://www.zerohedge.com/news/2016-12-01/dollar-generals-startling-admission-half-us-consumers-are-feeling-more-dire-ever

It may be 6 months old but that’s not too old!  Here’s a depressing snippet from the piece:

I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that's out there, that demographic, things have not gotten any better for her, and arguably, they're worse. And they're worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip.

More evidence that the so-called recovery has been selective.  Savers and lower income workers have been and remain punished by progress.

We’re going to start wrapping up things with several choice snippets, a graphic and a link to a great piece that we came across today.  This will certainly be about as contemporary as it gets!  We’re excited to present this material mainly because it’s our own!  (Just kidding, but it could be given how closely this take matches our own) Keep in mind that this comes from an investment management veteran that raised big bucks from investors LESS THAN 4 week ago…:

“… it is safe to say he won't be using any of that cash to buy stocks at current prices, or even BTFD. Instead, as he writes in his Q1 letter to investors, the legendary hedge fund manager thinks "that it is a good time to build a significant amount of dry powder"

The reason for that is if, or rather when, Trump's pro-growth agenda fails to be implemented, "all hell will break loose" and that a recession looms as the artificial crutches propping up risk assets are pulled out:

Given groupthink and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like...), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.

YES, we “bolded” the entire paragraph because it’s pure gold!  As is the next paragraph that followed and the graphic that followed it:

Isolating the impact of the "Trump Put" as described recently by Deutsche Bank, Singer writes that "although the growth agenda of the Trump administration is slow to get off the ground, markets still anticipate that much of it will be enacted, sooner or later." And yet, according to most metrics, the Trump trade has already been priced out of most markets with the notable exception of equities, which as Bank of America pointed out in a note last week, are now the "last one standing".

Here’s the link for the full read: http://www.zerohedge.com/news/2017-05-30/paul-singer-warns-all-hell-will-break-loose

To be perfectly clear, it’s quite simple, he’s raised money now so that after all hell breaks loose, his fund can feast on much better value propositions.  Not exactly a vote of confidence in the near-term future but not long term apocalyptic either.  We like it!  Final snippet:

So what is Singer's advice for today's investors? In a time of historic market complacency, Singer believes that "the trick in such periods is to keep out of trouble.” Eventually the markets wake up, and when they do, that's when "all hell will break loose." When that moment comes, Singer is confident he will be ready.

It depends on where you look and for how long but still though, things are improving, right?  That’s what the media reports and that’s what the parade of experts on CNBC says.  Of course, there’s no doubt that’s been the official message for 8 years and counting.  One would think that with things improving, the markets rising and low unemployment, (or so the stories go), the pension funding situation would be a part of the mix, no?  NO!  It’s actually gotten worse, much worse!  Those “hapless” pols have been at it again.  Over-promising and under-delivering!  How bad is it?  BAD!:

Above are just a few graphics from the link just below.  It’s worth the read if you’re one that’s concerned with respect to the long term.  If you are, consider yourself a dying breed as most taxpayers have been rolled by the government so frequently that their numb at this point!  On the bright side, what’s $400 trillion between countrymen?

http://www.zerohedge.com/news/2017-05-26/global-pension-underfunding-will-grow-400-trillion-over-next-30-years-world-economic

The graphics above may seem a little “international” in their flavor.  If that’s the case for you and you’re a glutton for punishment, have a looksee at the specifics of the approaching American disaster.  Taxpayers are on the hook more than ever and most have no idea what the government will need to extract from them in the future.  California’s taxpayer future, in particular, is pure pain:

http://www.zerohedge.com/news/2017-05-24/six-terrifying-graphs-simplistically-summarize-americas-public-pension-crisis

Finally, if you haven’t already lit out to the local watering hole, here is a link to the last missive from a 47-year veteran that’s seen it all and had enough.  In short, he sees things as broken: http://www.zerohedge.com/news/2017-05-28/after-47-years-stephen-lewis-calls-it-quits-scathing-critique-modern-markets

And, he’s not alone.  Here’s a “2 and 20” guy, throwing in the towel or whatever it is that they throw in Australia at times like this: http://www.zerohedge.com/news/2017-05-29/market-crazy-hedge-fund-returns-hundreds-millions-clients-citing-imminent-calamity

Thoughts on Rolling in AIG

AIG was our lone idea that triggered last week.  On Friday, we sent out this update:

AIG, our only stock that triggered this week, followed through a little more for us today despite the markets trading very near unchanged for most of the day.  It's normally a good sign when a stock outperforms in a listless market.  It touched just under $64.00 in earlier trading and that would suggest more strength could follow if it closes near that high or better yet through that high. Had the indices powered higher today, it would be very easy to simply wait on AIG. 

Not knowing if this market breakout is real or fake makes things a little tricky here as it's probably not ideal to roll up at this juncture.  For these reasons, conservative players could take respectable profits at these levels or "partial" their way out of some call inventory by selling a third or half of their contracts. 

Those that want more from this trade idea shouldn't be dissuaded from holding on longer as the stock has acted well and if it closes the week well there's not much to complain about!  The indices, post-holiday weekend, are a different story; potentially.  How they act next week is the unknown since the follow through we'd like to see hasn't materialized.  There may be a little resistance at $64.90 and near $66.00ish too but either of those levels would represent good spots to "bank and roll" should AIG continue to act well.

We highlighted the middle paragraph because it may have left some wondering why we didn’t mention rolling up or possibly up and out, especially since we discuss how important it is quite regularly.  A lot can be involved when it comes to deciding to roll.  We’re going to go somewhat in-depth with respect to this non-rolling example in AIG in hopes of shedding some light on our thought process.  First, let’s cover a few reasons why we elected not to roll before getting into what would prompt us to roll.

Why We Didn’t Roll

1. Although the stock acted well, actually performing better than the indices in percentage terms last week, it didn’t ramp higher. In other words, we were up nicely for a 3-day trade but it wasn’t a windfall.
2. It backed off late on Friday afternoon but it managed to close at its highest level in some time and it eked out a close ($63.55) above the May 4^th high of $63.48. This was a positive technical sign for sure but the fact remains that it backed off from the $63.90 level that it touched earlier on Friday.  That made rolling more difficult because we weren’t up as much in profits with respect to our entry as we hoped.
3. Any reasonable roll-up strike in the near term would have produced even more loss due to decay (theta). Not an intriguing prospect when we consider the long holiday weekend.  This made it easier to be patient and avoid 3 to 4 days of theta by postponing our roll until this week.
4. The stock hadn’t gotten just above or hovered at the key resistance level at $64.00ish that we identified. The late day back off removed that as a consideration since it took nearly 1/3^rd of the stock’s positive movement away from us since entering.  Normally, in a supportive market, stocks tend to make more than 1 attempt to test key technical levels.

Things were working well from a technical perspective.  Nice volume, much nicer than the SPYs (see above), accompanied the rise in AIG.  It may have an inverted Head & Shoulders pattern working for it bullishly.  It respected $64.00 but still hadn’t made it to the stronger resistance we expect to hit near $65.00 (horizontal green line).  It’s not close to the top target area of $66.00 (horizontal red line) which would theoretically provide stout resistance while also serving to close a gap.  The orange arrow serves to highlight the point where AIG may have bottomed and started to convert from a downtrend to an uptrend.  These positive factors helped us to remain a little more patient with respect to rolling while also making it clear that we hadn’t moved up enough quite yet.  We believed that there was likely more to come in AIG if the indices would allow it.

What Would Prompt Us to Roll  

If AIG were to rise to $65.00, that would mean not only very nice profits but it would also mean that we’re now back to a price level that the stock tried to rally through 3 times before failing!  We’d have to respect that level, since the stock has in the recent past, and as a result, we’d roll up in case $65.00 proves too challenging, at least for the time being.  We’d be up well more than double at that point in profits so we’d really be “banking and rolling” in the sense that we’d have significant profits (especially given the short duration of the trade to this point) to protect but we’d also realize that the market’s recent rally was aging as was AIG’s.  We’d have moved “quite far, quite fast” would be another way to view matters.  A question arises:  Why not just take profits and exit?  A question as the reply: Well, with all things still working well, why cut and run?  We shouldn’t give up so easily on something that’s working out nicely but not nice enough to roll up after having banked the big money without giving things a second thought.  That’s why we’d stay in but AFTER having rolled up and possibly out; we still expect more.  If AIG blasted all the way to $66.00, at that point we’d have the highly coveted “no brainer” roll on our hands.  Our trade would be up over 200% at that point and everything we just noted about the $65.00 roll would still apply and in some cases even more so!

At the end of last week, we suggested that folks consider closing out a respectable winner or selling out some contracts not knowing what this week would bring (for certain) and because there just wasn’t enough profit at that point to justify rolling into heavier theta in front of such a long holiday weekend.

Just as with charting, options strategy selection, and stock selection etc., rolling concepts can be rooted in solid logic but there’s an art component to factor in as well.  Many other factors could have played a role in our decisions last week with respect to all things AIG.  Although we see patterns and behaviors repeat somewhat consistently in the markets, there’s always a uniqueness to each day’s particular trading considerations.

Have a great week!

The Advantage Point Team