• This Week's Trade Ideas:
Bullish: Lowes Cos. Inc. > LOW > $81.43 Last.  Buy the Dec. 15th 80 Calls for $2.25 or less with a close or anticipated close above $81.60 in an up market with expectations for continued strength in the major indices.

Bullish Mentions: AAL, DAL, UAL, CL, TSCO, TIF

Bearish: None at this time.

Bearish Mentions: AZN. ORCL.  Both only with major market weakness to support them.

• Market Overview:
The SPYs are unique this week in that they appear to be close to a line of resistance. Normally, this would matter a great deal to us but, at the moment, we’re wondering if it will at all…

• Below the Radar:
November is almost fully booked, and the scent of freshly baked year-end bonuses is wafting through Wall St. “Just a little further and we’re there boys!” It seems like an inopportune time to raise concerns near and far off but that’s what we do here in BTR.

• Options Academy:
Last week we led off OA with: “This one-note market is lulling everyone to sleep as it plods higher.” If you’ve managed to remain awake, we’re at risk having you doze off! That’s right, we’re heading right back into the land of VERTICAL SPREADS.

More and then Less Snoozing, Even Newer 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.

We’re off and running again after a holiday pause.  We still see no reason to pick a fight with this market.  However, we’ve put out ideas or mentions on both sides just in case.  We must admit however, that we’d be very surprised if the market gives the bearish side a real chance to trigger.

Bullish Ideas: Lowes Cos. Inc. > LOW > $81.43 Last.  Buy the Dec. 15th 80 Calls for $2.25 or less with a close or anticipated close above $81.60 in an up market with expectations for continued strength in the major indices.

Bullish Mentions: AAL, DAL, UAL, CL, TSCO, TIF*.

Bearish Ideas: None at this time.

Bearish Mentions: AZN. ORCL.  Both only with major market weakness to support them.

Outlook:

It’s worth noting last week’s 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!”

As of Tuesday morning’s action, we may have finally gotten to the “more”.  Hopefully this nascent bullish uprising is just getting started and we’ll get better movement from the indices.

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:

We can sum up last week by saying: “There’s a whole lotta nothin’ “ that went on.  Thanksgiving created a “turkey” of a week, pretty much as expected.  There wasn’t much to do since nothing can really develop if we have a market that essentially goes nowhere.  We always prefer to enjoy a market that’s behind our ideas and mentions.  Last week the market didn’t get behind bulls or bears.  It was just there but mostly it stayed asleep.  Neither our HOLX bullish idea, nor our ORCL bearish idea had a chance to trigger.

The same really can be said of bullish and bearish mentions.  The bulls were IRM, ATHM, SYNA, XLV, TIF* while the bears were ADI, CCE.  Most of them failed to take out the key levels that we discussed in our webinar and thus were virtually untradeable.  Some moved a little and some backed off a lot.  Mostly, they served as shining examples of why it’s hard to make profits from directional trading in slowly churning holiday-influenced markets that go nowhere, ploddingly.  Are we disappointed?  Yes.  Our we surprised?  NOT AT ALL!

Some of these names could get some mojo in the near future but for now we’re moving on from them.  Alerts however, could still be in order should they begin to take flight.

Prior bullish idea SAVE is finally rewarding the patience we extended it in last week’s webinar.  As we write it is above $39.00 finally and hopefully on its way to the upside of it’s channel at a minimum.

This week we’re branching out.  Let’s head to see our trusty SPYs first:

The SPYs are unique this week in that they appear to be close to a line of resistance.  Normally, this would matter a great deal to us but, at the moment, we’re wondering if it will at all.  And, here’s why:

Notice how on the DIAs above, and the NDX below….

That there’s a lot more room to run.  The recent pattern in all three was holiday-esque in the sense that things were sleepy and remained sleepy until today.  But after, let’s call it a brief nap, the gang is ready to goose things even higher it would appear.  The SPYs are right up against it, so to speak, but the DIAs and the NDX have room and we expect them to try to use it.  Our guess would be that the SPYs are then tugged higher for the ride which will bring them through the nearby resistance line.  There’s not much we can say in the way of negative technicals, at the moment.  It is possible that the SPYs being stopped could somewhat slow down the other indices but that seems less likely to us.  We’ll close out this section with the same line we used from last week:

“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.”

The economic calendar is fairly stacked throughout the week.  We expect the news to be “good” on balance and expect it to further buoy stock prices.  “News” would be made if the news did not serve that end.

November is almost fully booked, and the scent of freshly baked year-end bonuses is wafting through Wall St.  “Just a little further and we’re there boys!”  It seems like an inopportune time to raise concerns near and far off but that’s what we do here in BTR.

Lance Roberts is one of our “go to” authors so let’s go to his latest missive: https://realinvestmentadvice.com/the-perfect-storm-of-the-coming-market-crisis/

The title may well be the most overused cliché in modern times, but the content is what we care about.  We’ll get right into it with this cutaway that echoes Kevin Muir’s concerns regarding volatility:

It’s clear that:

1. The Gang has absolutely crushed the VIX to historically low levels
2. This is the exact opposite of the case with respect to equity prices
3. Volatility Spikes are cyclical and We’re long OVERDUE

Guess what else is happening?  If you guessed “Record margin buying”, you are correct!:

As can clearly be seen, not only is margin buying at record levels but notice how Free Cash is at the lowest levels recorded as well!  That’s right, everyone’s practically invested to the hilt!

We’re particularly fond of this part:

Investors can leverage their existing portfolios and increase buying power to participate in rising markets. While “this time could certainly be different,” the reality is that leverage of this magnitude is “gasoline waiting on a match.”

When an “event” eventually occurs, it creates a rush to liquidate holdings. The subsequent decline in prices eventually reaches a point which triggers an initial round of margin calls. Since margin debt is a function of the value of the underlying “collateral,” the forced sale of assets will reduce the value of the collateral further triggering further margin calls. Those margin calls will trigger more selling forcing more margin calls, so forth and so on.

Roberts went on to remind everyone that’s not worried about excessive use of margin and the excessive shorting of volatility, that things can change and when they do they can change big and quick:

Robert’s piece is worth the read.  It’s not news when Robert’s puts out material such as this, but it is news when Morgan Stanley does so, and they just did: https://l.facebook.com/l.php?u=http%3A%2F%2Fwww.zerohedge.com%2Fnews%2F2017-11-27%2Fmorgan-stanley-turns-apocalyptic-credit-cycle-turn-closer-many-believe&h=ATNKcJg9leLG5eoOeGUnwSEfKdQyzJAXlHHwhhIGNfvkB1oE89uSEiOxuYJtS9ItECh8Y-fJa9B-WNGrErMZXuOOtFIjeJffM0OEbO3PVomNA5m1YWH-ueyZ79DRbrtsOiEqDpE7i5MT0kCWYWHkSGg00jw

That links to a very long, graphics-laden piece from MS via ZH.  What it boils down to is this (we added highlights of our own 😐):

These two paragraphs really stood out:

More than anything else, we firmly believe that central banks have been THE driver of credit in this cycle, stimulating markets like never before. Now they are attempting to tighten in a completely untested way, and yet credit is pricing in a seamless unwind. At the least, we expect a bumpier 2018, with a tougher setup anyway we slice it. Growth will decelerate, while the Fed continues tightening into a low-inflation environment, driving a completely flat yield curve (per our rates forecasts). Additionally, the year is beginning with booming confidence, as hopes for tax cuts rise, thus the bar to positively surprise is high, while "Goldilocks" is firmly in the price across most risk assets.

We would not rule out the scenario in which financial conditions could tighten materially next year as the Fed withdraws stimulus in this unprecedented way, especially if growth expectations decline at the same time, pushing us from late cycle to end of cycle (though not our economists’ base case). And for those expecting the Fed to come to the rescue any time volatility picks up, remember that, with the balance sheet now effectively set on "auto-pilot," reversing course, in our view, is a last resort.

Of the many graphics within the piece, this caught our eye and held it:

We’ll conclude as they did:

Wrapping up the above, Morgan Stanley's conclusion is the following:

Adding everything up, we see three key challenges in 2018: 1) Credit markets have been hugely reliant on central banks in this cycle, and now the Fed is withdrawing liquidity in an unprecedented way. We think markets are underestimating the risks of a mistake. 2) This liquidity withdrawal is happening while late-cycle risks (we think) are popping up all over the place. 3) Investors are buying credit at valuations that almost guarantee poor long-term returns, with the assumption that they will be able to time when to get out before the turn.... or stated even simpler, "get out now."

We’re now going to bring things to a conclusion with a quick stretch of the legs through Bizarro World.  Walk on, look on…

This graphic, and those that follow, aren’t leaving us feeling confident but rather concerned, based on their track record, but Americans are a confident bunch at this juncture in time:

This left us “perplexed”.  Somehow those reading are occurring as the following are as well:

Who exactly did they survey?  But wait, let’s not forget the explosion of student debt that it took to earn the declining wages above.  Would the earnings above and the debt below make you happy and “confident”?:

Yet, here we are:

Read all about it, courtesy of John Mauldin: http://www.mauldineconomics.com/editorial/8-charts-that-show-how-insane-the-economy-is-today/zhb#

Last week we led off OA with: “This one-note market is lulling everyone to sleep as it plods higher.”

If you’ve managed to remain awake, we’re at risk having you doze off!  That’s right, we’re heading right back into the land of VERTICAL SPREADS.

We wrapped things up with a few hints as to where we’d pick things up this week and we’re doing just that.  Here’s last week’s concluding paragraph:

“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 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.”

We stand by that gibberish!  Well, because it’s actually the opposite of “gibberish” but we can’t help but go for cheap laughs at times 😉.  The “exact right choice” is very difficult to know except in retrospect.  Given that, let’s explore the “more aggressive premium collection-oriented bull call” that some favor.  Last week we put on a bull call spread of the “extrinsic value offset” variety.  The call we bought had an amount of extrinsic value that was offset by the extrinsic value of the call we sold.  In doing that, we avoided the negative effects of Theta and still left a nice amount of bullish potential to be claimed if our forecast panned out.  What if we became more aggressive sellers?  Would we be asking the stock to do even less for us?  Let’s find out…

Notice that we’ve added a RED highlight to bring the focus to the $175.00 call as it will serve as our more aggressive selling target rather than last week’s $177.50 strike in YELLOW.

We're going to again assume that we can buy the $167.50 calls for $6.80 and sell the $175.00 calls for $1.75 just to keep things realistic and rounded off.  That puts us into this bull call spread for $5.05 vs. last week’s spread which cost us $5.85.  We also know that our max risk is since $5.05 we can only lose what we pay for the spread.  Again, let’s look at the max reward?: The spread between the strike prices this time is = $7.50.

Assuming that you may be new vertical spreads, think of this trade as a "package deal" and realize that the max value of this "package" as constructed, is $7.50.  As we paid $5.05 for this week’s version of the package, which is less than last week’s by $0.80.  That’s about a 14% discount vs. last week’s $5.85 outlay for those wondering.  However, the most we can hope to sell this spread for is $7.50, the dollar difference between the strike prices.  That being the case, the most we can make on it is $2.45 for every spread that we buy or $245.00 per spread in the real world.  $245.00 in profit on a $505.00 investment in 17 days, again, with a few weekends and customary holiday-time sleepiness in the markets built in, isn't too bad!  That's still about 49%!  That’s pretty tempting in just over 2 weeks but still, it’s down from the 71% we were getting last week.  Why would we opt for this more aggressive bull call spread that’s only 14% cheaper combine with the fact that it reduces our reward potential so much (from $415.00 to $245.00)?  A great question!  But remember, we needed the stock to do quite a bit of work for us last week: “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!”

With this week’s spread, we would need for Apple’s price to be at $175.00 or above at expiration to max out our profits.  This version of the spread requires a lot less work from Apple to deliver very nice profits and that’s the main reason why some may opt for this approach.  However, there are other reasons and we’d like to note just one because it’s an important one.  What’s the break-even point on this spread?  It happens to be the lower strike price, $167.50 + $5.05 (the price we paid for this “package deal”) which equals: $172.55.  This is where it gets interesting if you’ve never considered this before.  How much work are we asking Apple to do for us, really?  It’s already trading ABOVE our break-even point.  It’s at $173.45 and anywhere above $172.55 results in us profiting!  That’s pretty good stuff!  Some may call that “starting out ahead”, and, well, they’d be right.  Why?  Why is this the case?  It has to do with us selling much more extrinsic value than we purchased.  Thus, even if Apple’s share price flatlines, we win!  Even if it goes down a little, we may still win!  We already know that if it goes up, we win!

We’ll leave off here as we’ve now set the table quite nicely for next week’s OA installment that will focus on the passive approach we alluded to last week.  We may have to switch sides of the fence but who knows?  The grass may look greener for some once we do!

If you have questions with respect to this Apple bull call spread or last week’s bull call spread, ask away in this week's Advantage Point Morning Call webinar.