Author: TheAcsMan

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Weekend Update – June 8, 2014

This was a week with some potentially market rattling news.

Whenever the market is sitting at new highs, especially when having done so in a series of tentative moves and on low volume the risk may be heightened for a reversal of fortunes.

For definitional purposes, I would call that “exciting.”

Among the potential stumbling blocks to further market records were the much awaited announcement by Mario Draghi, the President of the European Central Bank, regarding interest rates, followed the next day by the monthly Employment Situation Report.

However, both were expected to be devoid of surprise and weren’t widely expected to move the markets unless some true surprise was announced.

True to expectations neither event contained any surprises.

In contra-distinction, I would call that boring and would generally expect ambivalence in response. Yet despite fully expecting the outcomes the market added nearly 100 points on each of those days, turning those yawns of boredom into gains and giving meaning to the age old saying that “no news is good news.”

The ECB’s reduction of its key lending rate was taken in stride and was a non-event, yet for some reason the market closed with just shy of a triple digit gain having suddenly turned around from an early morning loss. That early loss seemed more in line with another age old saying that has us selling on the news.

As the gain picked up some steam there was an obligatory need to find a reason and it was simple, as David Tepper, hedge fund manager and founder of Appaloosa Management, who had recently moved markets both up and down, was reported by CNBC’s Kate Kelly, via CNBC’s Twitter publicity machine to have said that his market concerns had “alleviated.”

That revelation soon found its way into what now passes for mainstream media and was reported as “David Tepper Isn’t Nervous Anymore.”

click to enlarge)

It’s always nice to know what’s going on and what causes market moves. Of course, what was conveniently missing here was the time line, as the turnaround started at 10:18 AM and the initial Kelley Tweet didn’t appear until an hour later, at which point 50% of the gain in the S&P had already been realized.

By the time the CNBC publicity machine Tweet was posted and the Business Insider article appeared about 90% of the gain had already been realized.

But we can still give Tepper the credit. After all, it doesn’t really matter other than for the creation of image.

Friday was a little more straightforward. Completely expected non-farm payroll numbers and the market opened with a gap higher and just stayed there throughout the day. There was no need to look for search high and low for an explanation and make it fit the events.

The spin surrounding the employment statistics was that as a nation we were now back to pre-recession employment numbers, as if that itself would be received as meaningful or even good news.

The message seems to be that the market doesn’t need a catalyst to go higher. It just needs to ensure that there’s no deterrent. The status quo is just fine.

Boredom is the new black bottom line for portfolios.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

While boring may be good for your health and your portfolio Cree (CREE) the maker of LED light bulbs has been anything but boring since becoming a publicly traded company and is, nonetheless, high on my list for consideration this week.

That’s because Cree may be settling into senescence of late. After a disastrous response to its most recent earnings report it has settled into a downright boring trading pattern and its own measure of volatility is no longer one that should send a sane investor heading in a different direction.

While the recent trading pattern has been in a tight range, memories of days past that included numerous sharp rises and declines help to keep option premiums at attractive levels. In the past I’ve both owned shares and sold calls, as well as sold put contracts. Most recently, after some rollovers following an adverse price move, I accepted assignment and again own shares. This time around I may again elect the put sale route with the hope of being able to rollover contracts if assignment is likely.

Las Vegas Sands (LVS), on the other hand, may not be settling into senescence. Although its Chairman is getting on in years, he hasn’t let that dim his level of enthusiasm for life or diminish Las Vegas Sands’ impact on gaming worldwide.

While Caesers (CZR) cast a little pall on the sector on Friday with word of a notice of default from some bond holders, it was already a challenging week for casinos and Las Vegas Sands hasn’t been immune to the selling pressure.

Down about 15% from its March 2014 high I have been waiting for an entry point. Like Cree, I may prefer to do that with the sale of put options, although I may be more inclined to accept assignment, rather than rolling over, as shares go ex-dividend the following week.

One last bit of excitement may come from LuLuLemon Athletica (LULU) which reports earnings this week. Since I already own shares at a price far higher than it currently

sits, despite Friday’s 4% move higher and also am short puts, I’m considering the put sale route again this coming week.

Always a candidate for an explosive price movement on earnings and forward guidance, the options market is implying a 10.3% movement in price upon the event, which would suggest a lower price range of $40. However, a 1% weekly ROI may be able to be attained at a strike price as low as $38.50, which would represent a 13.8% price decline.

Could that large of a drop happen? With LuLuLemon? Absolutely. Just look at June 2013 or December 2013 earnings.

On the other hand, there is Lorillard (LO). The tobacco industry is generally a fairly boring one when litigation isn’t part of the equation. Lately the excitement level has gone a bit higher with the introduction of “e-cigarettes” of which Lorillard is said to be a leader.

But the real excitement revolves around the market’s response to the potential buyout of Lorillard, the tangled web of ownership and the potentially internecine relationships both between the various involved companies and with their own customers.

While there is always risk associated with jumping on board in anticipation of a buyout or merger, there’s little reason to believe that some kind of alliance won’t be realized, as there haven’t been any signs of protest or contention from any of the parties and there appears to also be a buy-in from British American Tobacco (BTI), which owns a substantial piece of the proposed acquiring company, Reynolds American (RAI). In addition to an attractive premium that was generally the case prior to buyout speculation, the longer the process is drawn out the more likely one is to also benefit from a very attractive dividend, as well.

The Gap (GPS) is an anachronism, as it remains one of the few retailers to still provide monthly comparable sales statistics.

In hindsight, it seems that I’ve been caught too often in the crossfire between those reports and the market’s reaction to those reports. I’ve also been trading in The Gap long enough to see that those reports vary wildly from month to month as does the subsequent reaction.

This past Friday was one such report and unusually, the comparable sales statistics were flat, as was the response. My existing shares were subsequently assigned. However, with any weakness in price, particularly returning shares to the $41 level, I would be an eager buyer, but would always try to be mindful of the recurring monthly event that makes the option premiums appear very attractive, but that bring along additional risk.

Finally, I’ve been lately focusing more on dividend payments, as option premiums increasingly reflect the low volatility environment. The combination of dividends and option premiums can address the challenge of low expectations for sudden price movements, particularly among “Traditional” or low beta stocks in an already low volatility market environment.

This week both Coca Cola (KO) and Merck (MRK) are ex-dividend. Neither are frequent targets for past purchase, although I have owned Merck twice in the past year and Coca Cola has been in one of my children’s accounts for more than a decade.

While there are some more adventurous and less boring potential positions to be considered this week, the boring DJIA components have a certain comfort level that may be just right at this point of the market’s climb.

One contrast to that boring approach to the accumulation of dividends is Newmont Mining (NEM) which is also ex-dividend this week. While suggestions that its dividend may be imperiled have slowed down, it is certainly tied to the price of gold, which has been imperiled on its own of late.

Already owning two more expensively lots of Newmont Mining and long suffering while awaiting some rebound in price, I’m finally ready to add shares in anticipation of an opportunity to realize some capital gains in addition to option premiums and dividends.

At that point I would then be happy to settle into boring mode.

 

Traditional Stocks: Lorillard, The Gap

Momentum: Cree, Las Vegas Sands

Double Dip Dividend: Coca Cola (6/12), Merck (6/12), Newmont Mining (6/10)

Premiums Enhanced by Earnings: LuLuLemon Athletica (6/12 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

 

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Weekend Update – June 1, 2014

I read an excellent article by Doug Kass yesterday. Most of all it explained the origin and definition of the expression “Minsky Moment” that had suddenly come into vogue and received frequent mention late this past week.

I enjoy Kass’ perspectives and opinions and especially admire his wide range of interests and willingness to state his positions without spinning reality to conform to a fantasy.

Perhaps it was no coincidence that the expression was finding its way back to use as Paul McCulley, late of PIMCO, who had coined the phrase, was being re-introduced to the world as the newest PIMCO employee, by a beaming Bill Gross.

The basic tenet in the Kass article was that growing complacency among investors could lead to a Minsky Moment. By definition that is a sudden collapse of asset values which had been buoyed by speculation and the use of borrowed money, although that didn’t appear to be the basis for the assertion that investors should prepare for a Minsky Moment.

Kass, however, based his belief in the possibility of an impending Minsky Moment on the historically low level of market volatility, which he used as a proxy for complacency. In turn, Kass simply stated that a Minsky Moment “sometimes occurs when complacency sets in.”

You can argue the relative foundations of those suppositions that form the basis for the belief that it may be opportune to prepare for a Minsky Moment. Insofar as it is accurate to say that sometimes complacency precedes a Minsky Moment and that volatility is a measure of complacency, then perhaps volatility is an occasional predictor of a sudden and adverse market movement.

Volatility is a complex concept that has its basis in a purely statistical and completely unemotional measure of dispersion of returns for an investment or an index. However, it has also been used as a reflection of investor calm or anxiety, which as far as I know has an emotional component. Yet volatility is also used by some as a measure the expectation of a large movement in one direction or another.

Right now, the low volatility indicates that there has been little dispersion of price, or put another way there has been very little variation in price in the recent past. Having gone nearly 2 years without a 10% correction most would agree, without the need for statistical analysis, that the variation in stock price has been largely in a single direction.

However, few will argue that volatility is a forward looking measure.

Kass noted that “fueled by new highs and easy money, market observers are now growing more optimistic.”

Coincidentally enough, on the day before the Kass article appeared, I wrote in my Daily Market Update about complacency and compared it to the 1980s and 2007.

Of course, that was done through the lens of an individual investor with money on the line and not a “market observer.”

While I’m very mindful of volatility, especially as low volatility drives down option premiums, it doesn’t feel as if the historic low volatility is reflective of individual investor complacency. In fact, even among those finding the limelight, there is very little jumping up and down about the market achieving new daily highs. The feeling of invincibility is certainly not present.

Anyone who remembers 1987 will recall that there was a 5 year period when we didn’t know the meaning of a down market. Complacency is when you have a certain smugness and believe that things will only go your way and risk is perceived to be without risk.

Anyone who remembers 2007 will also recall how bored we became by new daily record highs, almost as if they were entitlements and we just expected that to keep being the new norm.

I don’t know of many that feel the same way now. What you do hear is that this is the least liked and respected rally of all time and the continuing expectation for some kind of reversal.

That doesn’t sound like complacency.

While the Volatility Index may be accurately portraying market prices that have demonstrated little variation over a finite time frame, I don’t believe that it remotely reflects individual investor sentiment.

As opposed to earlier times when new market highs were seen as preludes to even greater rewards you may be hard pressed to find those who believe that the incremental reward actually exceeds the risk of pursuing that reward.

Put me in that latter camp.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

One stock that I really haven’t liked very much has been Whole Foods (WFM). I say that only because it has consistently been a disappointment for me and has reflected my bad market timing. WHile I often like to add shares in positions that are showing losses and using a “Having a Child to Save a Life” strategy, I’ve resisted doing so with Whole Foods.

However, it finally seems as if the polar vortex is a thing of the past and the market has digested Whole Foods’ expansion and increased cap-ex and its strain on profits. But that’s a more long term perspective that I rarely care about. Instead, it appears as if shares have finally found a floor or at least some stability. At least enough so to consider trying to generate some income from option sales and perhaps some capital gains on the underlying shares, as well, as I believe there will be some progress toward correcting some of its recent price plunge.

Mosaic (MOS) which goes ex-dividend th

is week is one stock that I’ve been able to attenuate some of the pain related to its price drop upon news of the break-up of the potash cartel, through the use of the “Having a Child to Save a Life” strategy. Shares have slowly and methodically worked their way higher since that unexpected news, although have seen great resistance at the $50 level, where it currently trades.

While I don’t spend too much time looking at charts, Mosaic, if able to push past that resistance may be able to have a small gap upward and for that reason, if purchasing shares, I’m not likely to write calls on the entire position, in anticipation of some capital gain on shares, in addition to the dividend and option premiums.

Holly Frontier (HFC) also goes ex-dividend this week. Like so many stocks that I like to consider, it has been recently trading in a range and has occasional paroxysms of price movement. Those quick and unpredictable moves keep option premiums enticing and its tendency to restrict its range have made it an increasingly frequent target for purchase. It is currently trading near the high of my comfort level, but that can be said about so many stocks at the moment, as they rotate in and out of favor with one another, as the market reaches its own new highs.

Lowes (LOW) us one of those companies that must have a strong sense of self-worth, as it is always an also-ran to Home Depot (HD) in the eyes of analysts, although not always in the eyes of investors. It, too, seems to now be trading in a comfortable range, although that range has been recently punctuated by some strong and diverse price moves which have helped to maintain the option premiums, despite overall low market volatility.

MasterCard (MA) was one of the early casualties I experienced when initially beginning to implement a covered call strategy. I never thought that it would soar to the heights that it did and my expectations for it to drop a few hundred points just never happened, unless you don’t understand stock splits.

For some reason, while Apple (AAPL) shares never seemed too expensive for purchase, MasterCard did feel that way to me although at its peak it wasn’t very much higher than Apple at its own peak. Also, unlike Apple which will start trading its post-split shares this week, that split isn’t likely to induce me to purchase shares, while the split in MasterCard was a welcome event and re-introduced me to ownership.

With a theme of trading in a range and having its price punctuated by significant moves, MasterCard has been a nice covered option trade and I would be welcome to the possibility of re-purchasing shares after a recent assignment. With some of the uncertainty regarding its franchise in Russia now resolved and with the hopes that consumer discretionary spending will increase, MasterCard is a proverbial means to print money and generate option income.

I was considering the purchase of shares of Joy Global (JOY) on Friday and the sale of deep in the money weekly calls in the hope that the shares would be assigned early in order to capture its dividend, as Friday would have been the last day to have done so. That would have prevented exposure to the coming week’s earnings release.

Instead, following a nearly 2% price drop I decided to wait until Monday, foregoing the modest dividend in the hope that a further price drop would occur before Thursday’s scheduled earnings.

With its reliance on Chinese economic activity Joy Global may sometimes offer a better glimpse into the reality of that nation that official data. With its share price down approximately 6% in the past month and with my threshold 1% ROI currently attainable at a strike level that is outside of the lower boundary defined by the implied move, the sale of put contracts may have some appeal.

If there may be a poster child for the excesses of a market that may perhaps be a sign of an impending Minsky Moment, salesforce.com (CRM) should receive some consideration. Although there are certainly other stocks that have maintained a high profile and have seen their fortunes wax and wane, salesforce.com seems to go out of its way to attract attention.

Following a precipitous recent decline in price over the past few days shares seemed to be on the rebound. This past Friday morning came word of an alliance with Microsoft (MSFT), a company that salesforce.com’s CEO, Marc Benioff, has disparaged in the past.

While that alliance still shouldn’t be surprising, after all, it is all about business and personal conflict should take a back seat to profits, what was surprising was that the strong advance in the pre-open trading was fairly quickly reversed once the morning bell was rung.

With a sky high beta, salesforce.com isn’t a prime candidate for consideration at a time when the market itself may be at a precipice. However, for those with some room in the speculative portion of their portfolio, the sale of puts may be a reasonable way to participate in the drama that surrounds this stock. However, I would be inclined to consider rolling over put options in the event that assignment looks likely, rather than accepting assignment.

Finally, everyone seems to have an opinion about Abercrombie and Fitch (ANF). Whether its the actual clothing, the marketing, the abhorrent behavior of its CEO or the stock, itself, there’s no shortage of material for casual conversation. Over the past two years it has been one of my most frequent trades and has sometimes provided some anxious moments, as it tends to have price swings on a regular basis.

Abercrombie reported earnings last week and I had sold puts in anticipation. Unlike most times when I sell puts my interest is not in potentially owning shares at a lower price, but rather to simply generate an option premium and then hopefully move on without shares nor obligation. However, in the case of Abercrombie, if those put contracts were to have fallen below their strike levels, I was prepared to take delivery of shares.

While rolling over such puts would have been a choice, Abercrombie does go ex-dividend this week and its ability to demonstrate price recovery and essentially arise from ashes it fairly well demonstrated.

My preference would have been that Abercrombie had a mild post-earnings
loss, as it is near the higher end of where i would consider a purchase, but it’s an always intriguing and historically profitable position, despite all of the rational reasons to run fro ownership of shares.

Traditional Stocks: Lowes, MasterCard, Whole Foods

Momentum: salesforce.com

Double Dip Dividend: Abercrombie and Fitch (6/3), Holly Frontier (6/4), Mosaic (6/3),

Premiums Enhanced by Earnings: Joy Global (6/5 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – May 25, 2014

This was a good week, every bit as much as it was an odd one. 

You almost can’t spell “good” without “odd.”

We tend to be creatures that spend a lot of time in hindsight and attempting to dissect out what we believe to be the important components of everything that surrounds us or impacts upon us.

Sometimes what’s really important is beyond our ability to  see or understand or is just so counter-intuitive to what we believe to be true. I’m always reminded of the great Ralph Ellison book, “The Invisible Man,” in which it’s revealed that the secret to obtaining the most pure of white paints is the addition of a drop of black paint.

That makes no sense on any level unless you suspend rational thought and simply believe. Rational thought has little role when it calls for the suspension of belief.

This past week there was no reason to believe that anything good would transpire.

Coming on the heels of the previous week, which saw a perfectly good advance evaporate by week’s end there wasn’t a rational case to be made for expecting anything better the following week. That was especially true after the strong sell-off this past Tuesday.

Rational thought would never have taken the antecedent events to signal that the market would alter its typical pattern of behavior on the day of an FOMC statement release. That behavior was to generally trade in a reserved and cautious fashion prior to the 2 PM embargo release and then shift into chaotic knee-jerks and equally chaotic post-kneejerk course corrections.

Instead, the market advanced strongly from the opening bell on that day, erasing the previous day’s losses and had no immediate reaction to the FOMC release and then in an orderly fashion moved mildly higher after the words were parsed and interpreted.

The trading on that day and its timing were entirely irrational. It was odd, but it was good.

Ordinarily it would have also been irrational to expect a rational response to the minutes that offered no new news, as in the past real news was not a necessary factor for irrational buying or selling behavior.

The ensuing rational behavior was also odd, but it, too, was good.

As another new high was set to end the week there should be concern about approaching a tipping point, especially as the number of new highs is on the down trend. However, the market’s odd behavior the past week gives me reason to be optimistic in the short term, despite a belief that the upside reward is now considerably less than the downside risk in the longer term. 

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

This was a week in which those paid to observe such things finally commented on the disappointing results coming from retailers, despite the fact that the past two or three quarters have been similar and certainly not reflective of the kind of increased discretionary spending you might expect with increasing employment statistics.

With some notable exceptions, such as LuLuLemon (LULU) and Family Dollar Store (FDO) I’ve enjoyed being in and out of retailers, although I think I’d rather be maimed than actually be in and out of anyone’s actual store.

This week a number of retailers have appeal, either on their merits or because there may be some earnings related trades seeking to capitalize on their movements. Included for their merits are in the list are Bed Bath and Beyond (BBBY), eBay (EBAY), Nike (NKE) and The Gap (GPS), while Abercrombie and Fitch (ANF) and Kors (KORS) report earnings this week.

After a disappointing earnings report Bed Bath and Beyond has settled into a trading range and gas seemed to establish some support at the $60 level. Along with so many others that have seen their shares punished after earnings the recovery of share price seems delayed as compared to previous markets. For the option seller that kind of listless trading can be precisely the scenario that returns the best results.

eBay has also stagnated. With Carl Icahn still in the picture, but uncharacteristically quiet, especially after the announcement of a repatriation of some $6 billion in cash back to the United States and, therefore, subject to taxes, there doesn’t seem to be a catalyst for a return to its recent highs. That suits me just fine, as I’ve liked eBay at the $52 level for quite a while and it has been one of my more frequent in and out kind of trades. At present, I do own two other lots of shares and three lots is my self imposed limit, but for those considering an initial entry, eBay has been seen as a mediocre performer in the eyes of those expecting upward price movement, but a superstar from those seeking premium income through the serial sale of option contracts week in and out. If you’re the latter kind, eBay can be as rewarding as the very best of the rest.

The Gap reported earnings on Friday and exhibited little movement. It’s currently trading at the high end of where I like to initiate positions, but it, too, has been a very reliable covered option trade. An acceptable dividend and a fair option premium makes it an appealing recurrent trade. The only maddening aspect of The Gap is that it is one of the few remaining retailers that oddly provides monthly same store sales and as a result it is prone to wild price swings on a regular basis. Those price swings, however, tend to be alternating and do help to keep those option premiums elevated.

You simply take the good with the odd in the case of The Gap and shrug your shoulders when the market response is adverse and just await the next opportunity when suddenly all is good again.

Despite all of the past criticism and predictions of its irrelevance in the marketplace Abercrombie and Fitch continues to be a survivor.  This past Friday was the second anniversary of the initial recommendation of taking a position for Option to Profit subscribers, although I haven’t owned shares in nearly 5 months. Since that in

itial purchase there have been 18 such recommendations, with a cumulative 71.5% return, despite shares having barely moved during that time frame.

Always volatile, especially when earnings are due, the options market is currently implying a 10.2% move in price. For me, the availability of a 1% ROI from selling put contracts at a strike level outside of the lower boundary of that implied range gets my interest. In this case shares could fall up to 13.9% before assignment is likely and still deliver that return.

Kors, also known as “Coach (COH) Killer” also reports earnings this week. It has stood out recently because it hasn’t been subject to the same kind of selling pressure as some other “momentum” stocks. The option market is implying a price movement of 7.4%, while a 1% ROI from put sales may be obtained at a strike level currently 8.8% below Friday’s closing price. However, while Abercrombie and Fitch has plenty of experience with disappointing earnings and has experienced drastic price drops, Kors has yet to really face those kinds of challenges. In the current market environment earnings disappointments are being magnified and the risk – reward proposition with an earnings related trade in Kors may not be as favorable as for that with Abercrombie.

In the case of Kors I may be more inclined to consider a trade after earnings, particularly considering the sale of puts if earnings are disappointing and shares plummet.

After last week’s brief ownership of Under Armour (UA) this week it may be time to consider a purchase of Nike, which under-performed Under Armour for the week. Shares also go ex-dividend this week and have been reasonably range-bound of late. It isn’t a terribly exciting trade, but at this stage of life, who really needs excitement? I also don’t need a pair of running shoes and could care less about making a fashion statement, but I do like the idea of its consistency and relatively low risk necessary in order to achieve a modest reward.

Transocean (RIG) is off of its recent lows, but still has quite a way to go to return to its highs of earlier in the year. Going ex-dividend this week, the 5.7% yield has made the waiting on a more expensive lot of shares to recover a bit easier. As with eBay, I already have two lots of shares, but believe that at the current level this is a good time for initial entry, perhaps considering a longer term option contract and seeking capital gains on shares, as well. As with most everything in business and economy, the current oversupply or rigs will soon become an under supply and Transocean will reap the benefits of cyclicality.

Sinclair Broadcasting (SBGI) also goes ex-dividend this week. It is an important player in my area and has become the largest operator of local television stations in the nation, while most people have never heard the name. It is an infrequent purchase for me, but I always consider doing so as it goes ex-dividend, particularly if trading at the mid-point of its recent range. CUrrently shares a little higher than I might prefer, but with only monthly options available and an always healthy premium, I think that even at the current level there is good opportunity, even if shares do migrate to the low end of its current range.

Finally, Joy Global (JOY), one of those companies whose fortunes are closely tied to Chinese economic reports, has seen a recent 5% price drop from its April 2014 highs. While it is still above the price that I usually like to consider for an entry, I may be interested in participating this week with either a put sale of a buy/write.

Among the considerations are events coming the following week, as shares go ex-dividend early in the week and then the company reports earnings later in the week.

While my preference would be for a quick one week period of involvement, there always has to be the expectation of well laid out plans not being realized. In this case the sale of puts that may need to be rolled over would benefit from enhanced earnings related premiums, but would suffer a bit as the price decrease from the dividend may not be entirely reflected in the option premium. That’s similar to what is occasionally seen on the call side, when option premiums may be higher than they rightfully should be, as the dividend is not fully accounted.

Otherwise, if beginning a position with a buy/write and not seeing shares assigned at the end of the week, I might consider a rollover to a deep in the money call, thereby taking advantage of the enhanced premiums and offering a potential exit in the event that shares fall with the guidelines predicted by the implied volatility. Additionally, it might offer the chance of early assignment prior to earnings due to the Monday ex-dividend date, thereby providing a quick exit and the full premium without putting in the additional time and risk.

 

Traditional Stocks: Bed Bath and Beyond, eBay, The Gap

Momentum: Joy Global

Double Dip Dividend: Nike (5/29 $0.24), Sinclair Broadcasting (5/28 $0.15), Transocean (5/28 $0.75)

Premiums Enhanced by Earnings: Abercrombie and Fitch (5/29 AM), Kors (5/28 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – May 18, 2014

Some weeks seem more productive than others.

After a week of some large and dramatic moves in both directions the S&P 500 barely budged when the final numbers were tallied for the week.

Normally when you don’t actually go anywhere you don’t feel so exhausted, but I felt that way after this week came to its inglorious conclusion. Who knew that reversion to the mean could be so tiring?

I don’t know what actually goes through the minds of hamsters that just keep running, yet go nowhere. I don’t think that they ever learn or maybe they just don’t care because it’s all about the spinning rather than the destination.

If you’re investing the destination is probably much more important to you than the spinning that may seek to interpret past events or predict the future.

Normally, I like those weeks that seem as if they were just spinning wheels and going nowhere. If you sell options you love the idea of the market not going anywhere. That way you can sell the same option over and over again upon expiration. But in order to have that as an attractive option you need to have occasional spikes and plunges in prices. Those movements create the uncertainty that entice people to buy those options and support the premiums that are willing to be paid.

This week, however, despite those market movements in opposite directions, the volatility just kept going lower and lower, as did the option premiums.

There’s no really good way to spin that, unless you can think of a reason that risk without reward can be a good thing. No matter how much I may keep running in that wheel, I don’t think that I would ever come to that conclusion, although the ensuing dizziness may be reward enough.

The record books will eventually show a week in which the index changed less than 0.05%, but will somehow lose the details and the character of a week that evoked lots of emotions.

Included in those emotions were the elation that may have come with setting more new record closing highs and the fears that accompanied two successive triple loss days in the DJIA. The confusion that remained at the end of the week will certainly not be reflected anywhere.

It was also another week in which attention was focused on bonds and interest rates, but the more you listen to those discussions the more dizzy you may get. It wasn’t too long ago that the spin feared for the equity markets if the 10 Year rate would have exceeded 2.9%. Then the spin changed and the fears centered on the rate dipping below 2.7%.

With the equity markets not having been destructed as either of those two levels were attained we are now being told to fret about the 2.5% level.

In the interim the 2.9% level was exceeded and the 2.7% level was breached, yet we kept setting new market records. You can be certain that along the way there was lots of spinning and if hamster behavior is any indication, there will be lots more to come, none of which will likely advance any of our interests.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.

I did very little trading last week, perhaps the slowest week in 5 years. However, some of the selections considered look even better to me after some price corrections of the past week and I may consider some of those selections as much as those from this week.

Among the many things that confuse me is the seeming disconnect between retail earnings and reports of increasing employment. That is also one that seems hard to spin. You would expect that increasing employment would lead to increasing discretionary spending, but the general trend has been to see retail revenues lower and many have been punished for not even being able to achieve already lowered previous guidance.

Kohls (KSS), despite regaining some of its earnings related losses on Friday would seem to be a beneficiary of an improving economy fueled by increasing employment. With its price drop this week it is now trading at the mid-point of its recent range. With an upcoming dividend later in the June 2014 cycle and an always attractive option premium, owing to its occasional price gyrations, despite a low beta, Kohls is always a good consideration.

Best Buy (BBY), on the other hand, may be an understandable casualty of a changing retail dynamic. Yet it has been an excellent covered option trade since its last earnings report when it plunged to its current level. Having traded at that level for the past three months has made it an excellent covered option trade. However, with earnings due to be announced this week my thoughts turn to the possibility of selling puts. The 1% ROI that I generally seek for a one week trade is attainable at a strike level about 10% below the current price and outside of the 7.7% Implied Move range. However, based upon past earnings, shares can certainly move well outside of the expected range and put sellers should be prepared to either take ownership of shares or attempt to roll the puts over to a future date.

Under Armour (UA) is now down about 22% since announcing it would split its shares. Uncharacteristically, the boost in share price after the announcement of the split wasn’t maintained for very long. in fact within just days that premium was gone and shares have steadily eroded. With earnings out of the way shares are beginning to approach a pre-split price level at which they were range bound. As with most apparel and specialty retailers there is increased risk with share ownership. Under Armour, however, other than the recent descent following the split announcement has been a fairly steady performer and its CEO, Kevin Plank, has shown the ability to respond to potential crises.

Another area of confusion is the reason for a steady decline in The Blackstone Group (BX). I already own shares and have endured that decline. I certainly remember how its IPO was the equivalent of that of Facebook (FB) in anticipation and disappointment, but that’s ancient history. Whether actually heralding the market crash or simply serving as a cash out vehicle for some of its principals, Blackstone knows how to identify companies, rehabilitate them and bring them to market. I would think that a decreasing interest rate environment would be beneficial to Blackstone, although a potentially weakening IPO market may not. However, at its current share price, I think it is a good candidate not only for an attractive option premium, a generous dividend, but also for capital appreciation. This is a potential purchase that I would consider for a longer term holding and use of some longer term option contracts.

Ingersoll-Rand (IR) is now trading a little below the mid-point of its recent range since after a spin-off of assets. I haven’t owned shares in nearly two years. During that time until its spin-off, Ingersoll-Rand greatly outperformed the S&P 500, despite the latter’s stellar performance. For most of the time since then they have matched one another in performance, other than in the past month, when Ingersoll-Rand began to lag.

With some concerns about short term market volatility, the availability of only monthly options, a dividend payment this monthly cycle in addition to a fair premium, make Ingersoll-Rand attractive, once again after a long absence.

Chesapeake Energy (CHK) is one of my more frequently traded companies over the past few years. With or without Aubrey McClendon, its past Chairman, it is an always interesting company that still carries the legacy of McClendon and his antics.

After a fairly strong run higher over the past month there was some giveback on Friday as the market was disappointed with the results of some asset sales. While there may be more of those disappointments to come, as the company has been criticized for its strategic disposal of assets, it is a stock that has long offered great opportunity through the use of covered options, particularly for those with patience during its frequent large price moves. With that kind of risk vcomes the reward, or so goes the spin.

Unitedhealth Group (UNH) is well off its recent highs of the past two months and has badly trailed the S&P 500 recently. As the Affordable Care Act increasingly sheds political uncertainty there shouldn’t be too much concern for the ability of health care insurance companies to reconfigure their product offerings and pricing to maintain profit margins. Unitedhealth Group has some diversification, including patient demographics, health care information technology and financing that makes it resilient, even when the sector may be under attack.

International Paper (IP) goes ex-dividend this week. After some recovery from its recent price drop shares gave up a little of that recovery the past few days. Like Ingersoll-Rand it is now trading at a point below the mid-point of its recent range and I believe also offers the opportunity for share appreciation, option premium and dividend. That’s a nice combination, if realized

Finally, Bristol Myers Squibb (BMY) was just one of those companies that has recently felt the magnified wrath this market holds for any kind of adverse opinion or event. In this case it received a downgrade late in the week that called into question whether the company warranted being considered in the same category as the more biotechnology centered pharmaceutical companies.

After so much spin and from so many people that the company was a different breed and should be considered along the likes of Gilead (GILD), rather than the more staid and traditional likes of Pfizer (PFE) and others, the downgrade came as a shock and the market reflected that shock.

It likely won’t take too long for a different kind of spin to come along that will support the contention that Bristol Myers deserves a higher multiple than a company that needs to change its business address in order to expand profit margins.

Traditional Stocks: Bristol Myers Squibb, Ingersoll-Rand, Kohls, Unitedhealth Group

Momentum: Blackstone, Chesapeake Energy, Under Armour

Double Dip Dividend: International Paper (5/21 $0.35)

Premiums Enhanced by Earnings: Best Buy

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – May 11, 2014

 A few hundred years ago Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.

In hindsight, that “discovery” shouldn’t really be as momentous as the discovery more than a century earlier that the sun didn’t revolve around the earth. It doesn’t seem as if it would take an esteemed mathematician to let the would know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.

Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describe the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.

For those that remember the “Great Stockbroker Fallout of 1987,” back then young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing  the practical application of Newton’s genius in foretelling the ultimate direction of every stock and stock markets.

The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It’s unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.

As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can’t help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.

With earnings season nearing its end the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity’s inevitable power.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

As a past customer, I was never enamored of Comcast (CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won’t easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company’s shares. 

Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. It’s history of annual dividend increases, good option premiums and price stability adds to that appeal. While there is much back story at present in the world of cable providers and Comcast’s proposed purchase of Time Warner Cable (TWC) may still have some obstacles ahead, the core business shouldn’t be adversely impacted by regulatory decisions.

Also, as a one time frequent customer of Best Buy (BBY), I don’t get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (AMZN), but for me it was all about the floor plan. But while I don’t shop there very much anymore it’s stock has been a delight trading at the $26 level.

Having had shares assigned for the fourth time in the past two months I would like to see a little bit of a price drop after Friday’s gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle you do have to be prepared for nasty surprises as are often delivered. There’s still more time for someone to blame cold weather on performance and this may be the retailer to do so. WIth that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.

There’s barely a week that I don’t consider buying or adding shares of Coach. I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.

Mosaic (MOS) is another one of those companies that I’ve owned on many occasions over the years. Most recently I’ve been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings I’m ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.

Dow Chemical (DOW) is also a company whose shares I’ve owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.

Holly Frontier (HFC) has become a recent favorite replacing Phillips 66 (PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, Holly Frontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.

The financial sector has been weak of late and we’ve gotten surprises from JP Morgan (JPM) recently with regard to its future investment related earnings and Bank of America (BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn’t been matched by its share price which is now about 10% off its recent high. 

With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.

Since I’ve spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.

Finally, it’s hard to believe that I would ever live in an age when people are suggesting that Apple (AAPL) may no longer be “cool.” For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name. 

Last week I thought there might be opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it work turn out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don’t usually chase stocks and in this case that proved to be fortuitous as shares followed the market’s own ambivalence and finished the week lower.

However, this week comes the same potential opportunity with the newly resurgent Microsoft (MSFT). While it’s still too early to begin suggesting that there’s anything “cool” about Microsoft, there’s nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.

Microsoft has under-performed the S&P 500 over the past month as the clamor over “old technology” hasn’t really been a path to riches, but has certainly been better than the so-called “new technology.” Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.

 

Traditional Stocks: Comcast, Dow Chemical, Holly Frontier

Momentum: Best Buy, Coach, Morgan Stanley, Mosaic

Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – April 27, 2014

“The Bear” is waking up.

Whether you interpret that to mean that Russia is seeking to return to some of its faded and faux glory left behind as its empire crumbled, or that the stock market is preparing for a sustained downward journey, neither one likes to feel threatened.

As we prepare for the coming week the two bears may be very much related, at least if you believe in such things as “cause and effect.”

It now seems like almost an eternity when the first murmurings of something perhaps going on in Crimea evoked a reaction from the markets.

On that Friday, 2 months ago, when news first broke, the DJIA went from a gain of 120 points to a loss of 20 in the final hour of trading, but somehow managed to recapture half of that drop to cap off a strong week.

Whatever happened to not going home long on the brink of a weekend of uncertainty?

Since that time the increased tensions always seemed to come along on Fridays and this past was no different, except that on this particular Friday it seems that many finally went home with lighter portfolios in hopes of not having lighter account balances on Monday morning.

As often is the case these kind of back and forth weeks can be very kind to option sellers who can thrive when wandering aimlessly. However, while we await to see what if any unwanted surprises may come this weekend, the coming week packs its own potential challenges as there will be an FOMC announcement on Wednesday and the Employment Situation Report is released on Friday. Although neither should be holding much in the way of surprise, it is often very surprising to see how the market reacts to what is often the lack of news even when that is the expectation.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.

With the prospects of some kind of uncomfortable beginning to the coming week there may be reason to stay away from those companies or sectors that might have enhanced risk related to any kind of escalating “tit for tat” that may occur if events in and around Ukraine and Russia deteriorate.

Bed Bath and Beyond (BBBY), which as far as I know has little exposure east of Bangor and west of Los Angeles, is one of those companies that suffered the wrath of a disappointed market. Like many that stumble, but whose underlying business, execution or strategies aren’t inherently flawed, there comes a point that price stability and even growth returns. While it has only been 2 weeks since earnings, Bed Bath and Beyond has withstood any further stresses from a wounded market and has thus far settled into some stability. While some may question the legitimacy of using this past winter’s weather as an excuse for slumping sales, I’m not willing to paint with a broad brush. In fact, I would believe that retailers like Bed Bath and Beyond, typically not located in indoor malls would be more subject to weather related issues than mall based, one stop shopping centers.

Having been to a number of other countries and having seen the high regard in which coffee is held, it’s not very likely that Keuring Green Mountain (GMCR) would feel any serious loss if exports to Russia were blocked as part of sanctions. At the current high levels, I’m surprised to be considering shares again, but I have had a long and happy history with this very volatile stock that has taken on significantly greater credibility with its new CEO.

Because of its volatility its option premiums are always attractive, but risk will be further enhanced as earnings are scheduled to be reported the following week. Shares are approaching that level they stood before its explosive rise after the most recent earnings report.

Aetna (AET) for a brief moment looked to be one of those reporting earnings that was going to capitalize on good news. Following a nice advance on the day of earnings it started on this past fateful Friday with another 1.5% advance on top of a nearly 6% advance the day before. Within 10 minutes and well before the market started its own decline, that early gain was completely gone.

As pro-Russian militias may say if they believed that any expatriate nationals might be threatened in France, “C’est la vie.” While that is certainly the case, such unexpected moves re-offer opportunity as the health care insurers are in a position to bounce back from some recent weakness. With earnings now out of the way and little bad news yet to be reported regarding the Affordable Healthcare Act transition, Aetna can get back to what health insurance companies have always been good at doing, besides lobbying. Although it’s dividend is on the low side, Aetna is a company that I could envision as a long term core holding.

Dow Chemical (DOW) also reported earnings this past week and beat projections the old fashioned way. They cut costs in the face of falling revenues. While that says nothing good about an economy that is supposed to be growing, Dow Chemical’s value may be enhanced as it has activists eyeing it for possible break-up. On the other end, defending the status quo is a hardened CEO who is likely to let little fall through the cracks as he pursues his own vision. While shares are trading near their highs the activist presence is potentially helpful in keeping shares trading within a range which entices me to consider shares now, after a small drop, rather than waiting for a larger one on order to re-open a position. With its option premiums, generous dividend and opportunity for share appreciation, Dow Chemical is one stock that I would also consider for longer term holding.

I’m on the fence over Cypress Semiconductor (CY). I currently own shares and always like the idea of having some just as it trades near it strike price. It has a good recent habit of calling $10 its home and works hard to get back to that level, whether well above or well below. However, befitting its high beta it fell about 5% on Friday and has placed itself quite a distance from its nearest strike. While I generally like paying less for shares, in the case of Cypress I may be more enticed by some price migration higher in order to secure a better premium and putting shares closer to a strike that may make it easier to roll over option contracts to June 2014, if necessary. Holding shares until June may offer me enough time after all of these years to learn what Cypress Semiconductor actually does, although I’m familiar with its increasingly vocal CEO.

This is another week replete with earnings. For those paying attention last week a number of companies were brutalized last week when delivering earnings or guidance, as the market was not very forgiving.

Among those reporting earnings this week are Herbalife (HLF), Twitter (TWTR) and Yelp (YELP).

There’s not much you can say about Herbalife, other than it may be the decade’s most unpredictable stock. Not so much in terms of revenues, but rather in terms of “is it felonious or isn’t it felonious?” With legal and regulatory issues looming ahead the next bit of truly bad news may come at any moment, so it may be a good thing that earnings are reported on Monday. At least that news will be out of the way. Unlike many other volatile names, Herbalife actually move marginally higher to end the week, rather than plunging along with the rest. My preference, if trading on the basis of earnings, would be to sell puts, particularly if there is a substantive price drop preceding earnings.

Twitter lost much of the steam it had picked up in the early part of the week and finished at its lows. I already have puts on shares having sold them about a month ago and rolled them forward a few times in the hopes of having the position expire before earnings.

However, with its marked weakness in the latter part of the week I’m interested in the possibility of selling even more puts in advance of earnings on Tuesday. However, if there is price strength on Monday, I would be more inclined to wait for earnings and would then consider the sale of puts if shares drop after earnings are released.

Yelp is among those also having suffered a large drop as the week’s trading came to its close. as with Twitter, the option market is implying a large earnings related move in price, with an implied volatility of nearly 15%. However, a drop of less than 21% may still be able to deliver a 1.1% return.

For those that just can’t get enough of earnings related trades when bad news can be the best news of all, a more expanded list of potential trades can be seen.

Finally, Intel (INTC) and Microsoft (MSFT) are part of what now everyone is affectionately referring to as “old tech.” A few months ago the same people were somewhat more derisive, but now “old tech” is everyone’s darling. Intel’s ex-dividend date is May 5, 2014, meaning that shares would need to be owned this week if hoping to capture the dividend. Microsoft goes ex-dividend during the final week of the May 2014 cycle.

Both stocks have been frequent holdings of mine, but both have recently been assigned. Although they are both trading near the top of their price ranges, the basic appeal still holds, which includes generous dividends and satisfactory premiums. Additionally, bit also have in common a new kind of leadership. Intel is much more focused on operational issues, befitting the strength of its new CEO, while Microsoft may finally simply be ready to “get it” and leverage its great assets, recognizing that there may be some real gems beyond Windows.

Traditional Stocks: Momentum Stocks: Aetna, Bed Bath and Beyond, Dow Chemical, Microsoft

Momentum: Cypress Semiconductor, Keurig Green Mountain

Double Dip Dividend: Intel (ex-div 5/5)

Premiums Enhanced by Earnings: Herbalife (4/8 PM), Twitter (4/27 PM), Yelp (4/30 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – April 20, 2014

I really didn’t see this past week coming at all.

Coming off of an absolutely abysmal week that saw the market refuse to follow up good news with further gains and instead plunging some 400 points in 2 days there were so many reasons to believe that markets were finally headed lower and for more than just a quick dip.

While I strongly believe in not following along with the crowd there has to be some bit of you that tells the rest of you not to completely write off what the crowd is thinking or doing. On horse racing, for example, the favorite does still have its share of wins and the Cinderella long short story just doesn’t happen as often as everyone might wish.

To completely ignore the crowd is courting disaster. At least you can occasionally give the crowd their due.

But this past week wasn’t the week to have done so. This was absolutely the week to have ignored virtually everyone. Unfortunately, this was also the week that I chose not to do so and went along with the crowd. The argument seemed so compelling, but that probably should have been the first clue.

What made this past week so unusual was that hardly anyone tried to offer a reason for the inexplicable advance forward. Not only did the market climb strongly, but it even reversed a late day attempt to erase large gains and ended up closing at its highs for the day. We haven’t seen anything like that lately, as instead we’ve seen so many gains quickly evaporate. For the most part I felt like an outsider because i didn’t open very many new positions last week, but it was rewarding enough to have heard such little pontification, as few wanted to admit that the unexpected had occurred.

With the S&P 500 now less than 2% from its high, it does make you wonder whether the concept of a correction being defined on the basis of a 10% decline is relevant anymore. Although its much better to think in terms of relative changes, as expressed by percentages, but perhaps our brains are wired to better understand absolute movements. Maybe we interpret a 400 point move as being no different from any other 400 point move, regardless of what the baseline is for either and simply take the move as a signal to reverse.

It’s tempting to think that perhaps we’re simply returning to the recent pattern of small drops on the order of 5% and then returning to unchecked climbs to new records. Of course, that would be in the realm of the "expected."

I have little expectation for what the next week may bring, as trying to figure out what is now driving the markets seems very futile of late. While I don’t think of "going along for the ride" as a very satisfying strategy I may be content to do so if the market continues moving higher for no apparent reason. But without any real indication of a catalyst I’m not terribly excited about wholeheartedly endorsing the move higher in a tangible way.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.

Not all stocks shared in last week’s glory. JP Morgan Chase (JPM) and Unitedhealth Group (UNH) in part accounted for the DJIA lagging the S&P 500 for the week.

JP Morgan and Unitedhealth both felt some backlash after some disappointing earnings reports. For JP Morgan, however, it has been about a year since there’s actually been anything resembling good news and yet its stock price, up until the past week had well out-performed the S&P 500. I’ve been waiting for a return to a less pricey entry point and after the past week it’s arrived following a 9% drop this month. With little reason to believe that there’s any further bad news ahead it seems to offer low enough risk for its reward even with some market weakness ahead.

Unitedhealth Group’s decline was just slightly more modest than that of JP Morgan and it, too, has returned to a price level that I wouldn’t mind owning shares. I haven’t done so with any regularity but the entry price is getting less expensive. As more news emerges regarding the Affordable Care Act there is potential for Unitedhealth Group to go in either direction. While its most recent earnings disappointed, there may be some optimism as news regarding enrollments by younger people.

Fastenal (FAST) is a company that I like very much, but am a little reluctant to purchase shares at this level, if not for the upcoming dividend that I would like to capture. I’ve long thought of Fastenal as a proxy for the economy and lately shares have been trading near the upper end of its range. While that may indicate some downside weakness, Fastenal has had good resilience and has been one of those monthly contracts that I haven’t minded rolling over in the past, having owned shares 5 times in the past 6 months.

You probably can’t get much more dichotomous than Kohls (KSS) and Abercrombie and FItch (ANF). While Kohls has reliably sat its current levels and doesn’t live and die by fads and arrogance, Abercrombie has had its share of ups and downs and always seems to find a way to snatch defeat from victory. Yet they are both very good covered option trades.

With Kohls having recently joined Abercrombie in the list of those stocks offering expanded weekly options it is an increasing attractive position that offers considerable flexibility, good option premiums and a competitive dividend.

Abercrombie, because of its volatility tends to offer a more attractive option premium, but still offers an attractive enough dividend. Following some recent price weakness I may be more inclined to consider the sale of puts of Abercrombie and might be willing to take assignment of shares, if necessary, rather than rolling over put contracts.

This week there are a number of companies reporting earnings that may warrant some consideration. A more complete list of those for the coming week are included in an earlier article that looks at opportunities in selling put contracts in advance of, or after earnings. Of the companies included in that article the ones that I’ll most likely consider this week are Cree (CREE), Facebook (FB) and Deckers (DECK).

All are volatile enough in the own rights, but especially so with earnings to be released. I have repeatedly sold puts on Cree over the past few months with last week having been the first in quite a while not having done so. It can be an explosive mover after earnings, just as it can be a seemingly irrational mover during daily trading. It has, however, already fallen approximately 8% in the past month. My particular preference when considering the sale of puts is to do so following declines and Cree certainly fulfills that preference, even though my target ROI comes only at a strike level that is at the very edge of the range defined by its implied volatility.

Deckers has only fallen 5% in the past month and it, too can be explosive at earnings time. As with Cree, for those that are adventurous, the sale of deep out f the money puts can offer a relatively lower risk way of achieving return on investment objectives. In this case, while the implied volatility is 10.1%, a share drop of less than 13.2% can still return a weekly 1% ROI.

Facebook has generally performed well after earnings announcements. Even the past quarter, when the initial reaction was negative, shares very quickly recovered and surpassed their previous levels. As with all earnings related trades entered through the sale of puts my goal is to not own shares at a lower price, but rather to avoid assignment by the rollover of put contracts, if necessary, in the hope of waiting out any unforeseen price declines and eventually seeing the put contracts expire, while having accumulated premiums.

Finally, it seems as if there’s hardly a week that I don’t think about adding or buying shares of Coach (COH). Having already owned it on 5 occasions in 2014 and having shares assigned again this past week, it’s notable for its stock price having essentially stayed in place. That’s what continually makes it an attractive candidate.

This week, however, there is a little more risk if shares don’t get assigned, as earnings are reported next week and Coach has been volatile at earnings for the past two years.

For that reason, this week, Coach may best be considered as a trade through the sale of puts with the possible need to rollover the puts if assignment seems likely. That rollover, if necessary, would then probably be able to be done at a lower strike price as the implied volatility will be higher in the week of earnings.

Traditional Stocks: Momentum Stocks: JP Morgan, Kohls, United Healthcare

Momentum: Abercrombie and Fitch, Coach

Double Dip Dividend: Fastenal (ex-div 4/23)

Premiums Enhanced by Earnings: Cree (4/22 PM), Deckers (4/24 PM), Facebook (4/23 AM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – April 13, 2014

Volatility is back!

Barely a month ago there was much talk about rising volatility in the face of a declining market. Those that would tend to use charts to predict the future suggested that the then rise in volatility was the precursor of the correction we had all been expecting.

Now we’re at it again.

A month ago there were clearly identified catalysts that were weighing heavily on the markets. Disappointing economic news from China coupled with the unfolding crisis in Crimea mixed the economic realm with the geo-political one.

However, back then it appeared that the rise in volatility may have been reminiscent of previous smaller “mini-VIX” rises that occurred on a regular basis, nestled between larger rises that also came on a regular basis.

As it turned out, that was precisely the case, as the volatility rise seen at that time quickly gave way and the market did what it has repeatedly done over the past 18 months. It simply recovered from short lived setbacks and went on to new highs.

An extension of the chart presented last month to illustrate the cyclic nature of the “maxi-VIX and mini-VIX” pattern shows that would was a possible “mini-VIX” in the making turned out to be exactly that and as short lived as its predecessors and its rise ended at a level right where previous smaller VIX rises had ended.

Now, the question has evolved into whether the current rise in volatility is part of a developing “maxi-VIX” formation. The timing is right and certainly few would disagree that it has been a long time since we’ve had a downward move that could be classified as a “correction.”

The significance, of course, is that the market tends to go lower as volatility rises. While people may disagree as to whether volatility is predictive in nature or simply a by product of events, it does paint a picture of the health of markets.

The glaring difference between this month’s rise and that of last month is that there are no obvious catalysts, although that would never stop those from offering hypotheses.

The past week saw a 600 point reversal in the DJIA in the latter half of the week. That move was framed in the context of elation tied to an FOMC that appeared to be supportive of continued lower interest rates to the fears that interest rates would rise.

It was a week that saw clear flight to safety before the elation and “risk on” behavior the very next day, which then gave way to universal flight.

Whatever the cause for the abrupt turnaround it did validate the old aphorism that you shouldn’t count your chickens before they’re hatched, as this past week was a rare one in which I had no positions assigned, after having already plotted exactly how I would be spending all of that money that at mid-week I knew would be pouring in from assignments.

While the coming week may have even more of the “bargains” that have been lacking lately, I’m neither as anxious to commit toward their ownership nor do I have as much in my cash reserves as I would like to really capitalize on opportunities.

If a “maxi-VIX” pattern is in the making it would be reasonable to expect even lower prices in the coming weeks. Although this past week was fairly dreadful, mitigated somewhat by hedging positions, the 4.1% decline from the recent high is still far from satisfying the expectations of those awaiting a standard correction. I’ve been waiting for one of those so long that I may also learn the truth of another aphorism and learn to regret what I had been wishing for.

The potential benefit of increasing volatility for the option seller is that premiums are likely to perk up and that may especially become apparent for the longer term options, such as for the standard monthly variety. During a period of uncertainty the use of longer term contracts can help to ride out any near term weakness while paying you to wait.

While the aphorism “there’s no such thing as a free lunch,” may be true, at least the premiums from those option sales offer a bit of a discount.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and “PEE” categories..

In a week that was fairly indiscriminate in which stock was dragged lower the one that really received my attention was one that I was certain would be assigned on Friday. MetLife (MET) was one of those that fell victim to fears of rising interest rates and fell more sharply than it had risen on the immediately preceding belief that rates would remain low. Whether the elation or the fears were warranted sometimes it is possible to simply have an overly exaggerated reaction and MetLife had them in both directions during the week as it went along for the rides. Any respite in interest rate theories, regardless of what direction, should allow MetLife to show some stability, which in the past has made it an excellent covered option position.

Perhaps it’s just an unintended juxtaposition that would have discussion of the merits of an insurance company precede discussion of Lorillard (LO). Since Lorillard only offers monthly option contracts I’m especially drawn to it during the final week of a monthly cycle or before an ex-dividend date. In this case it’s the former, but it’s appeal goes beyond the time of month. Potentially in play as a take over target die to its reported lead in the e-cigarette area, much of that premium in its price has now been discounted, due to the tangled web of relationships between the various tobacco companies. Instead, Lorillard is simply a cash machine that is seeking to expand its user base, despite denials of that strategy.

Of course, while e-cigarettes may or may not enhance the need for fastidious oral hygiene, the real thing does and while Colgate Palmolive certainly makes products other than toothpaste, as a one time Pediatric Dentist, that’s the one that I can readily associate with Colgate. What I can also associate with shares is its dividend and potential refuge for those seeking safety. It goes ex-dividend this week and offers an attractive premium. The single caveat is that shares are trading near the yearly highs and earnings are reported the following week. However, as with some other positions being considered this week, there is added reason to consider the sale of May 2014 option contracts to secure additional premium and insulate oneself s a little from near term market weakness.

In retail, The Gap (GPS) and L Brands (LB) frequently infuriate me and delight me, respectively.

The Gap is yet another company that I had expected to be assigned this past week. For some reason it continues to provide monthly same store sales statistics and for me, their timing is usually less than fortuitous. However, The Gap always seems to have a way of reversing the disappointments and has been a very reliable covered option trade, despite the histrionics displayed by an investing community that interprets each month’s worth of data as being reflective of the company’s prospects in perpetuity.

L Brands, on the other hand is a company that simply executes among its various brands, although it, too, provides those comparable sales statistics. Down about 8% in the past week in part as a result of lower same store sales, L Brands is a company that I frequently like to consider owning during the final week of a monthly option cycle, as with Lorillard, particularly if its price has moderated. A nice dividend, good option premiums and reliable management is a good combination, especially when the market itself can’t be trusted to act rationally.

Best Buy (BBY), while certainly a volatile stock over the past few years has lately settled into somewhat of a comfort zone, punctuated by flights higher and lower. While I may not want to be holding shares in advance of earnings, that is still 5 weeks away and in the interim there’s not too much reason to believe that it will be disrupted for long from its recent path. After weakness last week it’s price is at the lower end of that range and seems to be offering a good entry point even in a rocky market.

Among those reporting earnings this week are Yahoo (YHOO) and SanDisk (SNDK).

Yahoo has fallen about 15% in the past month and it’s not likely that they will be in a position to blame the winter weather for their quarterly results. Other than the promise of riches from its piece of Ali Baba which will be coming public, it’s hard to know what drives Yahoo forward, just as it’s hard to know whether its CEO, Marissa Mayer, warrants accolades for any initiatives that are increasingly difficult to categorize. A weakening IPO market may disproportionately impact Yahoo share prospects and would certainly detract from Mayer’s scorecard.

With the option market implying an approximate 7% earnings related move in shares, there may be some opportunity in the sale of puts outside of that range, but the opportunities, that is the risk/reward balance would be more enticing if the overall market was not in continued deterioration.

SanDisk, on the other hand is also seeing an implied move of 7%, however, it does offer a slightly improved reward for the risk. Perhaps more importantly, in contrast to Yahoo, its strategic direction is clear. While Yahoo passively rescued itself from oblivion through its Ali Baba stake, SanDisk rescued itself from the oblivion of commoditization through active and creative product development. Since shares also go ex-dividend later in the month, if making this earnings trade through the sale of puts and being faced with assignment, I might consider that possibility, whereas ordinarily I would seek to roll over puts and await a price turnaround and subsequent exit from the position via expiration.

Finally, to me it almost seems ironic that during a week that saw a less than gracious welcome for IPO offerings, one of the most recently memorable disappointing IPOs, that may have signaled a market top comes to mind. Blackstone (BX) reports earnings this week and has been increasingly responsible for this era’s new initial public offerings. This week, for example, La Quinta (LQ) went public again to less than enthusiastic demand. The cynical might suggest that Blackstone’s use of the IPO process for its own properties is an example of opportunism at its very finest and might suggest that a market top is in the vicinity.

To that I would argue that opportunism at its finest is when you use IPO proceeds to completely cash out. While that may not currently be the case, one does have to wonder whether there will be enough dinghies for all of us once we come to realize what Blackstone has in the past so well demonstrated that it is capable of doing.

Meanwhile, as opposed to many earnings related  trades that I would make via the sale of put contracts and prefer to execute only as part of a very short lived strategy, Blackstone is one that I could envision a longer relationship. While in general reluctant to take possession of shares if put to me, Blackstone is one that is far more than a vehicle to exploit excesses in option premiums.

Traditional Stocks: L Brands, Lorillard, MetLife, The Gap

Momentum Stocks: Best Buy

Double Dip Dividend: Colgate Palmolive (ex-div 4/17)

Premiums Enhanced by Earnings: SanDisk (4/16 PM), Yahoo (4/15 PM)

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – April 6, 2014

This week started on such a positive note with the reassuring words of a dove, yet ended so harshly.

This time of the year it’s supposed to be the other way around with the lamb having the final word as months of a less threatening nature await ahead.

Instead, after Friday’s close, whatever optimism may have been generated by setting even more record highs earlier in the week, had given way to caution and perhaps preparation for some ill winds.

Back when I was in college it wasn’t meant as a compliment if you were referred to as being a “dove.” and the proverbial lamb was always being led to slaughter.  In fact, if you were called a “dove,” that was only in polite circles. Otherwise, the words used were far more descriptive and derisive.

By the same token, the doves out there may not have had the kindest of words for the hawks, but in nature, it’s usually the hawk that triumphs. In fact, recalling the recent mauling of a peace dove that had been just released by Pope Francis and some children, it didn’t really even require a hawk. A seagull and a lowly crow were enough for the task.

This week, though, it was the dove that ruled the day and set the tone for the week. Well, at least most of it, until its fragile nature beset itself.

A fragile market can be equally susceptible even to less formidable foes, as Friday’s sell-off had little basis and came on the day of the Employment Situation Report, which for the past 20 months or so has been strongly correlated to a higher moving market on the day of release and for the week as a whole. While the week as a whole did show an advance, the former correlation stood for only a short time before strong selling set in.

Whatever doubts there may have been regarding where Janet Yellen stood on that continuum from dove to hawk following her initial press conference, she made it clear that on issues of the Federal Reserve’s actions to help lower the unemployment rate, she was an unabashed dove and while there may be more dissenting voting members than before sitting on the Federal Reserve, she still controls the hawks, but probably keeps at least one eye wary at all times.

The stock market loved that re-affirmation of policy the way we love the beauty of a dove, even though like short sellers, we may privately relish its obliteration by a swooping predator hawk.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

While this was an especially brutal week for stocks on the NASDAQ and particularly for many of those stocks that had borne a disproportionate amount of everyone’s attention as they moved ever higher, many others were included in whatever wrath took hold.

With earnings season beginning this coming week there may be some return to fundamentals, however, disappointments, particularly if weather hasn’t been fully factored in or discounted may further exploit market fragility.

MasterCard (MA) was one such casualty of the stampede. There was little to account for its 2.5% drop on Friday, bringing it to its 5 month low. The previous week, faced with some potentially adverse decisions regarding swipe fees it reacted well, yet this week it did otherwise without any new challenges being sent its way. While it goes ex-dividend on Monday it’s puny dividend isn’t something that’s likely to be missed by those entering into new positions as shares find themselves at a 5 month low. Believing that last week’s selling was overdone I would consider a slightly longer option contract and the use of an out of the money strike as a means to allow some time for price repair while collecting an option premium while waiting.

While not falling quite as much as MasterCard on Friday, shares of Starbucks (SBUX) also succumbed to selling pressure. While the past week was filled with news regarding other players entering into the breakfast marketplace, including offering free cups of coffee, there was really an absence of Starbucks specific news. While breakfast taco waffles may garner some attention, Starbucks has become as much a way of life as it has a product provider. It’s current price is one where it has shown considerable strength and it too may warrant the use of slightly longer term option contracts and an out of the money strike.

Apollo Education (APOL) was a stock that I highlighted last week as a possible earnings trade. As usual, I prefer those through the sale of well out of the money put contracts prior to earnings, especially if share price is trending downward prior to earnings. In Apollo’s case shares had instead shown strength prior to the earnings release, so I stayed away from selling puts at that time. After earnings shares did sustain a drop and I then sold some out of the money puts in the hope that the drop wouldn’t continue beyond another few strike levels. While there was almost a need to roll them over on Friday as the market was crumbling, Apollo shares showed resilience, even as the market did not.

While I still don’t have much confidence in the product it offers nor the manner in which it generates its revenues, that’s largely irrelevant, as it continues to offer some reasonable returns even if shares continue to experience some decline. Once again, however, I would most likely consider the sale of puts rather than an outright purchase of shares and concomitant sale of calls.

There’s probably very little that can be added to make a discussion of Herbalife (HLF) newsworthy, but when there is, it will really be worth paying attention. While Herbalife has been a good target of put sellers following the severe price drop in the wake of regulatory and legal investigations that are being escalated, it has recovered very nicely with the realization that any real news is likely to be in the distance. It too, is a position that I would likely consider entry through the sale of out of the money puts.

This week’s dividend stocks for consideration are two that

I haven’t owned for a while, as I’ve been waiting for them to return to more reasonable price levels. Sometimes the realization comes that waiting only prevents being an active participant. Aetna (AET) Abbott Labs (ABT) have long been absent from my portfolio despite continually thinking about adding them back.

With a large number of existing positions already going ex-dividend this week I’m not as anxious to add any additional ones. However, of those two, Abbott Labs is more appealing for having a higher dividend rate and for having already come off some recent price peaks. In need of additional health care sector stocks, Abbott also carries that personal appeal at this point in time. However, it reports earnings the following week so my preference, if purchasing shares, would be a quick holding and given its current option premium would even be willingly accepting of an early assignment.

Aetna has simply left me behind in the dust as I’ve been waiting for it to return to what I believed was a fair price, but apparently the market has long disagreed. While it may be some time until we all realize whether new healthcare mandates are a positive or negative for the insurers, the one thing that most everyone can agree is that the long term is always positive when your fee structure is highly responsive to actuarial data. Add to that an increasing interest rate environment and the future may be bright for insurers.

Among the shares that I had assigned this past week were Comcast (CMCSA) and Coach (COH). Following the week ending sell-off I was grateful to have as many assignments as there were, especially to replenish cash reserves in the event of buying opportunities ahead. However, among those assigned, these two are ones that I’m eager to re-incorporate into my portfolio.

Comcast, despite my personal feelings about the product and service, has just been a spectacular growth story and has had great guidance under the control of the Roberts family. My celebration of “Comcast Liberation Day” a few years ago didn’t mean that I would boycott share ownership or overlook its attributes as an investment. It’s recent 10% price drop in the past two months from its highs has offered an opportunity to find some more realistic entry points. While I’ve been following shares for quite some time, it only recently began offering weekly and expanded weekly options. For me, that was the signal, combined with the reduced share price to start initiating positions.  I envision a similar opportunity with Comcast shares on a serial basis as I have experienced with Coach.

Coach remains a stock that I feel like I could happily buy most week in and out as long as it’s trading in a $48-$54 range and have done so repeatedly when it has done so. Despite a near absence of positive news in almost two years and the company having been written off as a loser in the competitive wars, especially with Michael Kors (KORS), for those who can recognize that multiple small stock gains can be very meaningful it has been a consistent performer. With earnings approaching at the end of the month I would be less inclined to use longer term option contracts at this time, as Coach has had a recent history of sharp and unpredictable moves following earnings.

While Coach has been unable to do anything right in the eyes of many, until recently, Under Armour (UA) could do no wrong. WHile it’s still not clear whether the design of their latest skating wear for US Olympians was in any way related to their disappointing performance, Under Armour’s CEO, Kevin Plank, was a perfect study in how to present his company when under public scrutiny. 

While it received a downgrade about 3 weeks ago and subsequently fell more than 7% in that aftermath, it fell an additional 9% from that sentinel point late this week as it was carried along with the rest of the deluge. As with many others the selling was in the absence of substantive news.

With earnings season beginning this coming week, Under Armour is among those announcing early in the process on April 17, 2014. It’s volatility is commanding a health option premium at a time when many others are languishing, however, the risk may be compounded during the following week. For that reason, if considering the purchase of shares I would likely use a weekly contract and if necessary roll that over to a longer term contract in anticipation of that enhanced risk. As earnings approach, Under Armour may also turn out to be a potential earnings related trade through the sale of out of the money put options.

Finally, a number of years ago I was studying two stocks with an eye toward adding one to my regular rotation in need of another energy sector position. They were Anadarko (APC) and Apache (APA). For a while I would get their stock symbols confused and really had a difficult time discerning their differences. I still have no real idea of what those differences may be, but for some reason I gravitated toward Anadarko.

This week, that dalliance may have come to an end, at least for the time being, as my shares were assigned following an untimely and unexpected end to the Tronox litigation that was an unwelcome part of its Kerr McGee purchase.

Whatever positive comments I would normally make about Anadarko relative to its prospects for trading in a range and offering an attractive premium can now be transferred to Apache. The best part, though, is that Apache is approximately 10% below its recent high and can make me forget about Anadarko for now.

Traditional Stocks: Apache, Comcast, MasterCard, Starbucks

Momentum Stocks: Apollo Educational, Coach, Herbalife, Under Armour

Double Dip Dividend: Aetna (4/8), Abbott Labs (4/11)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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Weekend Update – March 30, 2014

I’m not really certain what persuaded markets to do as they did this past week.

Given the very wide range of interpretations for what caused the various ups and downs during trading it seems like no one really had any clue of what was going on and influencing trading, although that didn’t stop anyone from trying to explain it all.

With this earnings season having essentially concluded and the new one still two weeks away and with absolutely nothing seeming ready to implode or explode in the world, the market found itself in a vacuum and having to decide its own fate, while simultaneously being sucked along by whatever unexplainable momentum existed on any particular day.

That momentum changed daily and often saw intra-day swings, as well, with optimism being generally something reserved for the mornings and pessimism to end the trading sessions.

Like a child without guidance it’s hard to know what to do when nothing is happening around you other than random events. Add to that some native hyperactivity and you have a formula for unexplainable actions.

I think that may be the source of some of the confusion exhibited this past week. There were simply no guideposts and nothing to react to or against. Not even a Federal Reserve Chairman’s wayward words. When you are left to be alone with your thoughts and you begin to delve into your introspective mode anything may come out from the other end.

Observations, though were easy to make and of course every casual observation led to interpretations and conclusions regarding what each event meant for the market’s future.

Momentum stocks suddenly had the brakes put on them. The observations about momentum stocks was unending, but always led to the same conclusion.

That signals a top.

The NASDAQ, as a result was suffering disproportionately. That signals a top.

The less than successful post-IPO trading of King Digital Entertainment (KING) and others signals a top.

And so on and on. Without a doubt the emphasis was on all of the negative signs being exhibited and the negative outcomes that could be the only possible results to come.

I can’t be accused of being a unrepentant bull and have certainly been more cautious than has been warranted over the past year, but when you hear a cacophony of warnings about being at the top it may be time to see what lies even higher. When one of my favorite CNBC shows, Street Signs, begins the session with a segment “Should your clients be in Momentum Stocks,” that reinforces my unfounded opinion.

In some cases the vacuum leads you to a very specific place and offers no ability for fine tuning your destination to suit your needs or the environment. However, at least next week the vacuum may be disrupted as we do have some potentially market moving events as the European Central Bank chimes in and the Employment Situation Report is released. Both of those have had a recent and more lengthy history, respectively, of being market advancers.

Of course, late reports on Friday of increasing numbers of Russian troops appearing on the Ukraine borders may be just the thing to break that vacuum, in which case, maybe all of those warnings about Momentum stocks may turn out to be right, but for the wrong reasons.

Still, right is right.

Interestingly, when the story of potential conflict in Crimea first broke some weeks ago, also on a Friday afternoon, the market ceded significant gains heading into the close. The repeat of the story, with the same timing produced no identifiable reaction going into the close of trading.

Or as the Russian army may say by Monday morning, “Might is right.”

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no “PEE” selections this week (see details).

This past week, while not being one that saw a large overall drop in the market did see some under-performance of the broader S&P 500, which dropped 0.48%, as compared to the narrower DJIA which gained 0.12%. That gap was narrowed considerably by the S&P 500’s strong performance on Friday, bettering the DJIA by 0.10%.

While there was certainly some price givebacks among the higher flying momentum stocks, there was also some selling in more esteemed and established names, such as Starbucks (SBUX), YUM Brands (YUM), L Brands (LB), Lowes (LOW) and The Gap (GPS), among others.

Starbucks, for example, was down about 4% for the week. However, even prior to this week it had under-performed the S&P 500 YTD and could hardly be in the same category as those truly high flying and low earning entities. Yet, in the absence of any meaningful news Starbucks was among those suffering out of proportion this week and returning to a more reasonable entry price for a new position.

Much of the above could also be said about L Brands. A consistent performer in a sector that is consistently challenging, L Brands’ 3.5% drop this past week simply bring

s it back to a more agreeable entry point. While I do like this company as part of a covered option strategy, its available strike prices and having only monthly options available makes me most interested either before a dividend date or when the entry price is close to one of the available strike prices in order to optimize the option premium obtained. While I would like to see shares still drop a bit further the drops this week may be the only invitation forthcoming.

YUM Brands is a perennial favorite of mine and consistently is punished for any news that may be interpreted as rocking the boat. Generally, this has meant any news regarding a downturn in the Chinese economy. However, YUM has shown itself to be resilient, as consumers want to keep consuming, even if the economy falters. Eating can be every bit as addictive as a smartphone game. This time YUM introduced an expanded menu concept for China and the reaction was swift and negative although there was recovery to end the week.

The fact that YUM Brands offers its dividend the following week and has now put some space between the ex-dividend date and its scheduled earnings report makes it an appealing proposition, potentially using the monthly contract rather than a weekly or expanded weekly option.

The Gap has a bad habit of still reporting monthly same store sales, a practice that many other retailers have abandoned. They usually do so near the end of the first week of each month. The stock always seems to react wildly after those reports, alternating between elation and grave despair, but not in a predictable pattern. Too bad, but it’s that seizure like movement that helps to support its option premiums that are often very attractive, particularly as it trades in a price range. Like YUM Brands, The Gap will go ex-dividend the following week and may warrant the sale of a longer option contract.

MetLife (MET) has been getting whipsawed a bit of late as its fate rises or falls along with the direction of interest rates. Like a number of other stocks it has fallen and may represent a relative value, although I would still like to see it still lower. However, its option premium does offer some cushion in the event of further interest rate liability. as interest rate increases become a more near reality, as Janet Yellen may have hinted, MetLife’s fortunes should rise along with rates.

Lowes was the best performing of this group of weekly laggards. It too had a little bit of a rebound in Friday’s trading and could stand to come down some more, but it has been a consistently reliable performer in the $48 range when used as part of a covered option strategy. While at or near that range there aren’t too many headwinds ahead to knock shares out of that trading range.

Bristol Myers Squibb (BMY) slid the previous week along with the more clearly obvious biotechnology stocks. I purchased shares last week that are at risk for being assigned early this coming week due to the upcoming ex-dividend date. While I will still be satisfied with the return if that does occur, I am likely to want to add more shares, both to capture dividend and to capture share appreciation, as selling in shares was really unwarranted and any fallout from Congressional inquiry of drug pricing is still far off. Until then, there is opportunity to recover from that recent drop.

Granted, the preceding were all fairly boring. Despite my belief that “Momentum” may not be as dead as “experts” may have you believe, I’m not even remotely tempted to explore the real high fliers, such as Tesla (TSLA), SolarCity (SCTY) and NetFlix (NFLX), among others. I have my own “Momentum” stocks and they offer me all of the excitement that I need, want or can deal with.

Despite their strong performance on Friday, even as the market lost steam in the final hours, I’m ready to look at and possibly own Abercrombie and Fitch (ANF), Best Buy (BBY) and Las Vegas Sands (LVS), again.

After a one week period of ownership of Best Buy, in order to capture its dividend, I’m ready to own shares again as it seems to be comfortable trading at the $26 level. While it’s easy to disparage the company has having lived beyond its useful age and perhaps being an anachronism, it continues to be a significant part of our lives and our spending. It’s recent price drops after disappointing earnings have provided multiple opportunities to find entry points, especially as it trades in a horizontal pattern as it has for the past two months. For anyone trying to generate option premium income there’s no better pattern to do so than the one that Best Buy has recently been following.

Abercrombie and Fitch is a frequent portfolio holding and would be a charter member of the “Dysfunctional Stock Fund.” Somehow, despite everyone saying that it no longer sells anything fashionable and that it has one of the worst CEOs imaginable, it just continues to be a serial profit generator when used in a covered call strategy. It is now trading near the top of the range where I would rush in to buy shares, but if it can give up some of the previous week’s late gains, I’m ready to deal with the dysfunction again. Profits ,make dysfunction much more tolerable.

Las Vegas Sands and its Chairman, Sheldon Adelson are now embroiled in the on-line gaming controversy pitting himself against other major industry players. If not for that subject, surely Adelson would find other controversies for his own entertainment. But this week as he met with political leaders to press his case the entire sector under-performed the market, with Las Vegas Sands running in the middle of that pack. Having fallen about 10% in the past 3 weeks, if I were a gambling man I might take odds that this was about as low as shares were going to go without me on board.

Finally, while so much attention is being focused on Herbalife (HLF) it seems that the real shame should be heaped on the private education group. Whether looking at their graduation rates, student loan defaults or other measures, one has to wonder about their rightful place in society, as long as some deference is given to the occasional successful graduate who can be identified on the basis of appearing in a television commercial touting the wonders of the particular educational model offered by Apollo and others.

But, as with any disdain I may have for smoking, that doesn’t mean that trying to exploit the stock is above me. In this case, an always volatile Apollo Education Group (APOL) and one perennially subject to bad news that may move shares, reports
earnings this week.

With an implied price move of 11.7% a 1% ROI may be generated even if shares fall as much as 16%. That’s the kind of risk-benefit proposition that even Sheldon Adelson may be willing to embrace.

Traditional Stocks: L Brands, Lowes, MetLife, Starbucks, The Gap, YUM Brands

Momentum Stocks: Abercrombie and Fitch, Best Buy, Las Vegas Sands

Double Dip Dividend: Bristol Myers Squibb (4/2)

Premiums Enhanced by Earnings: Apollo

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

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