• This Week's Trade Ideas:
Bullish: Dollar Tree.> DLTR– Buy the May 19th 81 Calls for $2.75 or less with a close or anticipated close above $83.25 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)
AstraZeneca ADR.> AZN– Buy the June 9th 30 Calls for $1.50 or less with a close or anticipated close above $31.10 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)
Bearish: GE – Buy the June 9th 29.5 Puts for $0.85 or less with a close or anticipated close below $28.80 in a down market with expectations for continued weakness.  (SPECULATIVE!)

• Market Overview:
To put things plainly, we’re very surprised by the lack of, and the extent of the lack of movement in the markets over the past few weeks.  The FED, the French election, the healthcare bill’s passage in the House, and disappointing earnings reactions to several big names releases have ALL failed to create ANY index volatility.  In fact, the VIX (the marketplace’s “fear gauge”) has hit a new low with quite a thud.

• Below the Radar:
There’s a lot to get to in this week’s “BTR” starting with another sign that things aren’t roaring in the economy…

• Options Academy:
We’re really opening a can of worms here this week in Options Academy but it’s for a good cause: To prevent extreme frustration and potentially, disaster!

AGAIN, How long can the lack of volatility last???  The eerie calmness persists…

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.  The narrowing of trading ranges and the lack of follow through by most stocks due to dead in the water indexes has left us with little in the way of “easy pickins”.

Regardless, 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.  As having the markets “wind at our backs” is greatly preferable, we publish these knowing that there’s no trend to seize upon presently.  Consider these ideas accordingly.

Bullish:

Dollar Tree.> DLTR– Buy the May 19th 81 Calls for $2.75 or less with a close or anticipated close above $83.25 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

AstraZeneca ADR.> AZN– Buy the June 9th 30 Calls for $1.50 or less with a close or anticipated close above $31.10 in an up market with expectations for continued strength in the indices.  (SPECULATIVE!)

Bearish:

General.> GE – Buy the June 9th 29.5 Puts for $0.85 or less with a close or anticipated close below $28.80 in a down market with expectations for continued weakness.  (SPECULATIVE!)

Outlook:

This is becoming historic folks!  Please see comments and links throughout this newsletter for more information with respect to the lack of volatility in the markets.  We need to go back more than a couple decades to find such a persistently lifeless environment.  With virtually no movement and very little in the way of trend, we’ll press on anyway.  However, we suggest attending the Advantage Point Morning Call webinar on Wednesday morning for appropriate technical coverage and commentary.

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 rather tentative ideas in VOD and HOG were both tracked and updated on Friday.  With the French vote looming, we discussed stepping aside unless investors held real conviction for the ideas.  Both stocks trended a little in the direction of our forecast, but with the historic lack of movement in the markets persisting, there wasn’t much to be had.

To put things plainly, we’re very surprised by the lack of, and the extent of the lack of movement in the markets over the past few weeks.  The FED, the French election, the healthcare bill’s passage in the House, and disappointing earnings reactions to several big names releases have ALL failed to create ANY index volatility.  In fact, the VIX (the marketplace’s “fear gauge”) has hit a new low with quite a thud:

http://www.marketwatch.com/story/wall-streets-fear-gauge-just-hit-its-lowest-level-in-24-years-2017-05-08

Of course, as the VIX has touched new lows, the major indices have scraped out new highs or are very close to doing so.  Given what technicals look like on “big picture” time frames, we’re not surprised by this attempt to push higher but the way in which it has unfolded has been extremely unimpressive in the sense that it has been such a weak push.  The lack of real, aggressive, day-long buying leaves us wondering how legitimate this move really is as we evaluate it.  It would appear that we will soon see if this rally is about to gain steam (finally!) or if a double-top might form (finally!).  There’s not much more to add beyond that.

We’re just about 1/3^rd of the way through May and there’s just not much to write home about…yet.  So far, this has to be one of the least volatile starts to a month in a very long time.  What makes this more fascinating is that Q1 was the least volatile quarters of the past 50 years.  Many long-time market observers are perplexed by the persistent lack of volatility in these markets despite the ample source material that’s lurking about.  For more on this, please see other sections of Advantage Point for links etc. that discuss this phenomenon, starting here: http://www.barrons.com/articles/the-least-volatile-quarter-on-record-since-the-1960s-1490994470

This Week’s Economic Calendar

The economic calendar is rather light this week with Friday providing the most impactful reports.  As we note many times this week, many larger, seemingly market-moving events and data points have barely nudged the indices so we’ll simply have to wait and see how things play out, if they play out at all!

There’s a lot to get to in this week’s “BTR” starting with another sign that things aren’t roaring in the economy:

It’s not just GM that’s experiencing slowing, many other auto manufacturers are in the same boat and so is last week’s bearish idea, Harley-Davidson, which can be seen above.  The US consumer seems to have hit a rough patch with respect to their “monthly payments”.  This is likely just a pause in consumer debt expansion but it’s becoming clear that consumers are fairly full at the moment.

Naturally, consumers do not consume in a vacuum, so US manufacturers are seeing it/feeling it too.  A graphic that puts last week’s factory orders release into perspective:

With indices wafting higher, we’re left wondering if consumers, autos, motorcycles, and manufacturing in general even matter???  All that we can determine to this point is that they have in the past:

As can be seen in the graphic above, correlations between the DOW’s performance and that of industrial factory orders has been solid over the course of time.  AND, just as with many other ostensibly important comparisons of late, equities have fully detached from historical precedent.  We’ve been following the “hard vs. soft” data divide for several months.  Soft data, consumer surveys and the like, have been the one silver lining with respect to the data stream.  We knew that something would have to give.  Either soft data would begin to rollover or the hard data (real economic output) would begin to jump.  The graphical update below “says it all”:

The euphoria that we saw in surveys and expectations has capitulated in a big way and so much so that it has effectively crashed below hard data readings in the graphic above.  The “odd line” out remains the SPX (S&P 500 Index).  With things taking a rather negative turn for the consumer and their employers, it follows that with the loss of optimism, there will be a loss of productivity:

Many commentators of late have, as usual, dismissed US domestic macro weakness as a non-issue by pointing to China and the expectations for a major pickup there after several years of less than stellar growth.  Unfortunately, things have just taken a rather ominous turn there and you can read all about it if you’d like, here:

http://www.zerohedge.com/news/2017-05-08/complete-mess-china-stocks-bonds-commodities-crumble-trade-data-disappoints

And for a high-profile expert’s take on it:

http://www.zerohedge.com/news/2017-05-03/kyle-bass-warns-all-hell-about-break-loose-china

Some may be thinking that yes, there are warning signs out there and Q1 was quite weak but we’ll bounce back in Q2.  Maybe…

The NY FED has been forced to drastically reduce their Q2 GDP forecast as can be seen above.  Things have dropped precipitously since late February.  Let’s not overlook the fact that commodities have been getting beaten up quite a bit lately as well.  Normally, a healthy commodities complex is a good sign that economies are firing and the converse is the case when they’re not.

With yet another week of BTR chock full of divergences and signs that things are rather shaky below the surface of new market highs, we must ask: What is keeping equity indexes aloft? It’s clearly not the macro data, domestic or international, so what is it?  The answers, while we can’t be sure, may be part what follows.

Is it good old-fashioned 90’s style euphoria??? It could be:

The S&P 500 P/E relative to the VIX has rarely been more euphoric than it is now.  This doesn’t mean that a crash is imminent of course.  It simply means that we’re chock full of euphoria based on an assessment of recent history.  But there are other factors…

For our money, earnings are a big, big reason why equities markets have remained buoyant.  We’ve commented on the earnings-rigging-game that Wall St. and their friends in financial media have perfected.  To be clear, we’re not the only ones.  For a closer look at what has “gone down”, check out this link and graphic and you’ll see that earnings have been trending lower for 5 years or so when the veil of shenanigans is lifted: http://www.marketwatch.com/story/the-earnings-recovery-is-an-illusion-2017-05-03

Also, if you often find yourself wondering how the biggest names continue to motor higher day after day, maybe it’s because they HAVE TO so that the “wealth effect recovery” is maintained.  They’re asking the top 5 to be workhorses of near-mythic capabilities but it’s worked so far:

http://www.zerohedge.com/news/2017-05-06/five-largest-stocks-account-42-nasdaq-and-why-goldman-clients-are-concerned

Most market participants view top stocks such as those named above as leaders.  If the leaders continue to lead, they’ll buy other stocks as well.  This works very well until the market’s leadership narrows and only a few stocks are “working”.  This worrisome form of narrowing normally is coincident with broad weakening in the economy.  We may be seeing this type of behavior as things currently stand.  However, the markets have yet to give way AT ALL.  They’re at ALL-TIME HIGHS in fact.  Why is it that we haven’t even witnessed a 7, 8 or 10% selloff though?  Wouldn’t it at least be natural for some investors to grow concerned and take some profits off the table?  That’s normal, historically at least.  But, we’re not in normal times and we’re certainly not operating in historically normal equities markets:

Can you spot a correlation?  That’s how you buy the dip!  But it with the BOJ!  Read more about the BOJ’s journey from central bank to hedge fund:

http://www.zerohedge.com/news/2017-05-05/bank-japan-bought-dip-over-half-time-last-4-years

We can hear it now: “OK, OK, so the central bank of Japan has bought up Japanese stocks like clockwork at key junctures.  What’s that have to do with the US’ or the EU’s or China’s markets?”

A quick Internet search will reveal that the BOJ has merely been mimicking its counterparts in Europe and China with respect to their stock markets.  Where it really gets interesting is in historically-neutral, low-profile Switzerland.  The home of everybody’s favorite banking intermediaries.  The Swiss just can’t enough long enough of US tech names, with a big add in Q1:

Rather than get on our own soapbox again with respect to CB’s goosing equities higher, we’ve pulled a few zingers from the piece that covers the activities of the Swiss (ostensibly):

“Yet while we are long beyond the point of debating the central bank intervention in equity markets (we do want to remind readers that until several years ago, it was considered "fake news" to even mention it, and those who accused central bankers of manipulating stock markets were said to be paranoid tinfoil basement dwellers), we want to point out that unlike the BOJ, which at least keeps its capital markets distortion local, the SNB, which likewise creates money out of thin air (then sells it for dollars in an attempt to keep the Swiss franc depressed) is actively resulting in even greater price distortions in the US.

While we doubt this will be investigated with stocks are at all time highs, we look forward to the Congressional hearings after the crash when the scapegoating and fingerpointing begins, and everyone is "stunned" to learn that central banks were responsible for blowing the biggest asset bubble the world has ever seen by directly buying stocks.”

To read more about the transformation of central banks from currency debasers to hedge fund players:

http://www.zerohedge.com/news/2017-05-06/mystery-central-bank-buyer-revealed-goes-q1-buying-spree

We must ask again, if things are so splendid, why are central banks continuing to imagine money into existence and then using it to buy stocks?  Is that the way out of the cluster-jam they’ve gotten themselves into?  If they foment long enough and strong enough will they be able to flip stocks back out to cover losses from toxic assets they elected to absorb?  We’re going to finish up BTR with several links that those that are concerned about such matters and the eerily placid surface being presented to us:

http://www.zerohedge.com/news/2017-05-08/goldman-last-time-correlations-were-low-was-just-financial-crisis

http://www.zerohedge.com/news/2017-05-08/citi-warns-volatility-surge-its-macro-risk-index-crashes-record-lows

http://www.zerohedge.com/news/2017-05-08/former-fed-governor-last-time-i-saw-such-uniformity-opinion-was-just-2007-crash

We’re really opening a can of worms here this week in Options Academy but it’s for a good cause: To prevent extreme frustration and potentially, disaster!

Trading the VIX, with options, sooner or later, becomes a subject that active options investors want to tackle.  This, rather unfortunately, is MUCH easier said than done.  In fact, it’s beyond the scope of Options Academy to cover this fully.  HOWEVER, this question has been bubbling up more and more of late.  This makes only too much sense as the VIX, with accompanying media coverage, plummets to lows not seen in over 20 years.  Everyone wants to get on the “buy low, sell high” express with the indices at all-time highs and oodles of significantly troubling issues being ignored by the markets as they whistle past those all-time highs!

Here’s the thing, you really, really have to nail the timing!

Let’s look at a stock-based example.  Let’s assume that today we buy Apple 140 strike calls out in October for about $17.00 with AAPL trading at $154.20.  Let’s assume that a few weeks go by and as May is about to close out, AAPL is trading at $170.00.  We know that our calls will have a minimum of $30.00 of intrinsic value at that point if we’d like to cash out.  That’s very clear to anyone that’s educated as to how options work.

Now let’s do the same thing but in the VIX options.  The VIX is currently at 9.95%.  If we buy the October 10 calls for $5.70 and the VIX shoots up to 30.00% in the very near future, we’ll have at least $20.00 of intrinsic value alone, right?  Unfortunately, that would be unlikely to be the case.

Notice on the graphic above the Implied Future level for October VIX options highlighted in green.  Those options are essentially trading on VIX futures for their underlying although that’s not technically the case.  To really make big money on this type of trade an investor would need those October VIX futures to rise dramatically.  What you see on the chart of the VIX when you pull it up on the OptionsHouse platform is the current/closest value for the VIX not October’s (at this point).  Check out May’s VIX options below:

As can be seen, they’re based on an entirely different future (so to speak).  If the VIX shot up soon these option values would likely spike much more relative to those in October.  This final graphic below probably best illustrates what’s going on here:

As can clearly be seen, the very near term VIX futures perform closest to the VIX index.  As the options on the VIX are essentially linked to VIX futures, we would need to catch the spike in the VIX with options contracts as close to the present as possible to realize the really big payoff.

This is not an easy subject to cover comprehensively.  Our goal here was to alert folks to the potential dangers of trading in products with less than a complete understanding of how they really work!

Have a great week!

The Advantage Point Team