Advantage Point Newsletter - September 5th, 2017
• This Week's Trade Ideas:
Bullish: Proshares Short S&P 500 SH– Buy the Oct 20th 32 Calls for $1.25 or less with a close or anticipated close above $33.15 in a down market with expectations for continued weakness in the indices. This is for those that like to being bullish on the inverse.
Bearish: Bank of America Corp.> BAC – Buy the Oct 6th 24 Puts for $1.20 or less with a close or anticipated close below $23.10 in a down market with expectations for continued weakness in the indices.
Bearish Mentions:
Delta Airlines > DAL. Top Bear idea early in day but fell nearly 4% at one point. Closed down > 3.5%.
IShares Germany ETF > EWG.
SPDR Euro Stoxx 50 Fund > FEZ. Both still technically vulnerable.
US Bancorp > USB. Very vulnerable chart. “OK” options markets.
Citizens Financial Group > CFG. Very vulnerable chart. Lacking open interest, strike choices.
USB and CFG are two more financials that have to hold where they are or it could get ugly for their stock prices and fast.
• Market Overview:
We have the sense that we’re at or approaching an interesting market juncture. September has often been a challenging month for the markets in the past. And, once again, we hit up against upside resistance and couldn’t push through.
• Below the Radar:
This week we’re all about perspective. Catching more of Wall St.’s propaganda channels over the past few weeks than we normally do got our wheels churning. It suddenly dawned on us that things have been so screwed up for so long that they’ve got most people largely convinced all is well.
• Options Academy:
Given the technically concerning yet unresolved state of the markets at present, we’re sticking with the concept of protection. What follows will be a brief but important take on things as we see them.
Wall St. to the rescue. They did what they HAD to do. Can they sustain it? We will see…
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 were concerned last week knowing that many key “parts” of the market were operating below trend. Our take was that we’d have to wait it out a little to see how the gang treated the North Korea news along with the rest of the economic news that was slated for dissemination especially in the back half of the week. Well, if you listened to the “talking head” take on it, and noted that the DOW closed UP about 56 points the day after North Korea sent a missile to the far side of Japan, you may have become really excited! Think about it, since it’s a good thing (we’re told it pushes the FED inching up rates back a little), and it seems repeatable as Kim has been fairly consistent, we can begin to extrapolate. There are about 17 trading weeks left this year. If Kim launches only 1 missile per week and the DOW tacks on 56 points each time as it “keeps pushing the FED back a little bit more”, with all other things being equal, we can count on finishing the year nearly 1000 more DOW points higher than where we are now! Clearly, we’re witnessing another gilded age in the stock market! It’s a simple as 1,2,3,4! Even Kim could get in on the action. Step 1 > Buy to open DIA Calls, Step 2 > PRESS SEND BUTTON (Sends Missile to far side of Japan), Step 3 > Wait patiently as US Market TV Experts cheer on the missile launch since IT TOO is good for stocks, Step 4 > Left Click to close out Calls for a profit!
As you may have guessed, we don’t see it quite that way. As we noted in Advantage Point and our Wednesday morning webinar, our take was that Wall St. bulls HAD to try to rescue the markets from a technically vulnerable predicament. That’s clearly what took place last week and their cause was aided by thin, late summer market conditions. The low volume, low liquidity markets of late August that we noted, were the perfect environment for additional upside volatility. This is something we noted in the webinar; That they’d try to do nearly exactly what they did. We can never know in advance if they’ll be able to pull it off but this time they certainly did! They used the NK news to create an obvious short selling trigger that also induced other weak hands to sellout at panic lows that morning on the news (after the Wall St. gang had already pushed the futures down big in pre-market trading), and then they literally never looked back as they jammed stocks up not only for the rest of the day but the balance of the week and month! This is a great illustration of the engineering that the Wall St. gang is capable of when called into action. We’ve taken the space to point this out because we want to make it clear that the “news” can be used for whatever purposes they need to use it for at any time. Consider this, would you go on a stock buying spree on the news that NK fired a missile to the far side of Japan? Few would but the gang certainly did. They NEEDED to! If they didn’t pull that off last week then the week and month would have closed out ugly, the technical state of key parts of the market would have been much more precarious and selling begets selling… The bottom line is that they staved off more forceful selling at least momentarily but they’re still not out of the technical woods! We’re could still fall back below what has been a key intermediate term trendline and that’s not something we take lightly!
Keep your eyes on the pink oval area above. The SPYs need to remain above there for the level of concern to back down. Other support areas are nearby of course but the lower $240.00s hold the key that unlocks the door to much more aggressive selling kicking in as we see it. Our “below trend concerns” also include the vaunted FAANG basket. Let the pink oval be your guide:
Bullish:
Proshares Short S&P 500 SH– Buy the Oct 20th 32 Calls for $1.25 or less with a close or anticipated close above $33.15 in a down market with expectations for continued weakness in the indices. This is for those that like to being bullish on the inverse.
Bullish Mentions:
NONE
Bearish:
Bank of America Corp.> BAC – Buy the Oct 6th 24 Puts for $1.20 or less with a close or anticipated close below $23.10 in a down market with expectations for continued weakness in the indices.
Bearish Mentions:
Delta Airlines > DAL. Top Bear idea early in day but fell nearly 4% at one point. Closed down > 3.5%.
IShares Germany ETF > EWG.
SPDR Euro Stoxx 50 Fund > FEZ. Both still technically vulnerable.
US Bancorp > USB. Very vulnerable chart. “OK” options markets.
Citizens Financial Group > CFG. Very vulnerable chart. Lacking open interest, strike choices.
USB and CFG are two more financials that have to hold where they are or it could get ugly for their stock prices and fast.
Outlook:
They saved August in the nick of time just like they did in June. They’re trying to keep the good times rolling but we remained concerned as we’re not operating above trend in key parts of the markets.
Too many stocks that are key and too many sectors that are key are flashing technical vulnerability to us at present. We remain cautious and concerned. It would take much to trip the switch for very aggressive selling to ignite.
Technicals:
Will be discussed in-depth in the Advantage Point Morning Call webinar.
Fundamentals:
These trade idea(s) 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 played out much as we thought it could had you been able to see and hear the finer points we covered in our Advantage Point Morning Call webinar on Wednesday morning. We began breathing a sigh of relief was the webinar progressed seeing as how the gang was in fall mark-up mode. We acknowledged that the “save the month” play had likely been called for execution. More specifically and fortunately, prior idea MU, powered to and then through one of our nearer target levels and nearly made it to our secondary target level of $33.00 as it hit a high just below there. Bullish mention SLCA also responded to the upside and is still hanging in there bullishly as we write. Remember, it’s a counter trend idea so consider staying prudent in there and managing it that way especially if the indices become heavy after last week’s party. Bearish mentions EWG and FEZ traded lower and then back up as the NKMLES virus (“North Korea Missile Launch Euphoria Syndrome”) spread into European equities. All in all, they’re not much different in price now than they were when we mentioned them last week.
We have the sense that we’re at or approaching an interesting market juncture. September has often been a challenging month for the markets in the past. And, once again, we hit up against upside resistance and couldn’t push through. As we write, we’re backing off and heading lower. Still though, we’re essentially trading between resistance below the $250.00 level in the SPYs and support in the lower $240.00’s. A break either way and things become much more interesting. A break to the upside sets an early bullish tone for the Fall which typically ends bullishly to begin with. A downside break, long overdue, could become very interesting as interest rates are supposed to be heading higher and the FED’s balance sheet is supposed to become lighter in the near future. Additionally, the “channel stuffing” that was used in Q2 to make it look much better than it actually was in all likelihood, will be revealed if the market’s fall causes consumption jitters and Q3 gives back much of Q2’s air…
Hurricane Irma is starting to dominate news coverage at the moment, so we’ll see how that affects stock prices soon enough. As we lamented during last week’s webinar, Wall St. loves destruction as it draws consumption dramatically forward and makes things look much better in the short run than previously expected. The loss of economic utility that was “booked” years prior is of no concern. To that, natural disaster rallies may be the perfect emblem for our modern, broken, “lighter fluid”-based economy.
Last week’s heavy week of news is followed by a very lite slate of reports for this week. As we noted above, the Wall St. gang will make “hay” out of whatever they need to whenever they need to with the wind from TV commentators at their backs. There isn’t anything earth-shattering due out this week but that won’t stop them from utilizing whatever they choose as if it is!
This week we’re all about perspective. Catching more of Wall St.’s propaganda channels over the past few weeks than we normally do got our wheels churning. It suddenly dawned on us that things have been so screwed up for so long that they’ve got most people largely convinced all is well. As we noted at the top of the newsletter this week, even missiles sailing over Japan are now spun into good news by the commentariat. That spurred us to go “macro”. What follows is a mix of graphics and commentary that attest to the fact that where we are now and how we got here is ANYTHING BUT NORMAL…
Last week we noted that the sub-surface, aka the “market internals” were further deteriorating. This hasn’t escaped the notice of the hedge fund community so naturally with fewer stocks “working”, there are more and more money managers chasing those few. To wit, does anyone else hear that crowded trade alarm sounding? Anyone?:
An escalator up and an elevator shaft down. Sounds a little risky but that’s what BTR is all about. This is where things are at present. This is what is keeping the market buoyed:
Remove the “momo” and we have a much different picture. What if momo heads south and the hedge fund crowd finds themselves under water holding heavy momo? Just a thought…
Read the entire piece here:
The CNBC and Bloomberg squawkers have kindly explained to us countless times why we’re not in an equities bubble. Apparently, the extreme and sustained measures undertaken by Central Banks to keep the music playing are now part of the “new norm” as far as they’re concerned and the fact that CB policies have pushed asset prices up dramatically and detached them from other factors, namely income levels, matters little. In other words, the rationalization process we saw near the top of prior recent bubbles is in full effect. Jeffrey Snider begs to differ and presents the following:
“Stocks are historically expensive because they trade on still the QE3 assumption. Part of the rationalization for it is simple disbelief; it is hard and even impossible for some to imagine how the US and global economy might just stop growing and stay that way. If you think such a state an assault on logic and sense, then you might trade as if one lost decade is the absolute limit of stagnation and malaise. True growth must be just around the corner, so why wait?”
Along with these graphics to support his case:
If you’d like to read and especially see more about bubbles, check it out: http://www.zerohedge.com/news/2017-08-30/two-parts-bubbles
Snider wasn’t alone recently when commenting on the fallout from the hyper-manipulation we’ve witnessed over the past few decades but especially the last one. Nomi Prins also published an interesting take that should be required reading if you want to know what the heck actually happened when we “bottom line” all the Central Banker/Bankers Club shenanigans and where things stand now. Don’t MISS THIS ONE!:
http://www.nomiprins.com/thoughts/2017/8/29/a-decade-of-g7-central-bank-collusion-and-counting.html
We’ve pulled a few choice sections that we couldn’t resist highlighting. Here’s just the intro:
Since late 2007, the Federal Reserve has embarked on grand-scale collusion with other G-7 central banks to manufacture a massive amount of money. The scope and degree of this collusion are historically unprecedented and by admission of the perpetrators, unconventional in approach, and - depending on the speech - ineffective.
Central bank efforts to provide liquidity to the private banking system have been delivered amidst a plethora of grandiose phrases like “unlimited” and “by all means necessary.” Central bankers have played a game with no defined goalposts, no clock rundown, no max scores, and no true end in sight.
At the Fed’s instigation, central bankers built policy on the fly. Their science experiment morphed into something even Dr. Frankenstein couldn’t have imagined. Confidence in the Fed and the U.S. dollar (as well as in other major central banks globally) has dropped considerably, even as this exercise remains in motion, and even though central bankers have tacitly admitted that their money creation scheme was largely a bust, though not in any one official statement.
She continued with a paragraph that’s power-packed:
The Winners and Losers
Since the global financial crisis, the biggest G7 winners have been the Big Six US banks that profited from access to cheap money. They benefitted from central bank purchases of their securities that exaggerated the value of the remaining securities on their books. They used “printed” or electronically crafted money to stockpile cash and fund buybacks of their own shares and pay themselves dividends on those shares. By producing and distributing artificial money, central bankers distorted reality in global markets. Multi-national banks were co-conspirators in that maneuver.
… They thus legally manipulated markets in plain sight by pushing their own share prices up with cheap money availed to them by the central bank that is supposed to regulate them.
As of this year, global debt levels stood at 325% GDP, or about $217 trillion. The $14 trillion of assets the G-3 central banks held on their books is equivalent to a staggering 17% of all global GDP. The European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England are still buying collectively $200 billion worth of assets per month.
And here’s her conclusion:
For all the cheap cash offered up, much at the expense of taxpayers who will bear the burden of the associated debt this enabled, and the bank fraud it plastered over, it will be ordinary citizens who will pay the price – yet again. In the era of money fabrication and monetary policy collusion, a decade of ongoing “emergency” procedure spells an eventual recipe for disaster.
Big US banks are bigger than before the crisis. They float atop a life-raft, among other things, of $4.5 trillion Fed asset book, as part of a total $14 trillion G7 central bank asset book. Yellen’s speech was code for preserving the status quo and central bank elasticity high. As for Cohn’s sentiment on the matter? Well, he feels the same. So does Trump. So did Obama.
Take the composite of all that and what are you left with? Ongoing G7 central bank monetary policy collusion, zero percent interest rates globally, unlimited QE potential, and major asset bubbles.
We conclude with this final brief but powerful reminder as to the “new state of normal”. Take a guess, a wild guess if you will, as to how many countries in Europe are currently inducing savers to not? Correct! 19 countries is absolutely right!:
Does that balance sheet expansion look normal? Remember, that’s all made possible by imagining money into existence. The other Central Bankers are guilty of the same if not worse.
We remain at a point at which the illusion must be maintained at all costs…
Given the technically concerning yet unresolved state of the markets at present, we’re sticking with the concept of protection. What follows will be a brief but important take on things as we see them.
Many folks become enamored with the “protective put”. They seem to love the idea that they can own stock and then, when needed, buy a put to protect against major adverse movement to the downside. We understand the logic as that is much better than simply getting “beat up” as stock values decline. However, we think there’s a better way if you can pull it off and here’s why…
As we write, the SPYs are just above the $245.00 level. If we look out about 1 month, we find the Oct. 4th expiration which is just about 1 month away (29) days. If we were to purchase the Oct. 4th $245.00 strike puts right now they’d cost us about $3.00 per share to insure a long stock position on our fictitious SPY stock holdings. If we do the math on that, it’s costing us $3.00 for 1 month of protection on a $245.00 “stock” (ETF). That’s over a 1% insurance charge for 1 month of protection. And, let’s not forget, that we when we buy insurance we hope to not have to use it! $3.00 per share is quite a bit that would disappear over the course of 1 month. And, if we’re still concerned, then what? Do we do it all over again? That can get pricey! Let’s do a little better though…
If we try to bring that down a little, we can move to the $240.00 strike at which we can pay $1.70 for that particular put and thus be protected from $240.00 all the way down should the markets take a tumble. $240.00ish is a key technical level as we see it so that makes sense that we’d buy there while it also reduces our cost. Even so, if we annualized the cost of either protective put, they’re both pricey. We’d have to have a nice market return every year on average to keep ourselves insured at all times but we know that’s probably overkill. We know, from experience, that we only feel the need to be insured in the markets at certain times. Thus, we could say that our psychology changes at those times. It’s at those times that we’re even more risk-focused (“fearful”) than profits-focused (“greedy”). If we accept that we’re not worried about missing out on a little bit of profits but are much more so concerned about not giving back profits or experiencing major losses, we can opt for our preferred and much lower cost hedging approach: The Collar
We’ve covered it before but to make it clear, we’d add a sold (covered btw) call to our protective put purchase to offset the cost of our put insurance. It’s that simple. That way, if the market dawdles around for a while we’re not getting eaten alive by the rapid decay we can experience from owning nearer-term options.
Just to put a number on it, let’s assume that we somewhat offset the purchase of the $240.00 put by selling the $248.00 call in the same expiration. We can sell that currently for $1.05. The Collar package thus costs $0.65 net ($1.70 debit for the put and $1.05 credit for the call = Net $0.65 debit) and we’re protected for roughly 1 month below a truly key level on the SPY chart but still have some time to react to the upside if the market starts to right the ship and looks to breakout to the upside. $0.65 cost / $245.00 SPYs underlying price brings us to roughly ¼ of 1% to put this form of insurance in place for the next month! That’s much more palatable to us. We’re still allowing for the SPYs to “breath” a little and we have a little room to adjust to the upside should we need it, once again, as we sleep soundly each night! Something to consider...
If you have any questions please bring those to our next Advantage Point Morning Call webinar.
Have a great week!
The Advantage Point Team