Advantage Point Newsletter - October 3rd, 2017
• This Week's Trade Ideas:
Bullish: None at this time.
Bullish Mentions:
WMB > $30.25 Last > Buy the Oct. 27th 29.5 Calls for $1.15 or less with a $30.40 stock trigger price.
SYMC > $33.10 Last > Buy the Oct. 27th 32.5 Calls for $1.40 or less with a $33.30 stock trigger price.
ADP > $110.67 Last > Buy the Oct. 27th 109 Calls for $3.05 or less with a $111.00 stock trigger price.
Bearish: None at this time.
Bearish Mentions: None.
• Market Overview:
Last week’s trifurcation was dealt with swiftly. All major indices were moved higher by certain degrees. The party re-energized last week beyond a doubt. We noted that the SPYs were the best rested and here’s where they are now…
• Below the Radar:
It’s clear: We’re very close to the highest level of “greed” we’ve registered in 3 years. The VIX is sub 10% and possibly on its way to challenging the sub 9% reading we saw only a short while back. These are about the only serious negatives we’ve come across that could affect the immediate plans the bulls likely have in store for this market. However, they are VERY serious negatives as one side of the boat is overloaded and it’s worse than we know.
• Options Academy:
This week we’re covering a more aggressive strategy that may be of use to earnings players with a lean. We’re also going to tackle the “but the stock’s so expensive” concern at the same time.
They seemed itchy to push higher and they did. Room to run remains but…we’re getting overbought
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.
“You'll be swell! You'll be great!
Gonna have the whole world on the plate!
Starting here, starting now,
honey, everything's coming up roses!”
Bulls in the market seemed to be inspired by the early 80’s movie “Airplane” or maybe the source material from “Gypsy” given their recent actions. As we’ve noted many times, regardless of what appears on the landscape, it’s all roses in the end as far as bulls are concerned. Last week we observed that things were “technically unresolved” and rather messy. That situation didn’t last long as the bulls cleaned everything up nicely and moved on yet again. There’s no doubt they’re back in control and it would seem that there’s room to run higher. Can they do it in a straight line or will they need a rest to reload?
Bullish Ideas:
None, at this time. Nothing came up on our scans/post-scan analysis that was close to ideal. Many names that had been on our radar simply moved too far away from us today. Some stocks were up over 6% today, while others were up 5%. Today’s overdone moves put those out of reach for us, at least momentarily.
The indices are getting stretched too far, too fast and for that reason we can’t feel comfortable chasing stocks that are up over 5% in one day. HOWEVER, we’re at another difficult juncture this week. No real let up after having ran up and no signs of retracing.
Bullish Mentions:
With records being made it’s hard to try anything on the bear side but the bull side is definitely overbought at this juncture. That doesn’t mean that the indices won’t keep rising. It doesn’t mean that at all. Should they continue to run higher, the following stocks, with a little more push of their own, could start to move up with the indices. They seem ready to us as we evaluate their cycles. We’re providing more specifics on these as it may be difficult for us to hone in on an official idea since the indices are already so overbought. As we noted above, many of our top names jammed up over 5% today and today only. That’s left us with our 2nd tier names that have been more muted thus far.
WMB > $30.25 Last > Buy the Oct. 27th 29.5 Calls for $1.15 or less with a $30.40 stock trigger price.
SYMC > $33.10 Last > Buy the Oct. 27th 32.5 Calls for $1.40 or less with a $33.30 stock trigger price.
ADP > $110.67 Last > Buy the Oct. 27th 109 Calls for $3.05 or less with a $111.00 stock trigger price.
Bearish Ideas:
None yet as the indices, while short-term overbought, have not yet shown signs of rolling over and retracing. We’re not ready to begin fighting against this environment quite yet.
Bearish Mentions: None.
Outlook:
It’s turned into a bullish rampage but now we’re drawing closer to resistance in some form.
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, fortunately, we sidestepped any bearish ideas or mentions and focused exclusively on the bull side.
CIEN was our lone official idea from last week and it had a good start, then backed off and found support where we’d expect (former resistance line), and then launched again only to then back off again! Fairly frustrating but it did move up over 5% from where we spotted it. It’s not over yet…
Highlighted bullish mention COST, has moved up but also has done so frustratingly. COST was near $164.00 last week when we mentioned it and has traded up to over $167.00 but it’s stalled more than we would have liked at times.
Bullish mention KR moved up over 2% since last week but it too has done so in a difficult manner. KOH was doing quite well but is having a rough Tuesday. KHC is down a little from last week and hasn’t done much of anything.
Last week’s trifurcation was dealt with swiftly. All major indices were moved higher by certain degrees. The party reenergized last week beyond a doubt. We noted that the SPYs were the best rested and here’s where they are now:
As can be seen above, the SPY was well-rested and used that to its advantage by moving up relentlessly to our near-term resistance line. A few other lines reside above this one. Do we pause here or blow right through this one?
The NDX did respond to the upside as well but it still lags the other main indices:
The NDX has a horizontal resistance level to deal with before it can match up better with the SPYs complexion.
The DIA ran the most prior to last week, but it has been chugging along ever since we covered it last week. It’s a little extended now but room remains:
DIA just kept running and has a little room above if it chooses to continue. Now onto FAANG:
The “bargain hunting” we believed we needed to see in FAANG, did take place last week. Still though, FAANG isn’t out of the woods yet. If the other indices keep floating higher, we expect that FAANG will be targeted for levitation soon thereafter. It’s in a better place now than it was last week. Is an ascending triangle forming in FAANG? We shall see…
We’ve been noting that the end of Q3 would likely be sufficient motivation to keep the party going. Now, the gang is only 1 quarter away from the promised land. Stocks are up 20% since 2014 and earnings have just now returned to 2014 levels (with great help from extremely lax accounting and share buybacks). It’s clear that the buying wasn’t motivated by “cheap valuations” and it’s clear that “faking it” is fine with the Street, in fact, it always has been. We don’t expect valuations and such to matter much when they can practically smell the finish line and another year of big bonuses.
With nearly all the indices resolving to the upside, we expect the rallying to continue with or without a pause. It’s really a matter of how close in proximity a particular index is to a resistance line. This is the first week of the month and of Q4 and there’s a euphoric feeling that’s growing and spreading out everywhere it seems. Additionally, Wall St. loves the hurricane damage as it could help this and last quarter, never mind the loss of life and economic utility. That could be just what was needed to prevent Q3 from slumping vs. Q2 as much “channel stuffing” occurred in Q2 and was likely to be exposed in Q3.
This week’s economic calendar has a little something each day with the back half a little heavier than the front half of the week, as is common. We forecast “cheerleading” for any and all numbers that are published this week.
“It’s all good!” 89 was the prior close’s reading but 87 is where we are now. How does our snapshot stack up in relative terms?
It’s clear: We’re very close to the highest level of “greed” we’ve registered in 3 years. The VIX is sub 10% and possibly on its way to challenging the sub 9% reading we saw only a short while back. These are about the only serious negatives we’ve come across that could affect the immediate plans the bulls likely have in store for this market. However, they are VERY serious negatives as one side of the boat is overloaded and it’s worse than we know:
If you’re reading the graphic above and thinking that there’s a new record short in volatility, as in, big money is being bet that there won’t be much, you are CORRECT! This is a powder keg and we’ll just have to wait and see what, if anything, comes of it.
The graphic above is another interesting item that we came across over the past week. In short, the extremely high correlations we’ve seen for many years during this bull run, have started to break down and in a big way. This matters only because the prior 2 times this occurred in the early 1990s and 2000, we witnessed rather serious selling not too far after. This is something to keep an eye on…
Other than the “all one way” sentiment and correlation breakdowns, other technical factors have actually improved quite a bit. Small caps have rallied in a big way. Energy is off the mat. Transports are doing better as have been financials. FAANG is no longer in immediate danger. World markets, led by the FED, which leads their easy CBs, are also on a tear. Growth isn’t anything special but since when has that mattered? And let’s not forget, Neel Kashkari is still afraid of hikes! What could go wrong?
We have to admit that we’re not thinking along these lines but perhaps we’re overlooking this angle as well. Kevin Muir’s argument is that nearly everyone is and that’s a problem as he sees it:
Enter our call of the day, which is going where few dare to venture right now. It comes from The Macro Tourist’s Kevin Muir, who thinks this rally has gone far enough.
He admits he’s all alone out there: “Practically no one is calling for a top. Everyone is too scared of looking stupid.”
Muir thinks inflation will be the “undoing of this stock market,” pointing to a big red flag in the form of yesterday’s ISM data, which showed a huge jump in prices paid by factories for raw materials.
“If we get a Trump tax cut, along with the Japanese & ECB quantitative easing kicking in, there is a decent chance the global economy could uptick. Growth, and even more important inflation, might outperform expectations in the coming months. And if that is the case, it is a terrible development for the stock market,” he says.
“As far as I can see, if you are an equity investor, the last thing you should be hoping for is economic strength. The moment that happens, the world’s biggest buyers will put away their blue tickets,” he adds.
Other worries? The absence of excessive pessimism. “Looking at investors who actually alter their investment forecasts, I think we are at full-on bullish. Everyone thinks they are outsmarting everyone else by trading from the long side,” he says.
Look at hedge funds, who think they’re crushing each other, but are pretty much all drinking the same Kool-Aid, he says.
Muir admits he could be wrong, and the market may be gearing up to spike higher. “Yet every time I have felt like I am all alone in a trade with the hedge-fund guys on the other side, it has proven to be the right trade,” he says. Read the full post here.
Frankly, we’re not onboard with inflation triggering a tip over but Below the Radar isn’t about our take, as readers know.
We’re now going to pivot beyond the “immediate” in the markets to the “socio” side of things for a moment or two.
As the markets climb higher, fewer and fewer seem to want to acknowledge what’s really going on “out there”. We’re still on the case here however. We’ve recently seen here in BTR that 78% of Americans live paycheck to paycheck. Perhaps here is the reason why:
The past 20 years have been devastating for American labor. The “bright spots” are workers at the twilight of their careers, post 55 and beyond. That’s problematic however as most of those folks are working because they have to! They’re way behind on their retirement savings! As the FED keeps printing and DC keeps spinning, most Americans keep lagging.
So…what’s filled the void? The “war on poverty” of course:
The government has made folks more dependent on them as they’ve inked “trade deals” that cut the legs out from under workers. Is there any wonder as to why the awful trends we see below the surface continue to exacerbate? Check this out for more on the sad decline: http://www.zerohedge.com/news/2017-09-30/visualizing-americas-disappearing-workforce
The great dichotomy of our times remains fully intact. Markets up big, American worker down big. Asset holders becoming further enriched as regular folks fall further behind and more dependent on the entity that caused the dichotomy in the first place! At times like this it helps to go back to basics and in this case, that will help us understand how it’s all held together. This short piece is well worth reading as it comes from Charles Hugh Smith, one of our favorite bloggers. He hasn’t forgotten about what’s really been going on for over 8 years and counting. Here’s the link but we’re also including links that we felt compelled to share: http://www.zerohedge.com/news/2017-10-02/was-eight-year-experiment-maintaining-status-quo-success-or-failure
It’s all about debt growth and the sustainability of debt growth. A minor side note: The comments within the graphics are by Smith but we’re on the same page.
Finally, we’ll turn back to the markets and the current psychology we’re witnessing. It’s getting even more interesting…
Jimmy Rogers has always been way early with his warnings about the markets. This time has been no different as he’s been concerned for a while. Here’s a link to an interview that some may enjoy as although he’s been “way early”, he’s also been right about the madness that has emanated from the FED time and time again that’s eventually “blown up”. We’re including our favorite snippets from the interview as well: http://www.zerohedge.com/news/2017-10-01/jim-rogers-invest-markets-are-hated
“… in America as you know, we've had bear markets every few years.
Well done. And Janet Yellen will tell you we're never going to have a bear market again because she's smarter than we are, she's smarter than the markets, and the central bank has things under control now. She publicly stated this. Do not worry. We will not have financial calamities again. Head of the central bank in America has said that out loud officially, Mrs. Yellen-- yeah, Mrs. Yellen.
I happen to have a different view. Now if you believe the American central bank, you shouldn't be talking to me at all. But we've had, we used to have bear markets every several years. We always, always since the beginning of the republic. In my view we will have them again.
And the next one is going to be horrendous, the worst-- you came in the business in '86. It will be the worst in your lifetime, in your financial experience.
And the reason, in 2008 we had a bear market because of too much debt, staggering amounts of debt. Steve, since 2008 the debt has gone through the roof. Every country in the world talks about austerity. Nobody has reduced their debt in the last few years.
Everybody has increased their debt in the last few years. And so the next time we have a bear market, it's going to be horrendous because of this.
Even China-- in 2008, the Chinese had a lot of money saved for a rainy day. It started raining in Singapore. They had a lot of money saved for a rainy day. It started raining.
They started spending and helped save the world. But even China has a lot of debt now.
Recently we’ve seen an influx of folks that have joined the “head scratchers” wondering how the markets just keep moving higher despite so many issues bubbling up here and there. However, several others have recently “throw in the towel” and are now backing off from their bearish predictions. This “backing off” has been a precursor to prior drops but it tends to evidence itself early. David Stockman is not backing off. He’s still at it and now he’s being openly mocked. That’s actually a positive for him as we’ve seen the “mocking stage” many times in our years. It is almost a prerequisite for eventually being right! He’s probably still way too early but if anyone still cares, here’s what he had to say just a few days ago. He’s not impressed by the current administration’s efforts:
The link is above but we pulled some of the quotes from the piece to wind things down this week. There’s more to the interview and that can be found at the link via another link"This is a fiscal disaster that when they [Wall Street] begin to look at it, they'll see it's not even remotely paid for. This bill will go down for the count," said Stockman.
He said White House economic advisor Gary Cohn and Treasury Secretary Steve Mnuchin "totally failed to provide any detail, any leadership, any plan. Both of them ought to be fired because they let down the president in a major, major way."
"You get a black swan in the old days, or maybe you get an orange swan now, the one in the Oval Office who can't seem to stop tweeting and distracting the whole process from accomplishing anything."
"There is a correction every seven to eight years, and they tend to be anywhere from 40 to 70 percent," Stockman said recently on CNBC's "Futures Now." "If you have to work for a living, get out of the casino because it's a dangerous place."
"This market at 24 times GAAP earnings, 21 times operating earnings, 100 months into a business expansion with the kind of troubles you have in Washington, central banks [are] going to the sidelines," he said.
"There's very little reward, and there's a heck of a lot of risk."
"This is a bubble created by the Fed," he said.
"We're heading for higher yields. We are heading for a huge reset of pricing in the risk markets that's been based on ultra-cheap yields that the central banks of the world created that are now going to go away because they're telling you that they're done."
This week we’re covering a more aggressive strategy that may be of use to earnings players with a lean. We’re also going to tackle the “but the stock’s so expensive” concern at the same time. With that in mind, let’s take a look at Alphabet (GOOGL).
GOOGL’s last price is $966.50 as we write. Its earnings are due out on October 26th after the closing bell. That makes the October 27th expiration ideal for our purposes.
A quick look at the Oct. 27th $945.00 calls reveals that they are trading for approximately $37.75 with $21.50 of intrinsic value and $16.25 or extrinsic value. A purchase of a 10 lot of these calls would require an outlay of $37,750! Quite a chunk of change for 10 calls! It’s for this reason that some options players like to employ a vertical spread in situations such as this one. GOOGL is an expensive stock with dollar-expensive options. The prices involved intimidate people away from trading it. That’s where a vertical can help. If we were to sell 10 Oct. 27th $985.00 calls for $16.60, that would result in a credit of $16,600 returning to our account vs. the $37,750 outlay. That would net-out to be a $21.15 debit to put on the Oct. 27th $945-$985 call spread. That debit would put our break-even point on the spread at $966.15. That’s not too bad, not too bad at all given that GOOGL is currently trading $966.50. This means that even if the post-earning reaction is a dud, and the stock price doesn’t move at all, we’re not going to be down big bucks. This is due to what we refer to as “extrinsic value offset”. We’ve structured this vertical to make it more affordable but also to avoid suffering the pernicious effects of theta. We accomplished this by “balancing” the extrinsic value of our long call vs. the extrinsic value of our short call. The passage of time won’t hurt us nor will we need it to make us money (more on that soon). We’ve also paid $21.15 net for a vertical spread that could be worth $40.00 at expiration if GOOGL closes above $985.00. That’s not a big ask if we’re bulls as it would only require a move of $18.85 in the stock price which is a little less than a 2% of the stock price. If that were to happen, we’d be sitting on an 89% return on the long vertical spread. Another item we should point out is that this vertical won’t require us to wait for the passage of time to earn us our money as most vertical spreads do. The 27th being expiration, this spread will produce its final valuation for us very quickly.
In summary, this is a much cheaper way to become involved in a high-priced stock with dollar-expensive options in front of an earnings release. Theta is kept at bay and there’s the potential for really nice return without asking the stock price to move much for us post-earnings. Of course, you always risk what you spend, let’s not lose sight of that. However, for those with an earnings lean, this approach may work for you. If that’s your sort of thing 😊
If you have any questions please bring those to our next Advantage Point Morning Call webinar.
Have a great week!
The Advantage Point Team