• This Week's Trade Ideas:
Bullish: None due to FED and long/stretched buy-cycle.***

Bullish Mentions:

***We’re providing very specific and detailed mentions this week as some may want to throw caution to the wind and become involved pre-FED.  The long awaited “balance sheet reduction” guidance that market participants are waiting to hear could produce volatility, assuming you remember what that means...

MGM - Buy the Oct 20^th 32 Calls for $1.45 or less with a close or anticipated close above $32.80 in an up market with expectations for continued strength in the in the major indices.  Speculative due to FED announcement and possible fallout.

MLCO - Buy the Oct 20^th 23 Calls for $1.45 or less with a close or anticipated close above $23.95 in an up market with expectations for continued strength in the in the major indices.  Speculative due to FED announcement and possible fallout.

DHI - Buy the Oct 20^th 37 Calls for $1.45 or less with a close or anticipated close above $37.80 in an up market with expectations for continued strength in the in the major indices.  Speculative due to FED announcement and possible fallout.

Bearish: None.

Bearish Mentions: None.

• Market Overview:
Last week we noted that the interesting market juncture we’d been waiting on had finally arrived. That the markets would likely try to continue to break to the upside. That’s still the trend but the lunatic fringe that’s been buying like there’s “no tomorrow” has driven stocks up “too far, too fast” in the short run/small picture. That’s brought us to another “interesting market juncture”!

• Below the Radar:
We’ve noted several times and quite recently that “things” just do not feel right. That the markets aren’t acting “normal”. We’ve categorized it as “extremely artificial” and “heavily engineered”. Well… we’re quintupling down on that now or whatever comes after quintupling!

• Options Academy:
As Q3 draws to a close, it’s worth noting that earnings season will be rolling around fairly soon. We thought we’d get a jump on that now by covering an alternative approach to participating in earnings moves in this week’s Options Academy.

The FED Again…Waiting on more “GoGo” Juice to Jam Higher?

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.  With the FED announcement looming tomorrow, this is even more critical than usual.

As we write, the Wall St. banksters are working on “Day 8” of a relentless rally and doing it right in front of another 2 day FED meeting.  And why not?  Since 2009 the FED has done nothing but work to inflate asset prices, especially equities.  The markets are clearly anticipating that the greasing of the skids will continue despite the FED signaling that rates would be rising this fall.  The market has gotten the FED part of the equation consistently right and for some time.  The markets have dismissed all the FED’s “hawkish” chatter over the years and they’ve been rewarded nearly every time.  The FED has talked tough on interest rates for several years but has ultimately acted true to their “dovish” nature in nearly every instance.  Why they have any credibility left is beyond our comprehension but that’s how the game is played.  Will the FED finally seek to reestablish some credibility?  That would truly be the “surprise” from our perspective.

Thus, we expect more of the same.  The markets are pricing in about a 50% chance of a rate hike as the FED meets over the next 2 days.  It’s a coin flip.  But the perspective from Wall St.’s twisted view has to be a positive one.  We’d speculate, given the past 8 days of panic-buying/short-covering, that everything’s coming up roses as the banksters see it.  Why?  Hurricanes are good!  Long range missile launches are good.  Wall St. doesn’t care about the lost utility of nearly everything at lower elevations in and around Houston or along the coastline of Florida nor do they care about the tens of millions of people potentially in harms way in Asia.  They’re much more focused on the rebuilds as that activity will be “booked” in the near future.  Earnings just improved baby!  Defense stocks?  Gotta buy them!  Maybe there’s a war looming in the Pacific!  That’s good for stocks!  We know that equity index prices have not cared much for the economic realities facing the American people for 8 years and counting.  It’s all been about juice from the FED and putting as much lipstick on everything they possibly can.  We expect that will continue for as long as they can maintain it.  Why change when something is working so well?

Finally, we can’t forget that they’re about to close out Q3 and that will leave them not very far from the end of year bonus extravaganza.  This stands to be a big payout year and we suspect, having seen these operators at work for a quarter century, they’ll do everything they can to keep the music playing and stock prices elevated as the year draws to a close.  It would take something very significant to change that outcome in our minds.  That doesn’t mean that it can’t happen but we’d need to see a radical change in behavior within the markets that would likely be due to the emergence of something that’s currently not on the radar screen of most money managers.  What that could be is anyone’s guess…

Bullish Ideas: None due to FED and long/stretched buy-cycle.***

Bullish Mentions:

***We’re providing very specific and detailed mentions this week as some may want to throw caution to the wind and become involved pre-FED.  The long awaited “balance sheet reduction” guidance that market participants are waiting to hear could produce volatility, assuming you remember what that means...

MGM - Buy the Oct 20^th 32 Calls for $1.45 or less with a close or anticipated close above $32.80 in an up market with expectations for continued strength in the in the major indices.  Speculative due to FED announcement and possible fallout.

MLCO - Buy the Oct 20^th 23 Calls for $1.45 or less with a close or anticipated close above $23.95 in an up market with expectations for continued strength in the in the major indices.  Speculative due to FED announcement and possible fallout.

DHI - Buy the Oct 20^th 37 Calls for $1.45 or less with a close or anticipated close above $37.80 in an up market with expectations for continued strength in the in the major indices.  Speculative due to FED announcement and possible fallout.

Bearish Ideas: None.

Bearish Mentions: None.

Outlook:

It’s very simple this week, we’re short term overbought but there is room left before we hit intermediate term resistance. (see Market Overview below) It will all come down the post-FED reaction.  Will they use it for more short-squeeze lighter fluid dispensation or will they use it for taking short -term profits?  We see it as fairly binary which makes it tough…  The wildcard is the balance sheet reduction yapping.

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 we flipped from being all bearish the week prior to all bullish in our ideas and mentions.  Fortunately, the momentum shift we thought we’d detected persisted.  Our official idea in HAL, a counter-trend trade, traded as high as $42.91 and that was right within a resistance target zone we’d covered.  Our AP updates noted that over the past several trading days.

Bullish mention and fellow energy sector name APC also performed well and reached the upper end of its down-trending channel.  Thus, it reached a potential profit-taking/rolling target zone as we noted in updates.

COST, our other bullish mention, really took off and made it to a resistance level we’d outlined just below the $164.00 level.  We’re not sure if it can bust through that level “right quick”, but it’s hanging around below there now and if the panic-buying in the indices continues, we’d expect it to try to jam through that level again.  If it can do that, there’s a gap area it could target that lies much higher on the chart.

Last week we noted that the interesting market juncture we’d been waiting on had finally arrived.  That the markets would likely try to continue to break to the upside.  That’s still the trend but the lunatic fringe that’s been buying like there’s “no tomorrow” has driven stocks up “too far, too fast” in the short run/small picture.  That’s brought us to another “interesting market juncture”!

The vertical red lines were placed on this chart by our “crack research team”.  The one thing that’s notable to us is that if you were to “go 2 weeks back” in front of every FED meeting and then see where the market is trading just at the FED meeting, you’d confirm that stocks lift off fairly consistently in the 2 weeks that precede the announcement that comes down from on high.  We just saw it happen yet again and in a big way.  It was and remains aided by short squeezing and the end of the month and Q3.  But there’s more…:

Though we opted for the DOW in the form of the DIA in front of the FED meetings as it has been grabbing all the headlines, as many readers know, we prefer to chart the SPYs as a proxy for the SPX to get a sense of what the market is doing on balance.  The SPY seems to be in just another mini-consolidation (white ovals) at the moment.  Room remains to run to the yellow resistance line and if the FED adds even more to their balance sheet and buys even more equities through intermediaries, there’s plenty ‘o room to cruise even higher towards the orange line.  If more hurricanes make landfall and more missiles are launched, there’s no reason why even the orange line would contain this market!  Kim may be holding Dec. 255 calls in the SPYs for all we know!

On a more serious note, the SPY aren’t as short term overbought as the DOW/DIA.  We’re not sure how that plays out and if it matters at all.  Most will remember that we prefer not to guess in front of a FED meeting.  The prudent player needs to remain in “wait and see” mode.  Now, onto lesser matters…

This week brings a fair number of economic reports with the FED’s announcement on Wednesday being the centerpiece.  We’re supposed to hear about “balance sheet reduction”, which, admittedly, could trigger volatility, but that would be a change of course and it’s hard for us to take the FED seriously at this point when it comes to anything other than asset inflation.  As regular readers know, the spin on any and all economic reports and developments has become too absurd in our view and has brought us to the point at which we’re not currently concerned much about the realities that underpin these “numbers”.  If the markets get real and get serious about them again, so will we.  However, as long as they’re used to justify whatever movement needs to be justified on any given day, as opposed to dissected to find truths with respect to economic realities, we don’t see them as worth of our time, forecasts, and analysis...  Just follow the goosing baby!

We’re jumping in with both feet this week!  Let’s go!

We’ve noted several times and quite recently that “things” just do not feel right.  That the markets aren’t acting “normal”.  We’ve categorized it as “extremely artificial” and “heavily engineered”.  Well… we’re quintupling down on that now or whatever comes after quintupling!  We came across the exact kind of research chock full of graphs we love: http://www.zerohedge.com/news/2017-09-16/difference-now-permanent

The entire piece is definitely worth a look if you want to see just how “managed” and serene this entire bull market run has been.  We borrowed several of the graphics as they were just too good not to!  Alas:

Notice in the chart above that once the “lever pullers” realized that QE 1 and QE 2 and “Operation Twist” did have a lasting effect, they then launched QE Infinity and began managing downside volatility to the point where they’ve eliminated it.  We’ve stated many times that human nature being what it is, it wouldn’t be a stretch for the President’s Working Group to move from being ready to act once a crisis has taken hold to “pre-empting” the crisis entirely.  This, in our opinion, is EXACTLY what has happened to downside volatility.  The lack of a significant or and sustained drawdown from all-time highs during this near 9-year bull run is historically astounding, especially so when we examine the past 5 years.  But it gets better, or worse, depending upon your confidence in central planning:

The central banksters around the globe have kept the music playing all night long, every night, week after week, month after month and year after year.  Before we know it we may need to add “decade after decade” as this synthetic situation continues to metastasize at an alarming rate and it’s clear that much has become dependent on it continuing further.  We’re approaching the 9 year mark of the prior bear market lows and the gang hasn’t let up on manipulation of all kinds yet they’ve told us time and time again that they would “normalize” as they tried to sell us that economic conditions were improving.  Yet, the lighter fluid keeps flowing!  Why?  What are they so afraid of 9 years henceforth?

As the author of the piece, Tim Knight noted, what will things look like and behave like if this artificiality is deemed to be a necessary permanent requirement to maintain our “markets”?

He speculates that it will be a lot like the diamond market (he doesn’t focus on the inflation factor however):

As it is, though, De Beers has balanced massive marketing ("a diamond is forever"........."how can you make two months' salary last forever?") with artificially-controlled supply to yield a market with pretty much zero volatility and a steadily increasing price.

Maybe the chart above is the future of stocks. I really don't know.

But do you notice there's no active public market for buying and selling diamond as a commodity? And that there aren't any technical analysts for diamond charts? Or that there's no national network devoted to news related to diamonds? It's because all of that stuff would be drop-dead boring, because prices are controlled, and predictable, and not worthy of examination. Someone figured out how to control the market. And thus the "market" no longer exists.

God help us all............us chartists especially...........if this is the new world order for equities.

Tim Knight should probably read this piece that we came across to get a handle on why things have become so artificial and why they need to stay that way!: http://www.zerohedge.com/news/2017-09-19/where-next-financial-crisis-will-come

Perhaps the charts that follow describe the rationale for the persistent maintenance of the artificiality we’re witnessing???

YES, you’re interpreting the graphic above correctly.  In terms of bond yields and equity valuations, this is the most expensive set of equity markets in modern recorded history.

Behold the 80 degree slope of CB assets and the spread between yield and debt:

Finally, the graphics below give us a sense as to how much the frequency of shocks increases the more the central bankers meddle.  The author, Jim Reid of Deutsche Bank, is operating on a macro level for sure but what’s most interesting is how he ties together not only the dismal failure of credit booms but how they’ve often led to a series of crises around the world time and time again.  If you’re curious about how monetary policies, equity markets and socioeconomics have converged historically, it’s worth checking out.

Before we wind things down, we included one final graphic that we came across in our travels this past week.  We’d like to show you just how little there is to show for all the rigging they’ve engaged in over the past 9 years.  The effects on asset prices are undeniable but let’s not forget that it was all justified as a means to get “the American economy going again and to get people back to work”.  Measured in those terms the powers-that-be continue to crow that they’ve been very successful and that justifies the risk they’ve placed us at.  The bottom-line suggests otherwise and no explanation for this graphic is needed:

Since the VIX is now “safely” below the 10% level again (where it belongs!), and most seem to believe that nothing can or will go wrong, we elected to end with this interview with Kyle Bass: http://www.zerohedge.com/news/2017-09-17/kyle-bass-chinas-40-trillion-banking-system-has-largest-imbalances-ive-ever-seen

And here’s the passage we’d like to leave you with as Bass doesn’t seem to believe that the across-the-globe hyper-engineering isn’t without risk:

KB: We're in the such late stages of a game that is the largest global imbalance I've ever seen in my life. When you look at on balance sheet and off balance sheets, you look at on balance sheet in the banks, you look in the shadow banks. The number of total credit in the system, China is right at $40 trillion. Think about the number I just said. $40 trillion. And that's using an exchange rate of call it 6.7 to the dollar, right? So it's grown 1,000% in a decade. And we're on a $40 trillion credit system on $2 trillion of equity on maybe $1 trillion of liquid reserves.

As Q3 draws to a close, it’s worth noting that earnings season will be rolling around fairly soon.  We thought we’d get a jump on that now by covering an alternative approach to participating in earnings moves in this week’s Options Academy.

As long-time readers are aware, we’re not keen on earnings speculation.  We prefer not having to guess if we can avoid it and also prefer less risk and more confidence when taking our positions.  However, as earnings hold the fascination of many, we thought we’d do our little part to lend a hand.  We’re going to use our “wayback” machine again and check out NVDA’s most recent earnings report on August 10^th.

NVDA is just the type of stock that earnings players like to dream about.  It’s a higher priced stock and tends to move a great deal at times.  In other words, it’s volatile.

NVDA earnings were released on August 10^th after the close.  On August 9^th, the current IV level in the “earnings options” set to expire on Aug. 11^th , that had 2 days until expiration, projected a $14.22 move in the stock as a 130.29% implied volatility level was recorded.  With NVDA’s stock price trading at $172.11, the potential move on the earnings to either side, up or down, projected to either $186.53 or $157.69.  So, after watching NVDA move up in a breath-taking manner for some time, had you wanted to bet against it holding those lofty levels post-earnings, you could have, on August 9^th, bought the $157.5 put calendar spread, the day before earnings, and you could have paid $1.16 for it.  That would have consisted of selling the Aug. 11^th expiration $157.5 puts for $1.76 while buying the Aug. 18^th expiration $157.5 puts for $2.92, thus a net debit of $1.16.  Had you done this, you’d have been sold 130.29% IV in the “earnings options” while buying 79.03 IV a week further out in time.

However, on August 10^th, NVDA dropped by $7.37 at one point.  Had you waited until the “last minute”, you could have bought the same calendar spread, the $157.5, for $1.00 very close to “mid market”.  To be clear, you could have bought the Aug. 18^th expiration for about $5.00 and sold the 11^th expiration for $4.00, approximately.  Naturally, were still discussing the $157.5 strike and YES, the stock was pretty wild that day but it was possible nonetheless. On that day, the IV levels were 175% vs. 85% in both puts respectively.  The earnings option experienced another 45% IV jump that day while the next week out jumped up by less than 10% in comparison.

And now the conclusion, on August 11^th NVDAs stock price traded down again to close the day at $155.96 fairly close to a target level predicted by the earnings straddle.  At the close you could have bought back the Aug. 11^th $157.5 puts for $1.54 for a $2.46 profit and sold out the Aug. 18^th puts for $4.35, a loss of $0.65.  That works out to a total profit of $1.81 on both sides of the calendar spread being closed post-earnings had you really timed it well on the 10^th or had you closed it for $1.81 by selling vs. $1.16 purchase (on the 9^th) for a $0.65 profit had you initiated in on the prior day, the 9^th.  In either case you came out a winner and only had $1.00 or a little more at risk depending upon when you timed your entry.  This approach is a way to still profit from earnings-driven movement but without a great deal at risk… if you like this 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