Advantage Point Newsletter - November 21st, 2017
• This Week's Trade Ideas:
Bullish: Hologic Inc. > HOLX > $40.60 Last. Buy the Dec. 15th 39 Calls for $2.35 or less with a close or anticipated close above $40.95 in an up market with expectations for continued strength in the major indices.
Bullish Mentions: IRM, ATHM, SYNA, XLV, TIF*.
Bearish: Oracle Corp. > ORCL > $48.60 Last. Buy the Dec. 15th 50 Puts for $2.00 or less with a close or anticipated close below $48.50 in a down market with expectations for continued weakness and what would be surprising weakness in the major indices as well.
Bearish Mentions: ADI, CCE.
• Market Overview:
Once again, the SPYs remain all we need this week since the complexions of the other index proxies are very similar. Yes, we're celebrating in near lock-step.
• Below the Radar:
It's a shortened trading week and thus a shorter BTR would seem in order. We'll keep it long in graphics.
• Options Academy:
This one-note market is lulling everyone to sleep as it plods higher. With nice moves only seeming to regularly occur on earnings-speculation or news, we've been getting more questions about vertical spreads. After all, aren't they a good fit for this market environment? It's hard to argue against that but we'll probably do that any way! Let's look at a few bullish varieties and then move on from there.
Snoozing our way to New All-Time Highs...
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.
All the support levels that we seemed to see of late, seemed to "work". Once again, the selling was halted fairly-easily, just a little below the $256.00 level in the SPYs that we deemed important. With that, the gang is running things up again in what may be the early stages of "saving November" and putting the best face forward just in time for Thanksgiving, as we've alluded to as "likely" recently. This also may be the early stages of picking up the little reward that seems to be left in current technical picture while predictably ignoring the downside risk that appears to be much greater. But, that's what FED engineered equity markets do...
Bullish Ideas:
Hologic Inc. > HOLX > $40.60 Last. Buy the Dec. 15th 39 Calls for $2.35 or less with a close or anticipated close above $40.95 in an up market with expectations for continued strength in the major indices.
Bullish Mentions: IRM, ATHM, SYNA, XLV, TIF*.
Bearish Ideas:
Oracle Corp. > ORCL > $48.60 Last. Buy the Dec. 15th 50 Puts for $2.00 or less with a close or anticipated close below $48.50 in a down market with expectations for continued weakness and what would be surprising weakness in the major indices as well.
Bearish Mentions: ADI, CCE.
Outlook:
A tough, holiday-centered and shortened week awaits us. The slow-motion low and slow melt-up remains intact with even the best bullish gains being achieved via overnight or early morning futures jam jobs. Thus, things remain challenging as the gang continues to grind volatility practically out of existence. All we can do is try and that's what we'll do! It may stay this way for a while so we have no choice but to contend with it as best we can even if it leaves us frustrated and wanting more. Which, it most certainly does!
Technicals:
Will be discussed in-depth in the Advantage Point Morning Call webinar.
Fundamentals:
These trade idea(s) and mentions 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:
Last week was a disappointment much like the market's actions were a disappointment. Last week we said this:
This may be one of the most congested charts we’ve ever chosen on which to focus but it is only because we must. There’s almost more support that we count near the $256.00 level and several other levels just below there. It would take something VERY substantial to push the major indices below these various nearby support levels. It’s possible but frankly we’d be surprised if it happened without major news to back the selling. The other major indices currently show a very similar complexion hence the SPYs are all we need. It’s most likely that they hold this initial time down and then rally from here and we’ll see where that takes us…
And with that, went our bearish ideas and mentions in X and OLN respectively. In the "hold on support the first time down" market environment we witnessed last week (as anticipated), these two names never had a chance to fire. We tried to find both bears and bulls so that we'd have something to latch onto regardless of which direction the markets chose.
However, the bullish side was just as forgettable unfortunately. In trying to "thread the needle" with lower risk yet respectable reward names we really got a mixed bag that amounted to not very much of anything. Bullish mentions VOD and JACK went up and down respectively. JACK was upended after initially looking good by a firm downgrade of its price target from $120.00 to $117.00 and VOD just stalled after looking OK at the get-go. Idea SAVE is down slightly from the trigger price as we write yet it started out strongly and to add to the frustration, the XTN and the SPY did move up AFTER SAVE was moving up strongly WITHOUT them! Of course, that made sense as we believed they were oversold.
From last week:
(Warning: The transports haven’t been working lately (XTN) but are oversold. This idea would require the XTN and the major indices to be moving back up to support SAVE. ... in an up market with expectations for continued strength in the XTN and the major indices. If the market’s unending rally is to continue, and the economy is improving as we’re told, the transports will need to start confirming that by moving back up.)
We can't say for sure why SAVE became hung-up especially after making a new recent high but it should be doing better and hopefully soon will. If it doesn't respond to the upside soon, we won't give it too much time beyond that to hurt us. (Maybe next time we'll just buy SPY and XTN calls too! 🙂 )
Once again, the SPYs remain all we need this week since the complexions of the other index proxies are very similar. Yes, we're celebrating in near lock-step:
We're still really congested but take a look beyond that to the green arrows showing recent support and the likely target just over 1% higher should the pre-planned Thanksgiving levitation rally move higher. That's about it. This week is typically a very quiet and light one and that's about what we'd expect but "you never know" is something we must at least mention. There's no immediate worries on the charts and thus it would take news of a serious kind to cause any serious selling from where we sit.
We're back to a light calendar this week after last week's heavy calendar. The calendar is fitting for this week and Wednesday appears to be the biggest day to send traders off in style to the Hamptons. The FOMC rarely disappoints when it comes to lifting equity markets so to do so in front of Thanksgiving would truly be a shocker.
It's a shortened trading week and thus a shorter BTR would seem in order. We'll keep it long in graphics.
Last week was largely about how the FED has destroyed so much, courtesy of Chris Hamilton. This week will faintly echo that sentiment. We'll start with: https://economicprism.com/how-uncle-sam-inflates-away-your-life/
Not a pleasant "holiday-esque" topic but this IS Below the Radar, or was, last time we checked. This entry is much more compact than Hamilton's was last week and is a quick read but we must include this part:
As more and more money is issued relative to the output of goods and services in an economy, the money’s watered down and loses value. By this account, price inflation is not in itself rising prices. Rather, it’s the loss of purchasing power resulting from an inflating money supply.
Because that's exactly what we've been saying! And for a long time! Check out the DOW priced not in the intentionally ever-devaluing USD but rather in the price of Gold:
Looks a little different doesn't it???!!! It's all a great deception which brings us to this graphical cutaway from the piece as it brings mention to our old friend John Williams of ShadowStats and his old ways that we long for:
We couldn't stop ourselves from adding the shading. Is it any wonder that so many fall so far shy of a comfortable retirement even AFTER doing the "right thing"? This is criminal but the criminals are running the joint so we can't do much about it as things presently stand. This will finish things for now before we move on:
How Uncle Sam Inflates Away Your Life
We doubt that the dollar devaluing effects of price inflation is a new concept for you. Most likely you’ve heard this many times before. Certainly, you experience it as you go about your business.
However, this stealthy destruction of your wealth bears repeating. The fact is over the course of your retirement half of your life-savings will be covertly confiscated from your bank account. We find this to be wholly intolerable.
We'll now include a recent snippet from a John Crudele piece that introduces John Butters of FactSet:
https://nypost.com/2017/11/20/why-wall-streets-record-run-may-soon-come-to-an-end/
According to FactSet’s John Butters, the earnings of companies in the Dow were substantially lower when reported on a Generally Acceptable Accounting Principles (GAAP) basis. GAAP is no-cheating accounting.
Butters says that 70 percent of the 30 Dow companies reported earnings in a non-GAAP — non-traditional — way.
To put it more simply, a lot of companies have been cooking their books. And Wall Street couldn’t be more thrilled — at least until Judgment Day for the market, when everyone will repent.
We don't want to kill the holiday mood so we're going to include just the link and one graphic, for now, from a recent piece on the "Everything Bubble" and "Near Extinction of Volatility and Risk":
After just a little more on the concern side, we're going to provide a few graphics to end on a good note. We're not big on fundamentals for short-term trading but we'd rather have them with us than against us! A few recent sectors that we've looked to for opportunities, may be back in our wheelhouses soon. Let's not forget that despite all our concerns, we still need to profit in this hyper-engineered environment after all.
Once again, as can be seen above, the earnings bars were set perfectly so that the customary "+70%" or greater percentage of companies "surprised to the upside". No surprise there but notice our other highlight on the chart itself. The spread just keeps on spreading! Notice below that our recent sectors of focus, energy and materials, turned the tide for Q3:
With TECH being beyond stretched, we'll keep an eye out for technical signs of rotation into materials and energy. We'll do the same for transports and financials while we're at it. Hopefully we'll be able to mine some of those areas over the next few months.
This one-note market is lulling everyone to sleep as it plods higher. With nice moves only seeming to regularly occur on earnings-speculation or news, we've been getting more questions about vertical spreads. After all, aren't they a good fit for this market environment? It's hard to argue against that but we'll probably do that any way! Let's look at a few bullish varieties and then move on from there.
We can elect to go long the bullish call vertical or go short the put vertical and thus be bullish in more of a passive way. Let's look at the standard-issue long call vertical/vertical call debit spread since it is the most straight-forward.
Additionally, we'll head back to Apple because it has great options liquidity, it's popular with us hoi polloi, but most importantly because it has a chart that we can shoe-horn in right here to fit our needs:
Apple's stock pulled out of its recent corrective action just about where we'd expect it to try to do so and it MAY have limited upside for at least a little while due to the all-time high residing just above but not by much. So, the assumptions are, we're bullish but not too bullish and this market is dull with the holiday season approaching. Slap on the bull call spread right? SURE, let's look at one of a certain type.
We highlighted a few strikes in the Dec. 8th expiration along with rounding off the Last Price so that things are clear. We're going to assume that we can buy the $167.50 calls for $6.80 and sell the $177.5 calls for $0.95 just to keep things realistic and rounded off. That puts us into this bull call spread for $5.85, thus we know what our max risk is very clearly as we can only lose what we pay for the spread. As for the max reward?: The spread between the strike prices = $10.00. Think of this trade as a "package deal", if you're unfamiliar with vertical spreads, and realize that the max value of this "package" as constructed, is $10.00. As we paid $5.85 for the package, the most we can hope to sell it for is the aforementioned $10.00, thus the most we can make it on is $4.15 for every spread that we bought or $415.00 in the real world. $415.00 in profit on a $585.00 investment in 17 days with a few weekends and customary holiday-time sleepiness in the markets built in, isn't too bad! That's 71%! Almost anyone would take that, but let's not forget that we'd need the stock price to be at or above $177.50 (the closest short strike we could find for our short side of this vertical. Yes, it's a little above our all-time high level of expected resistance but it still fits the bill.) Is it a "big ask" from Apple's stock that we're asking? That would be a little over 2% higher in about 2.5 weeks. That's aggressive, but we know that when Apple is rallying that's not a problem if we judge by observing history, which we do!
Here's when we throw the wet blanket on the proceedings. What if we're right about Apple but too right? If Apple zooms up to resistance quickly we will only make a fraction of that $415.00 because we also need time to pass in addition to being correct about the price forecast when we're "stuck" in the bull call spread. If our expected move unfolded quickly, much of that $415.00 would still remain elusive due to the nature of bull call spreads. And, it only "gets worse" from there if Apple's stock moves toward the upper angular trend line (orange) that's showing resistance on the top side of the channel of a lesser degree that we may be operating within. If that happens, we've really clipped our profit potential and maybe we're left wondering why we went "vertical" in the first place.
The exact right choice can only be known in retrospect. Covering our extrinsic value in the $167.50, and then some, by selling the $177.50 call for more extrinsic value is certainly appealing in this least volatile of nearly all markets. This "extrinsic value offset" vertical has its merits. However, even now we like the freedom and flexibility that the $167.50 call alone provides us. It's a personal thing and fits our trading style. This is a tough one however because this environment is well-suited for this type of vertical spread and but it may get even tougher next week if we pick up where we're leaving off. That would be with a more passive approach and maybe we'd even combine that with another more aggressive premium collection-oriented bull call that we could have opted for but even then, we'd have to compare it to our simple long call approach.
If you have questions with respect to this Apple bull call spread, ask away in this week's Advantage Point Morning Call webinar.
Happy Thanksgiving to All!
The Advantage Point Team