• This Week's Trade Ideas:
Bullish: Cien Corp. > CIEN > $21.54 Last. Buy the Oct 13^th 20 Calls for $1.10 or less with a close or anticipated close above $21.80 in an up market with expectations for continued strength in the NDX, QQQ, and XLK.  Speculative idea due to being counter-trend and indices at muddled juncture.  Purchasing nearer term option to reduce capital at risk as the complexion of the markets could change quickly due to pick up in volatility and seasonality.

Bullish Mentions:
Costco. > COST.  $164.13 last.  COST was a recent idea that jammed up quickly and then backed off somewhat and consolidated.  It could be on the verge of trying to power higher again especially if the SPYs and DIAs remain on the comeback trail.

The following names are all deeply oversold, much like CIEN.  However, they’re all potentially on the verge of at least temporarily trying to reverse if the markets recover further from last week’s selling.  These are also counter-trend by nature.  We can “talk” specifics in our Wednesday morning webinar.

KR

KHC

COH

Bearish: None.

Bearish Mentions: None.

• Market Overview:
It must be Austin Powers month here at Advantage Point because it remains a “mixed bag baby”. There’s no way around it and, if anything, we’re experiencing trifurcation.

• Below the Radar:
We’re breaking the rules of writing this week by omitting a “lead in” and while we’re at it we’ll break the rules of etiquette because we’ve had enough, at least at this moment. Straight-talk, straight-up, point-blank, here’s why we’re so dismissive of the FED…

• Options Academy:
Q3 is almost in the books and we’re following up last week’s entry with a very similar one as it may be of help to “earnings players” much in the same way that the Calendar Spread, covered last week, can be if factors fall into place. So… here we go…

Is the post-FED “Monkey Wrench” material or not?  They seem itch to try to push higher again…

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.

Last week our outlook included the following:

“It’s very simple this week, we’re short term overbought but there is room left before we hit intermediate term resistance.   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.”

AND our Ideas section read as follows:

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...

We strongly prefer to cover several high-quality ideas each and every Tuesday but the juncture that we find the indices at isn’t always conducive to our aims.  Last Tuesday was a prime example of that, hence our reprinting of the italicized commentary.  The DOW was very overbought especially and that left little immediate upside remaining in our estimation but it was still too early to rule any more upside push out entirely due to the FED announcement that would come.  We couldn’t go short anything either as the DOW hadn’t rolled over and the other major indices were only churning at the time.  Again, we had the FED outcome looming regardless.  AND, it did all come down to the post-FED reaction which brought volatility back into the equation a little as we sensed it could.  We went with bullish mentions only as we strongly prefer to cover at least a few stocks but warned that jumping in was a riskier proposition than normal.  Another line from Market Overview last week: The prudent player needs to remain in “wait and see” mode. 

That line may need to be kept at the ready again this week as the “regulators” of stock prices seem to have lost complete control if only momentarily.  The post-FED reaction has been one of the monkey wrench variety.  All was swell and now someone’s thrown a wrench into the proceedings and the ascent has been halted.  Is this a turning point of some importance or just another speed bump?  Material or not?  That’s what we have to wait to see but for how long need we wait?

Bullish Ideas:

Cien Corp. > CIEN > $21.54 Last.  Buy the Oct 13^th 20 Calls for $1.10 or less with a close or anticipated close above $21.80 in an up market with expectations for continued strength in the NDX, QQQ, and XLK.  Speculative idea due to being counter-trend and indices at muddled juncture.  Purchasing nearer term option to reduce capital at risk as the complexion of the markets could change quickly due to pick up in volatility and seasonality.

Bullish Mentions:

Costco. > COST.  $164.13 last.  COST was a recent idea that jammed up quickly and then backed off somewhat and consolidated.  It could be on the verge of trying to power higher again especially if the SPYs and DIAs remain on the comeback trail.

The following names are all deeply oversold, much like CIEN.  However, they’re all potentially on the verge of at least temporarily trying to reverse if the markets recover further from last week’s selling.  These are also counter-trend by nature.  We can “talk” specifics in our Wednesday morning webinar.

KR

KHC

COH

Bearish Ideas: None.

Bearish Mentions: None.

Outlook:

Market Overview really lays out the case.  It’s mixed.  That’s just what it is.  Sometimes patience, aka “sitting on our hands”, is a virtue.  Forcing trades on the other hand, never has been.  Last week it was the post-FED reaction that “monkey wrenched” things for a while but now the sell-cycle isn’t fresh nor can we be sure that it is over.  The indices are much more technically vulnerable than they had been a week ago in terms of falling to lower levels of key support.  The FAANG basket has us concerned but no trends or key support levels have been decisively broken in FAANG or in the major indices.  In short, proceedings remain messy and unresolved.

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 our caution may have saved us from our more aggressive side as we strongly suggested not getting involved pre-FED.  We did put out some mentions for the daredevils among us but they didn’t truly trigger as the market indices were not supportive of the bullish mentions.  We did update on MGM because we’d rather be safe than sorry and we guess that a thrill-seeker or two may have jumped the FED’s gun and gotten involved there.

It must be Austin Powers month here at Advantage Point because it remains a “mixed bag baby”.  There’s no way around it and, if anything, we’re experiencing trifurcation.

We’ll check out the SPYs first as they seem the most well-rested:

They’ve been held in check for quite a while and didn’t get euphoric when the DIA did nor did they swoon more as did the NDX.  We must wait to see where they begin to head next.  They have a gap to fill below and there should be many forms of support in the vicinity if they choose to do so but they’ve consolidated for a while and could easily be rested enough to move higher as well.

The NDX on the other hand looks much heavier at this snapshot in time:

The NDX has a gap as well but it’s already fallen a good bit and is resting on the lower Bollinger Band.  Other more important support levels lie just below.  It’s corrected the most but is it done?

The DIA ran the most absurdly and it’s held onto mild-channel nicely so it hasn’t fallen very far as of yet it and it may not be done or maybe it is...  It has plenty of support areas below and a gap to boot but it’s been resilient.  These major indices all have a different complexion and that’s something we haven’t seen much of in quite a while.

Perhaps the FAANG mini-basket is where we should focus our attention.  We’ve been keeping an eye on these stocks as they’ve held the key to the relentless march higher and the buying of every dip.  They’re clearly on the technical ropes right now:

FAANG has a head and shoulders pattern which means the basket could be on the verge of a pickup in volatility in either direction.  It’s remained weaker than the DIA by far and there’s a lot of “geometry” at work at present as one can clearly see given the number of lines we’re working with at the moment!  A big break lower could be a really big deal for this market and a rescue of FAANG could be just what is about to be ordered up to preserve the year.  The boys and girls of the street are days away from booking a solid Q3 for themselves with only 1 quarter remaining.  We noted last week that we thought the lunatic fringe had driven some stocks up “too far, too fast”.  Well, now, they need to go “bargain hunting” in these names otherwise leadership could be kicked out from under this market and that’s not something bonus-driven money managers will want to see right now.

Last week we ended on a rather undecided note with respect to the market’s direction given the FED events which were about to unfold.  That was the key reason, along with the technical juncture we found ourselves at, that we didn’t issue any official ideas.  Things are a little more clear now that some overboughtness has come out of the markets but we have to be patient to see where the indices tip their hand next.  The calendar is the calendar.  Broken record:  When it seems to matter in a legitimate way again, we’ll cover it that way.

This Week’s Economic Calendar

We’re breaking the rules of writing this week by omitting a “lead in” and while we’re at it we’ll break the rules of etiquette because we’ve had enough, at least at this moment.

Straight-talk, straight-up, point-blank, here’s why we’re so dismissive of the FED: http://www.marketwatch.com/story/feds-kashkari-again-says-more-fed-rate-hikes-are-a-bad-idea-2017-09-25

The stock market is about 6 months away from booking “year 9” of a bull market and yet Neil Kashkari thinks it is a bad idea to barely nudge interest rates away from effectively ZERO!

He’s very concerned about “tapping the brakes” given that the inflation rate is TOO LOW!  Put another way, he’s unhappy that the US Dollar’s purchasing power won’t be eroded by 2% this year as things stand now. (He’s also probably worried about a deflationary spiral that could spin out of control but that’s another issue altogether.)  How did we arrive at this point?  The FED and the other powers-that-be via the media infotainment complex have been telling us to “remain calm, all is well” with respect to the economy for many years running.  So…what is it?  Is it all radiant sunshine, rainbows and unicorns or have you been lying to us?  OH…, you just want to keep having it both ways since we have ideal conditions for the bankster and asset holder/management classes.  Well-played Neil!  Cite the FED”S “mandate”.  If a ferocious bear market should ever develop again anytime soon, one of the few positives that could emerge would be the complete loss of faith in the Federal Reserve system which has done nothing but inflate asset bubbles only to watch them crash hard once all their lighter fluid burned off.  We’re hoping it doesn’t happen again but we’re not going to delude ourselves about what’s going on here.

Let’s just check in on the housing market because we’ve been told time and time again that it’s really healthy and has been just swell!  Well, what about it? http://www.marketwatch.com/story/new-home-sales-swoon-to-8-month-low-in-august-2017-09-26

You can check out the latest pulse at that link but do you notice what we do in the chart below?

If you picked up on the fact that sales remain half of what they were over 10 years ago you win!  That’s right, with rates stuck at super low levels, new home sales remain less than half of what they were.  This provides us with the opportunity to point out two things.

1. Aren’t things supposed to “GREAT”? Does that look “GREAT”?
2. This is the direct result of Wall St./The FED/DC drawing consumption forward in the preceding bull market to keep the music playing. And as many of us said at the time, this would only lead to many lean years that would follow.

The short-term “success at all costs” approach remains short-sighted and dangerous to long-term stability and performance but the sociopaths that head the “steering committee” care not about the long-term as they’ll have cashed out long before it ever arrives.  From where we sit, this is one of the great under-reported plagues that inflicts damage upon modern American society.

Surely people would like to buy new homes.  There’s a need for them due to the population growth that’s taken place over the past decade.  So…what’s wrong?  As we’ve noted many times here in Advantage Point, the Masters of the Universe have left regular folks lagging too far behind, AGAIN!  Fixing the structural problems in the economy are a much more difficult proposition than placing gloss and lipstick on everything so why bother?  Why bother when you can keep getting away with playing it fast, loose, and sloppy?  The easy approach will help the short-term look superficially fine and that’s all that matters…to THEM.  So…that’s what we get round after round.  Each time the people get even more tired of the same old routine and vote the current crop of scoundrels out only to replace them with another group of scoundrels dressed in principled clothing.  But, as anyone that’s reflected on it knows, it’s only a matter of time before the new puppets mime the old puppets perfectly.

One last thing before we get into the volatility and such.  Housing sales may be a mere shell of their former selves but housing prices are a different matter!  They’re heading further and further away from affordability once again illustrating the utter failure of the FED’s asset inflation programs when the plight of Jane and John Doe are factored into the grading process: http://www.zerohedge.com/news/2017-09-26/case-shiller-home-prices-rise-fastest-pace-3-years-hit-new-record-high

What happens when the reality that incomes aren’t anywhere close to supporting these levels of home prices?  Why worry?  Squirt more lighter fluid, mix up another round and keep the music loud…What could possibly go wrong?

Volatility spiked a little last week.  Is the pickup in volatility arriving on cue?  Mark Hulbert seems to believe so.

http://www.marketwatch.com/story/get-ready-for-the-stock-markets-october-surprise-2017-09-26?mod=MW_story_top_stories

Hulbert’s piece is a quick read if you’d like to get a sense of Octobers past and what the month has portended for the market over the course of time.

In our own way, we’ve been lamenting the ratcheting up of “group think” over the course of this year and even long before that.  We’re in the company of noted investor Doug Kass but he’s more concerned about “Group Stink” and it’s bringing back bad memories:  https://realinvestmentadvice.com/the-scent-of-group-stink-is-as-strong-as-in-2000-2007/

“To me, the indomitable market is more a function of lemming-like behavior in a market, economy and profit setting that is far less secure and strong than many subscribe to,” Kass wrote. “Group stink is a powerful force in the markets, especially when the machines and algorithms and the ever-constant inflows into popular passive funds and ETFs dominate the investment backdrop.”

He says there’s “a near-universality of view” — yes, group stink — that stocks will just keep pushing higher and any dip will be taken as an excuse to buy.

“These factors exacerbate short-term trends and may contribute to the perpetuation of an ill-conceived perception of a daunting and inexhaustible virtuous market cycle,” Kass explained.

Before we move on from this link, we couldn’t help but to highlight these 2 items:

* Valuations: Most valuation metrics are at least in the 95% decile, an occurrence that typically has coincided over history with the end of maturing bull markets or in the ninth inning of speculative eras.

* Corporate Profits: With the largest spread between GAAP and non-GAAP earnings in history, never has such liberal use of accounting standards been accepted by the masses of market participants.

This may just be more of the same with respect to the proclivities of the Below the Radar staff but somebody’s got to do it!  We sure as Hades know that CNBC won’t as they’re too busy cheerleading!  The link we provided above will deliver riches for those in search of reasons to be concerned and keep risk as part of their equation for investing.  Kass et al. are seeing their ranks grow.  In fact, they’re now being joined by CFOs.  YES, the same people that have been engineering the share buy-backs to goose EPS numbers and the ones that tell Wall St. analysts how high to set the earnings bar so they can jump over it comfortably each quarter.  http://www.marketwatch.com/story/a-rising-share-of-wall-street-cfos-think-this-stock-market-is-bubblicious-2017-09-22

More than 80% of chief financial officers surveyed by accounting firm Deloitte said U.S. stock markets are overvalued, marking the highest level since Deloitte began conducting its quarterly poll about eight years ago.

According to a July study by StarCapital Research, the U.S. has the least affordable equity market in the world.

MarketWatch’s Mark Hulbert warns that when stocks become elevated, it doesn’t take much to tip them over the edge into a sharp fall, with seemingly no external triggers.

We’re going into wrap-up mode as we come full-circle.  This piece is phenomenal as it hits on our favorite theme of the elites engineering things to benefit themselves as they consign the rest of the country to be left further behind.  If we think not only in macro-economic terms but in “socioeconomic” terms, this is should gravely concern us all if we value long-term societal stability: http://www.zerohedge.com/news/2017-09-25/there-are-large-parts-america-being-left-behind

We’re going to leave most of it temporarily hidden from view at the link provided but these two graphics have “a lot to say” and make our point very well for us and thus we’re silent from this point onward except for this>>>  If you don’t have oil reserves lying around you’re likely in “53.4%” country:

 

 

Q3 is almost in the books and we’re following up last week’s entry with a very similar one as it may be of help to “earnings players” much in the same way that the Calendar Spread, covered last week, can be if factors fall into place.  So…here we go…

We’re sticking with the same stock, the same chart, and the same scenario so that players can compare and contrast the two different approaches.  We’re about to illustrate how to put on two vertical credit spreads at the same time in the same expiration.

Here’s the sitch: NVDA earnings were set for Aug. 10^th after the close.  On Aug. 9^th a projected move based on implied volatilities suggested that NVDA’s stock price would change by $14.22 potentially.  Implied Volatility registered at 130.29% in the front expiration of Aug. 11^th with 2 days remaining.  The stock was trading at $172.11, thus the potential move could produce a post-earnings price of either $186.53 or $157.69.

Let's look at two different expirations and how we could have traded them.

First, let's look at the front week of Aug. 11^th, 2017 with 2 days to expiration.  Our biased idea here is that there will be a down move in the stock with the fallout reaching the $157.00ish area potentially.

If we bought the $150.00 puts for $0.67 and sold the $155.00 puts for $1.26, we would take in $0.59.

If we sold the $180.00 calls for $4.15 and bought the $185.00 calls for $2.70 we would take in $1.45 for a total of $2.04

On Aug. 10^th the stock price opened at $164.74 and volatility increased because of the drop in the stock price, but price remained within the range of our two short strikes.

On Aug. 11^th the stock opened near our initial target price of $157.00 and proceeded to trade down to $152.91 before closing at $155.96, which is not too far at all from our biased downside target price.  This outcome allows us to keep the aforementioned credits collected on this trade, thus $2.04.

Now let's look at of Aug. 18^th, 2017 options with 9 days remaining to expiration to see a different scenario unfold.  Our main idea is the same...a down move in the stock price is expected with it potentially reaching the $157.00ish area.

In this expiration we could have bought the $150.00 put for $1.46 and sold the $155.00 put for $2.26 while selling the $180.00 calls for $5.35 and bought the $185.00 calls for $3.90 which would have resulted in a total credit of $2.25.

On Aug. 10^th, the stock price remained in our target zone.

On Aug. 11^th the stock closes at $155.96. The $150.00 puts are trading at $1.35 on the bid and $155.00 puts are trading for $3.25 on the offer.  This “side” or credit spread is about $1.10 against us BUT, the $180.00 calls are trading for $0.17 and $185.00 calls are trading for only $.08.  If we simply buy the $180.00 calls back we lock in profit of $1.28. We can leave the $185.00 calls alone since they are trading for only $.08 and although unlikely, it’s possible that they can again become worth something more significant.

On Aug. 14^th the stock opens at $159.67 and closes near highs at $168.40. The $155.00 puts are offered at $0.22 and $150.00 puts are bid at $0.08.  This put credit spread can now be taken off for profit of $0.58.  Those $185.00 calls we BRILLIANTLY LEFT ON 😊 just jumped to $0.15 and thus we’ll now sell them out, unless we are really swinging for the fences!

All in all, we made $0.58 on the $155-$150 put spread, and made $1.43 on the $180-$185 call spread.  In total, we made $2.01.  Double 😊😊

If we let both spreads work out until expiration, we could have made a max profit of $2.25, but we also would have had the added stress of managing big moves in a volatile stock over a longer period of time.

Keep in mind that we could have gotten more aggressive with what we sold but we are trying to provide a conservative example for those that care to tread into earnings season somewhat boldly but not too boldly!

The approaches we outlined above are known as Iron Condors.  If you’re unfamiliar with employing 2 vertical credit spreads simultaneously, you now know that you can and if you handle it as we illustrated you’ll know that you have an Iron Condor on as you do it.  Once again, this a way to profit from earnings-driven movement but without a great deal at risk compared to a long call or long put-only employed in expensive options environments…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