Weekend Update – December 4, 2016

It’s hard to say what really came as more of a surprise.

The fact that we have a President-Elect Trump or the fact that OPEC actually came to something of an agreement this past week.

When it has come to the latter, we’d seen any number of stock market run-ups in anticipation of an OPEC agreement to limit production of crude oil in an effort to force the supply-demand curve to their nefarious favor.

Had you read the previous paragraph during any other phase of your lifetime, you would have basically found it non-sensical.

But in the past 18 months or so, we’ve been in an environment where the stock market looked favorably on a supply driven increase in the price of oil.

So when it seemed as if OPEC was going to come to an agreement to reduce production earlier in the year, stocks soared and then soured when the agreement fell apart.

Unable to learn from the past, the very next time there was rumor of an OPEC agreement stocks soared and then again soured when the predictable happened.

This week, however, everything was different.

Maybe better, too.

Or maybe, not.

What was not better was that OPEC actually came to an agreement, although you can’t be blamed if you withhold judgment in the belief that someone will cheat or that U.S. producers might be enticed to increase production as prices rise.

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Weekend Update – October 16, 2016

As a movie a few years ago, “It’s Complicated,” starring Alec Baldwin, was a funny one that explored some aspects of life that many could relate to in one form or another.

A few weeks ago we were all surprised to learn of some new casting for the upcoming season of Saturday Night Live. But now after his successful appearances portraying Donald Trump, Alec Baldwin’s next role could very well be that of Janet Yellen.

While the Chairman of the Federal Reserve may not be as widely known as the Presidential candidate, for those that are aware of the very important role she plays in all of our lives, we could use something amusing to put events into perspective as we end so many days just shaking our heads wondering what is really going on.

Clearly, it’s complicated.

The one thing you know in life is that when you hear someone begin an explanation of anything with the qualifier “it’s complicated,” you had better be prepared to be deflated.

In the event you are paying attention to the world’s economies, deflated is not the direction anyone wants to be going.

Unlike the way it was portrayed in the movie, complications are usually not very funny, unless perhaps brought to life by Alec Baldwin.

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Weekend Update – August 21, 2016

We are pretty much done with the most systemically important earnings reports for this most current earnings season.

To say that it has been a confusing mix of results and projections would be an understatement.

By the end of the week, we had our fourth consecutive week of almost no net change. Yet the market remained within easy striking distance of its all time closing highs.

Why it’s at those all time closing highs is another question, but for the past 2 months the climb higher, while confounding, hasn’t disappointed too many people even as it’s given no reason to really be hopeful for more to come.

However, technicians might say that the lack of large moves at these levels is a healthy thing as markets may be creating a sustainable support level. 

That is an expression of hope.

Others may say that the clear lack of clarity gives no signal for committed movement in any direction.

That is an expression of avoidance, so as to preclude disappointment with whatever happens next. If you have no great hopes, you can’t really have great disappointment.

I buy into both of those outlooks, but have had an extraordinarily difficult time in believing that there is anything at immediate hand to use whatever support level is being created as a springboard to even more new highs.

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Weekend Update – July 31, 2016

Let me get this straight.

The people sequestered in their nearly meeting for 2 days in Washington and who only have to consider monetary policy in the context of a dual mandate are the smartest guys in the room?

We often hear the phrase “the smartest guys in the room.”

Sometimes it’s meant as a compliment and sometimes there may be a bit of sarcasm attached to its use.

I don’t know if anyone can sincerely have any doubt about the quality of the intellect around the table at which members of the FOMC convene to make and implement policy.

While there may be some subjective baggage that each carries to the table, the frequent reference to its decisions being “data drive” would have you believe that the best and brightest minds would be objectively assessing the stream of data and projecting their meaning in concert with one another.

One of the hallmarks of being among the smartest in the room is that you can see, or at least are expected to see what the future is more likely to hold than can the person in the next room. After all, whether you’re the smartest in the room and happen to be at Goldman Sachs (GS) or at the Federal Reserve, no one is paying you to predict the past.

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Weekend Update – August 30, 2015

Good luck to you if you have staked very much on being able to prove that you can make sense of what we’ve been seeing in the US stock market.

While it’s always impossible to predict what the coming week will bring, an even more meaningful tip of the hat would go to anyone that has a reasonable explanation of what awaits in the coming week, especially since past weeks haven’t necessarily been simple to understand, even in hindsight.

Sure, you can say that it’s all about the confusion over in China and the series of actions taken to try and control the natural laws of physics that describe the behavior of bubbles. You can simply say that confusion and lack of clear policy in the world’s second largest economy has spilled over to our shores at a time when there is little compelling reason for our own markets to make any kind of meaningful move.

That appears to be a reasonable explanation, in a case of the tail wagging the dog, but the correlation over the past week is imperfect and not much better over the past 2 weeks when some real gyrations began occurring in China.

The recovery last week was very impressive both in the US and in China, but in the span of less than 2 months, ever since China began restrictions on stock trading activity, we can point to three separate impressive recoveries in Shanghai. During that time the correlation between distant markets gets even weaker.

Good luck, then, guessing what comes next and whether the tail will still keep wagging the dog, now that the dog realizes that a better than expected GDP may be finally evidencing the long expected energy dividend to help boost consumer participation in economic growth.

Sure, anyone can say that a 10% correction has been long overdue and leave it at that, and be able to hold their head up high in any argument now that we’ve been there and done that.

There has definitely not been a shortage of people coming out of the woodwork claiming to have gone to high cash positions before this recent correction. If they did, that’s really admirable, but it’s hard to find many trumpeting that fact before the correction hit.

What would have given those willing to disengage from the market and go to cash following unsuccessful attempts to break below support levels a signal to do so? Those lower highs and higher lows over the past month may have been the indication, but even those who wholeheartedly believe in technical formations will tell you that acting on the basis of that particular phenomenon has a 50-50 chance of landing you on the right side.

And why did it finally happen now?

The time has been ripe for about 3 years. I’ve been continually wrong in that regard for that long and I certainly can’t hold my head up very high, even if I had gotten it right this time.

Which I didn’t. But being right once doesn’t necessarily atone for all of the previous wrong calls.

No sooner had the chorus of voices come together to say that the character and depth of the decline seen were increasingly arguing against a V-shaped recovery that the market now seems to be attempting that V-shaped recovery.

What tends to make the most sense is simply considering taking a point of view that’s in distinct contrast to what people clamoring for attention attempt to build their reputations upon and are equally prepared to disavow or conveniently forget.

Of course, if you want to add to the confusion, consider how even credible individuals see things very differently when also utilizing a different viewing angle of events.

Tom Lee, former chief US equity strategist for JP Morgan Chase (NYSE:JPM) and founder of Fundstrat Global, who is generally considered bullish, notes that history shows that the vast majority of 10% declines do not become bear markets.

Michael Batnick, who is the director of research at Ritholtz Wealth Management, looked at things not from the perspective of the declines, but rather from the perspective of the advances seen.

His observation is that the vast majority of those declines generally occurred in “not the healthiest markets.”

Not that such data has application to events being seen in China, but it may be worthwhile to make note of the fact that the tremendous upside moves having recently been seen in China have occurred in the context of that market still having dropped 20%.

Perhaps not having quite the same validity as laws of physics, it may make some sense to be wary of the kind of moves higher that bring big smiles to many. If China’s stock market can still wag the United States, even with less than perfect correlation, there’s reason to be circumspect not only of their continued attempts to defy natural market forces, but also of that market’s behavior.

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

While I’m among those happy to have seen the market put 2 consecutive impressive gains together, particularly after the failed attempt to bounce back from a 600+ point loss to begin the week, I don’t think that I’ll be less cautious heading into this week.

I did open 2 new positions last week near the market lows, and despite their performance am still ambivalent about those purchase decisions. For each, I sold longer term contracts than would be my typical choice, in an attempt to lock in some volatility induced premiums and to have sufficient time for price recovery in the event of a short term downturn.

With an unusually large number of personal holdings that are ex-dividend this week, I may be willing to forgo some of the reluctance to commit additional capital in an effort to capture more dividend, especially as option premiums are being enhanced by volatility.

Both Coach (NYSE:COH) and Mosaic (NYSE:MOS) are ex-dividend this week.

For me, both also represent long suffering existing positions that I’ve traded many times over the years, and have been accustomed to their proclivity toward sharp moves higher and lower.

However, what used to be relatively short time frames for those declines have been anything but that for some existing lots, even as having traded other lots at lower prices.

Since their previous ex-dividend dates both have under-performed the S&P 500, although the gap has narrowed in the past month, even as both are within reach of their yearly lows.

On a relative basis I believe that both will out-perform the S&P 500 in the event of the latter’s weakness, but may not be able to keep pace if the market continues to head higher. However, for these trades and unlike having used longer term contracts with trades last week, my eyes would be focused on a weekly option and would even be pleased if shares were assigned early in an effort to capture the dividend.

That’s one of the advantages of having higher volatility. Even early assignment can be as or more profitable than in a low volatility environment and being able to capture both the premium and dividend, when the days of the position being open are considered.

Despite having spent some quality time with Meg Whitman’s husband a few months ago, I had the good sense not to ask him anything a few days before Hewlett Packard (NYSE:HPQ) was scheduled to report earnings.

That would have been wrong and no one with an Ivy League legacy, that I’ve ever heard about, has ever crossed that line between right and wrong.

While most everyone is now focusing on the upcoming split of Hewlett Packard, my focus is dividend centric. As with Coach and Mosaic, the option premium is reflecting greater volatility and is made increasingly attractive, even during an ex-divided event.

However, since Hewlett Packard’s ex-dividend date is on Friday, there is less advantage in the event of an early assignment. That, though, points out another advantage of a higher volatility environment.

That advantage is that it is often better to rollover in the money positions, with or without a dividend in mind, than it is to accept assignment and to seek a new investment opportunity.

In this case, if faced with likely early assignment, I would probably consider rolling over to the next week and at least if still assigned early, then would be able to pocket that additional week’s option premium, which could become the equivalent of having received the dividend.

For those who are exceptionally daring, Joy Global (NYSE:JOY) is also ex-dividend this week and it is another of my long suffering positions.

These days, anything stocks associated with China have additional risk. For years Joy Global was one of a very small number of stocks that I considered owning that had large exposure to the Chinese economy. I gave considerably more credibility to Joy Global’s forecasting of its business in China than to official government reports of economic growth.

The daring part of a position in Joy Global has more to do with just having significant interests in China, but also because it reports earnings the day after going ex-dividend. I generally do stay away from those situations and much prefer to have earnings be release first and then have the stock go ex-dividend the following day.

In this case, one can consider the purchase of shares and the sale of a deep in the money weekly call option in the hopes that someone might consider trying to capture the dividend and then perhaps selling their shares before exposure to earnings risk.

In such an event, the potential ROI can be 1.1% if selling a weekly $22 call option, based upon Friday’s $24.01 close.

However, if not assigned early, the ROI becomes 1.8% and allows for an 8% price cushion in the event of the share’s decline, which is in line with the option market’s expectations.

For those willing to cede the dividend, there is also the possibility of considering a put sale in advance of earnings.

The option market is implying only an 8.1% move next week. However, it may be possible to achieve a 1% return for the sale of a weekly put that is at a strike price 12.5% below Friday’s closing price.

Going from daring to less so, I purchased shares of $24.06 shares General Electric (NYSE:GE) last week and sold longer dated $25 calls in an effort to combine premium, capital gains on shares and an upcoming ex-dividend date.

Despite the shares having climbed during the course of the week and now beyond that strike level, I may be considering adding even more shares, again trying to take advantage of that combination, especially the higher than usual option premium that’s available.

General Electric hasn’t yet announced that ex-dividend date, but it’s reasonable to expect it sometime near September 18th. While my current short call position is for October 2, 2015, for this additional proposed lot, I may consider the sale of a September 18 slightly out of the money option contracts.

In the event that once the ex-dividend date is announced and those shares are in jeopardy of being assigned early, I might consider rolling over the position if volatility allows that to be a logical alternative to assignment.

Finally, as long as Meg Whitman is on my mind, I’m not certain how much longer I can go without owning shares of eBay (NASDAQ:EBAY). While it has traded in a very consistent range and very much paralleling the performance of the S&P 500 over the past month, it is offering an extremely attractive option premium in addition to some opportunity for capital gains on shares.

The real test, of course, begins as it releases its next earnings report which will no longer include PayPal’s (NASDAQ:PYPL) contributions to its bottom line. That is still 6 weeks away and I would consider the purchase of shares and the sale of intermediate term option contracts in order to take advantage of that higher market volatility induced premium.

At least that much makes sense to me.

Traditional Stock: eBay, General Electric

Momentum Stock: none

Double-Dip Dividend: Coach (9/3 $0.34), Hewlett Packard (9/4 $0.18), Joy Global (9/2 $0.20), Mosaic (9/1 $0.28)

Premiums Enhanced by Earnings: Joy Global (9/3 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 stre

am for the week, with reduction of trading risk.

Weekend Update – May 17, 2015

The nice thing about the stock and bond markets is that anything that happens can be rationalized.

That’s probably a good thing if your job includes the need to make plausible excuses, but unless you work in the finance industry or are an elected official, the chances are that particular set of skills isn’t in high demand.

However, when you hear a master in the art of spin ply his craft, it’s really a thing of beauty and you wonder why neither you nor anyone else seemed to see things so clearly in a prospective manner.

Sometimes rationalization is also referred to as self-deception. It is a defense mechanism and occasionally it becomes part of a personality disorder. Psychoanalysts are divided between a positive view of rationalization as a stepping-stone on the way to maturity and a more destructive view of it as divorcing feeling from thought and undermining powers of reason.

In other words, sometimes rationalization itself is good news and sometimes it’s bad news.

But when it comes to stock and bond markets any interpretation of events is acceptable as long as great efforts are taken to not overtly make anyone look like an idiot for either having made a decision to act or having made a decision to be passive.

That doesn’t preclude those on the receiving end of market rationalizations to wonder how they could have been so stupid as to have missed such an obvious connection and telegraphed market reaction.

That’s strange, because when coming to real life personal and professional events, being on the receiving end of rationalization can be fairly annoying. However, for some reason in the investing world it is entirely welcomed and embraced.

In hindsight, anything and everything that we’ve observed can be explained, although ironically, rationalization sometimes removes rational thought from the process.

The real challenge, or so it seems, in the market, is knowing when to believe that good news is good and when it is bad, just like you need to know what the real meaning of bad news is going to be.

Of course different constituencies may also interpret the very same bits of data very differently, as was the case this past week as bond and stock markets collided, as they so often do in competition for investor’s confidence.

We often find ourselves in a position when we wonder just how news will be received. Will it be received on its face value or will markets respond paradoxically?

This week any wonder came to an end as it became clear that we were back to a world of rationalizing bad news as actually being something good for us.

In this case it was all about how markets viewed the flow of earnings reports coming from national retailers and official government Retail Sales statistics.

In a nutshell, the news wasn’t good, but that was good for markets. At least it was good for stock markets. Bond markets are another story and that’s where there may be lots of need for some quick rationalizations, but perhaps not of the healthy variety.

In the case of stock markets the rationalization was that disappointing retail sales and diminished guidance painted a picture of decreased inflationary pressures. In turn, that would make it more difficult for an avowed data driven Federal Reserve to increase interest rates in response. So bad news was interpreted as good news.

If you owned stocks that’s a rationalization that seems perfectly healthy, at least until that point that the same process no longer seems to be applicable.

As the S&P 500 closed at another all time high to end the week this might be a good time to prepare thoughts about whether what happens next is because we hit resistance or whether it was because of technical support levels.

^TNX Chart

On the other hand, if you were among those thought to be a member of the smartest trading class, the bond traders, you do have to find a way to explain how in the face of no evidence you sent rates sharply higher twice over the past 2 weeks. Yet then presided over rates ending up exactly where they started after the ride came to its end.

The nice thing about that, though, is that the bond traders could just dust off the same rationalization they used for surging rates in mid-March 2015.

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

Cisco (NASDAQ:CSCO) has had a big two past weeks, not necessarily reflected in its share price, but in the news it delivered. The impending departure of John Chambers as CEO and the announcement of his successor, along with reporting earnings did nothing to move the stock despite better than expected revenues and profits. In fact, unlike so many others that reported adverse currency impacts, Cisco, which does approximately 40% of its revenues overseas was a comparative shining star in reporting its results.

However, unlike so many others that essentially received a free pass on currency issues, because it was expected and who further received a free pass on providing lowered guidance, Cisco’s lowered guidance was thought to muzzle shares.

However, as the expected Euro – USD parity is somehow failing to materialize, Cisco may be in a good position to over-deliver on its lowered expectations. In return for making that commitment to its shares with the chance of a longer term price move higher, Cisco offers a reasonable option premium and an attractive dividend.

Both reporting earnings this week, Best Buy (NYSE:BBY) and Hewlett Packard (NYSE:HPQ), have fortunes that are, to a small degree, related to one another.

In two weeks I will try to position myself next to the husband of the Hewlett Packard CEO at an alumni reunion group photo. By then it will be too late to get any earnings insights, not that it would be on my agenda, since I’m much more interested in the photo.

No one really knows how the market will finally react to the upcoming split of the company, which coincidentally will also be occurring this year at the previous employer of the Hewlett Packard CEO, Meg Whitman.

The options market isn’t anticipating a modest reaction to Hewlett Packard’s earnings, with an implied move of 5.2%. However, the option premiums for put sales outside the lower boundary of that range aren’t very appealing from a risk – reward perspective.

However, if the lower end of that boundary is breached after earnings are released and approach the 52 week lows, I would consider either buying shares or selling puts. If selling puts, however and faced with the prospects of rolling them over, I would be mindful of an upcoming ex-dividend event and would likely want to take ownership of shares in advance of that date.

I currently own shares of Best Buy and was hopeful that they would have been assigned last week so as to avoid them being faced with the potential challenge of earnings. Instead, I rolled those shares over to the June 2015 expiration, possibly putting it in line for a dividend and allowing some recovery time in the event of an earnings related price decline.

However, with an implied move of 6.6% and a history of some very large earnings moves in the past, the option premiums at and beyond the lower boundary of the range are somewhat more appealing than is the case with Hewlett Packard.

As with Hewlett Packard, however, I would consider waiting until after earnings and then consider the sale of puts in the event of a downward move. Additionally, because of an upcoming ex-dividend date in June, I would consider taking ownership of shares if puts are at risk of being exercised.

It’s pretty easy to rationalize why MetLife (NYSE:MET) is such an attractive stock based on where interest rates are expected to be going.

The only issue, as we’ve seen on more than one recent occasion is that there may be some disagreement over the timing of those interest rate hikes. Since MetLife responds to those interest rate movements, as you might expect from a company that may be added to the list of “systemically important financial institutions,” there can be some downside if bonds begin trading more in line with prevailing economic softness.

In the interim, while awaiting the inevitable, MetLife does offer a reasonable option premium, particularly as it has traded range-bound for the past 3 months.

A number of years ago the controlling family of Cablevision (NYSE:CVC) thought it had a perfectly rationalized explanation for why public shareholders would embrace the idea of taking the company private.

The shareholding public didn’t agree, but Cablevision hasn’t sulked or let the world pass it by as the world of cable providers is in constant flux. Although a relatively small company it seems to get embroiled in its share of controversy, always keeping the company name in the headlines.

With a shareholder meeting later this month and shares going ex-dividend this week, the monthly option, which is all that is offered, is very attractive, particularly since there is little of controversy expected at the upcoming shareholder meeting.

Also going ex-dividend this week, and also with strong historical family ties, is Johnson and Johnson (NYSE:JNJ). What appeals to me about shares right now, in addition to the dividend, is that while they have been trailing the S&P 500 and the Health Care SPDR ETF (NYSEARCA:XLV) since early 2009, those very same shares tend to fare very well by comparison during periods of overall market weakness.

In the process of waiting for that weakness the dividend and option premium can make the wait more tolerable and even close the performance gap if the market decides that 2022 on the S&P 500 is only a way station toward something higher.

Finally, there are probably lots of ways one can rationalize the share price of salesforce.com (NYSE:CRM). Profits, though, may not be high on that list.

salesforce.com has certainly been the focus of lots of speculation lately regarding a sale of the company. However, of the two suitors, I find it inconceivable that one of them would invite the CEO, Marc Benioff back into a company that already has a power sharing situation at the CEO level and still has Larry Ellison serving as Chairman.

I share price was significantly buoyed by the start of those rumors a few weeks ago and provide a high enough level that any disappointment from earnings, even on the order of those seen with Linkedin (NYSE:LNKD), Yelp (NYSE:YELP) and others would return shares to levels last seen just prior to the previous earnings report.

The options market is implying a 7.3% earnings related move next week. After a recent 8% climb as rumors were swirling, there is plenty of room for some or even all of that to be given back, so as with both Best Buy and Hewlett Packard, I wouldn’t be overly aggressive in this trade prior to earnings, but would be very interested in joining in if sellers take charge on an earnings disappointment. However, since there is no dividend in the picture, if having sold puts and subject to possible exercise, I would likely attempt to rollover the puts rather than take assignment.

But either way, I can rationalize the outcome.

Traditional Stocks: Cisco, MetLife

Momentum Stocks: none

Double Dip Dividend: Cablevision (5/20), Johnson and Johnson (5/21)

Premiums Enhanced by Earnings: Best Buy (5/21 AM), Hewlett Packard (5/21 PM), salesforce.com (5/20 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.

Weekend Update – February 22, 2015


After setting a new high on the S&P 500 last week, the bull was asleep this holiday shortened trading week, having been virtually flat for the first 3 days of trading and having been devoid of the kind of intra-day volatility that has marked most of 2015.

That’s of course only if you ignore how the week ended, as this time the S&P 500 wasn’t partying alone, as the DJIA and other indexes joined in recording new record highs.

For the briefest of moments as the market opened for trading on Friday morning it looked as if that gently sleeping bull was going to slip into some kind of an unwarranted coma and slip away, as the DJIA dropped 100 points with no consequential news to blame.

However, as has been the case for much of 2015 a reversal wiped out that move and returned the market to that gentle sleep that saw a somnolent market add a less than impressive 0.1% to its record close from the previous week.

In a perfect example of why you should give up trying to apply rational thought processes to an irrational situation, the market then later awoke from that gentle sleep in a paroxysm of buying activity, as an issue that we didn’t seem to care about before today, took hold, thereby demonstrating the corollary to “It is what it is” by showing that it only matters when it matters.

That issue revolved around Greece and the European Union. The relationship of Greece and the EU seemed to be heading toward a potential dissolution as a new Greek government was employing its finest bluster, but without much base to its bravado. As it was all unfolding, this time around, as compared to the last such crisis a few years ago, we seemed content to ignore the potential consequences to the EU and their banking system.

While that situation was being played out in the news most analysts agreed it was impressive that US markets were ignoring the drama inherent in the EU dysfunction. The threat of contagion to other “weak sister”nations in the event of a member nation’s exit and the very real question of the continuing integrity of that union seemed to be an irrelevancy to our own markets.

Yet for some reason, while we didn’t care about the potential bad news, the market seemed to really care when the bluster gave way to capitulation, even though the result was reminiscent of the very finest in “kicking the can down the road” as practiced by our own elected officials over the past few governmental stalemates.

From that moment on, as the rumors of some sort of accord were being made known the calm of the week gave way to some irrational buying.

Of course, when that can was on our own shores, the result in our stock market was exactly the same when it was kicked, so the lesson has to be pretty clear about ever wanting to do anything decisive.

Next week, however, may bring a rational reason to do something to either spur that bull to new heights or to send it into retreat.

Forget about the impending congressiona

l testimony that Janet Yellen will be providing for 2 days next week as the impetus for the market to move. Why look for external stimulants in the form of economist-speak when you already have all of the ingredients that you need in the form of fundamentals, a language that you understand?

While “Fashion Week” was last week and exciting for some, the real excitement comes this week with the slew of earnings from major national retailers trying to sell all of those fashions. While their backward looking reports may not reflect the impact of decreased energy prices among their customers, their forward looking comments may finally bring some light to what is really going on in the economy.

With “Retail Sales” reports of the past two months, which also include gasoline purchases, having left a bad taste with investors, a better taste of things to come has already been telegraphed by some retailers in their rosy comments in advance of their earnings release.

This coming week could offer lots of rational reasons to move the market next week. Unfortunately, that could be in either direction.

With earnings reports back on center stage after a relatively quiet earnings week, stocks were mostly asleep, but, that was definitely not the case in other markets. If looking for a source of contagion there are lots of potential culprits.

Bond markets, precious metals and oil all continued their volatility. The 10 Year Treasury Bond, for example saw abrupt and large changes in direction this week and has seen rates head about 30% higher over the past couple of weeks after the FOMC sowed some doubt into their intentions and timing.

^TNX Chart

^TNX data by YCharts

While Janet Yellen may shed some light on FOMC next steps and their time frame, she is, to some degree held hostage by some of those markets, as traders move interest rates and energy prices around without regard to policy or to what they position they held deeply the day before.

For my part, I don’t mind the marked indecision in other markets as long as this current market in equities can keep moving forward a small step at a time in its sleep.

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

Yahoo (NASDAQ:YHOO) after all of the

se years is sadly in the position of having to establish an identity for itself, although with a market capitalization of $42 billion lots of that sadness can be assuaged.

It’s difficult to think of another situation in which a CEO has seen shares rise nearly 180% during their tenure, in this case about 30 months, yet remain so highly criticized. However, after a storied history it is a little embarrassing to be best known as the company that once owned Alibaba (NYSE:BABA), although the billions received and the billions more to come help to ease some of that awkwardness.

With Alibaba’s next lock-up expiration coming on March 18, 2015, there’s potentially some downward pressure on Yahoo which still has a sizeable stake in Alibaba, However, as has been seen over the last few years the flooding of the market with new shares doesn’t necessarily result in the logical outcome.

In the meantime, while there is some concern over the impact of that event on Yahoo shares and as Alibaba has its own uncertainties beyond the lock-up expiration, option premiums in Yahoo have gotten a little richer as shares have already come down 11% since earnings were reported. After that decline either a covered call or put sale, as an intended very short term trade may be appropriate as waiting for Yahoo to find itself before you grow too old.

For as long as Jamie Dimon remains as its CEO and Chairman, JP Morgan Chase (NYSE:JPM) isn’t likely to have any identity problems. Despite not having anywhere near the returns of Yahoo during the period of his tenure and having paid out much more in regulatory fines than Yahoo received for its Alibaba shares, the criticism is scant other than by those who battle over the idea of “too big too faii” and the actual fine-worthy actions.

However, just as the CEO of Yahoo was able to benefit from an event outside of her control, which was the purchase of Alibaba by her predecessor years earlier, Dimon stands to benefit from what will eventually be a rising interest rate rate environment. Amid some confusion over the FOMC’s comments regarding the adverse impact of low rates, but also the adverse impact of raising them too quickly, rates resumed their climb after a quick 4% decline. While the financial sector wasn’t the weakest last weak, energy had that honor, there isn’t too much reason to suspect that interest rates will return to their recent low levels.

BGC Partners (NASDAQ:BGCP) is another company that has no such identity problems as much of its identity is wrapped up in its Chairman and CEO, who has just come to agreement with the board of GFI Group (NYSE:GFIG) in his takeover bid.

For the past 10 years BGC Partners has closely tracked the interest rate on the 10 Year Treasury Note, although notably during much of 2014 it did not. Recently, however, it appears that relationship is back on track. If so, and you believe that rates will be heading higher, the opportunity for share appreciation exists. In addition to that, however, is also a very attractive dividend and shares do go ex-dividend this week. With only a monthly option contract available and large gaps between strike levels, this is a position that may warrant a longer term time frame commitment.

Also going ex-dividend this week are McDonalds (NYSE:MCD) and SanDisk (NASDAQ:SNDK).

I often think about buying shares of McDonalds, but rarely do so. Most of the time that turned out to have been a bad decision if looking at it from a covered option perspective. From a buy and hold perspective, however, it has been more than 2 years since there have been any decent entry points and returns.

With a myriad of problems facing it and a new CEO to tackle them my expectation is that more bad news is unlikely other than at the next earnings release when it wouldn’t be too surprising to see the traditional use of charges against earnings to make the new CEO’s future performance look so much better by comparison. Between now and that date in 2 months, I think there will be lots of opportunity to reap option premiums from shares, as I anticipate it trading in a narrow range or higher. Getting started with a nice dividend this week makes the process more palatable than many have been finding the menu.

SanDisk is a company that was written off years ago as being nothing more than a company that offered a one time leading product that had devolved into a commodity. You don’t, however, see too many analysts re-visiting that opinion as they frequently offer buy recommendations on shares.

SanDisk is also a company that I’ve very infrequently owned, but almost always consider adding shares when I have cash reserves and need some more technology positions in my portfolio. After a week of lots of assignments both are now the case and while its dividend isn’t as generous as that of McDonalds, it serves as a good time for entry and offers a very attractive option premium even during a week that it goes ex-dividend.

Despite a 10% share price increase since earnings, it is still about 15% below its price when it warned on earnings just a week prior to the event and received a belated downgrade from “buy to hold.” WIth continuing upside potential, this is a position that I would consider either leaving some shares uncovered or using more than one strike level for call sales

Most often when considering a trade involving a company about to report earnings and selling put options, my preference is to avoid taking ownership of shares. Generally, put sales shouldn’t be undertaken unless willing to accept the potential liability of ownership, but sometimes you would prefer to only take the reward and not the risk, if you can get away with doing so.

Additionally, I generally look for opportunities where I can receive a 1% ROI for the sale of a weekly put contract that is a strike level below the lower range of the implied move determined by the option market.

However, in the cases of Hewlett Packard (NYSE:HPQ) and The Gap (NYSE:GPS) that 1% ROI is right at the lower boundary, but I would still consider the prospect of put sales because I wouldn’t shy away from share ownership in the event of an adverse price move.

The Gap, which makes sharp moves on a regular basis as it still reports monthly sales, did so just a week earlier. It seems to also regularly find itself alternating in the eyes of investors who send shares higher or lower as if each month brings deep systemic change to the company. However, taking a longer term view or simply looking at its chart, it’s clear that shares have a way of just returning to a fleece-lik

e comfortable level in the $39-$41 range.

In the event of an adverse price movement and facing assignment, puts can be rolled over targeting the next same store sales week as an expiration date or simply taking ownership of shares and then using that same date as a time frame for call sales. If rolling over puts I would be mindful of an April ex-dividend date and would consider taking ownership of shares prior to that time if put contracts aren’t likely to expire.

Since I have room for more than a single new technology position this week, Hewlett Packard warrants a look, as what was once derisively referred to as “old tech” is once again respectable. While I would consider starting the exposure through the sale of puts, with an ex-dividend date coming up in just a few weeks, I’d be more inclined to take assignment in the event of an adverse price move after earnings.

Finally, there’s still reason to believe that energy prices are going to continue to confound most everyone. The coupling and de-coupling of oil to and from the stock market, respectively has become too unpredictable to try to harness. However, given the back and forth seen in prices over the past month as a floor may have been put in oil prices, there may be some opportunity in considering a pairs trade, such as Marathon Oil (NYSE:MRO) and United Continental (NYSE:UAL).

United Continental and other airlines have essentially been mirror images to the moves in oil, although not always for clearly understandable reasons, as the relative role of hedging can vary among airlines, although United has reportedly closed out its hedged positions and may be a more pure trading candidate on the basis of fuel prices..

While it’s not too likely that either of these stocks will move in the same direction concurrently, the short term volatility in their prices and the extremely appealing premiums may allow the chance to prosper in one while awaiting the other’s turn to do the same.

The idea is to purchase shares and sell calls of both as a coupled trade with the expectation that they would be decoupled as oil rises or falls and one position or another is either rolled over or assigned, as a result. The remaining position is then managed on its own merits or possibly even re-coupled.

As with earnings related trades that I make that are usually agnostic to the relative merits of the company, focusing only on the risk – reward proposition, this trade is not one that cares too much about the merits of either company. Rather, it cares about their responses to the unpredictable movements in oil price that have been occurring on daily and even on an intra-day basis of late.

Traditional Stocks: JP Morgan Chase, Marathon Oil

Momentum Stocks: United Continental Holdings, Yahoo

Double Dip Dividend: BGC Partners (2/26), McDonalds (2/26), SanDisk (2/26)

Premiums Enhanced by Earnings: Hewlett Packard (2/24 PM), The Gap (2/26 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.

Weekend Update – November 24, 2013

Sometimes the strategy is self-defense. Sometimes it’s just doing what you need to do to keep beta at bay.

I don’t know about other people, but I’m getting a little more nervous than usual watching stocks break the 16000 level on the Dow Jones and the 1800 level on the S&P 500.

What’s next 5000 NASDAQ? Well that’s not so ludicrous. All it would take is 4 years of 6% gains and we would could set the time machine back to a different era.

In hindsight I know what I would do at the 5000 level.

For those old enough to remember the predictions of Dow 35000 all we need is a repeat of the past 56 months and we’re finally there and beyond.

This being a holiday shortened trading week adds a little bit to the stress level, because of the many axioms you hear about the markets. The one that I believe has as much validity as the best of them is that low volume can create artificially large market moves. When so many are instead focusing on the historical strength of markets during the coming week, I prefer to steer clear of any easy guide to riches.

When faced with a higher and higher moving market you could be equally justified in believing that momentum is hard to stop as you could believe that an inflection point is being approached. The one pattern that appears clear of late is that a number of momentum stocks are quickly decelerating when faced with challenges.

When I find myself a little ill at ease with the market’s height, I focus increasingly on “beta,” the measure of a stock’s systemic risk compared to the overall market. I want to steer clear of stock’s that may reasonably be expected to be more volatile during a down market or expectations of a declining market.

As a tool to characterize short term risk beta can be helpful, if only various sources would calculate the value in a consistent fashion. For example, Tesla (TSLA), which many would agree is a “momentum” stock, can be found to have a beta ranging from 0.33 to 1.5. In other words, depending upon your reference source you can walk away believing that either Tesla is 50% more volatile than the market or 67% less volatile.

Your pick.

While “momentum” and “beta” don’t necessarily have correlation, common sense is helpful. Tesla or any other hot stock du jour, despite a reported beta of 0.33, just doesn’t seem to be 67% less volatile than the overall market, regardless of what kind of spin Elon Musk might put on the risk.

During the Thanksgiving holiday week I don’t anticipate opening too many new positions and am focusing on those with low beta and meeting my common sense criteria with regard to risk. Having had many assignments to close out the November 2013 option cycle I decided to spread out my new purchases over successive weeks rather than plow everything back in at one time and risk inadvertently discovering the market’s peak.

Additionally, I’m more likely to look at either expanded option possibilities or monthly options, rather than the weekly variety this week. In part that’s due to the low premiums for the week, but also to concerns about having positions with options expiring this week caught in a possible low volume related downdraft and then being unable to find suitable new option opportunities in future weeks. If my positions aren’t generating revenue they’re not very helpful to me.

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

While eschewing risk may be in order when you think a market top is at hand, sometimes risky behavior can be just the thing when it comes to assembling a potentially profitable mix of stocks. In this case the risky behavior comes from the customers of Lorillard (LO), Philip Morris (PM) and Molson-Coors (TAP).

With word that Europeans may finally be understanding the risks associated with tobacco and may be decreasing use of their ubiquitously held cigarettes, Philip Morris shares had a rough week. The 6% drop accompanying what should be good news from a public health perspective brings shares back to a much more inviting level. Shares did successfully test an $85 support level and subsequently bounced back a bit too much for my immediate interest, but I would welcome another move toward that level, particularly as I would prefer an entry cost right near a monthly strike level.

Lorillard, on the other hand, has essentially no European exposure, but perhaps in sympathy gave up just a little bit from its 52 week high after a sustained run higher over the past 6 weeks. While there is certainly downside risk in the event of a lower moving market, shares do go ex-dividend this week and think of all of those people lighting up after a hearty Thanksgiving meal. The near term risk factors identified for Europe aren’t likely to have much of an impact in the United States market, where the only real risk factors may be use of the products.

That Thanksgiving meal may very well be complemented with a product from Molson Coors. I imagine there will also be those using a Molson Coors product while using a Lorillard product, perhaps even dousing one in the other. Shares, which are down nearly 5% from its recent highs go ex-dividend this week. Because of the strike prices available, Molson Coors is one position that I may consider using a November 29, 2013 option contract, as many more strike levels are available, something that is useful when attempting to capture both a decent option premium and the dividend, while also enticing assignment of shares.

Speaking of risky behavior, the one exception to the central theme of staying away from high beta names is the consideration of adding shares of Walter Energy (WLT). While the last 9 months have seen its shares plummet, the last three months have been particularly exciting as shares had gone up by as much as 75%. For those with some need for excitement this is certainly a candidate, with a beta value 170% greater than the average of all other recommended positions this week, the stock is no stranger to movement. But speaking of movement, although I don’t look at charts in any depth, there appears to be a collision in the making as the 50 dma is approaching the 200 dma from below. Technicians believe that is a bullish indicator. Who knows. What I do know is that the coal, steel and iron complex, despite a downgrade this past Friday of the steel sector, has been building a higher base and I believe that the recent pullback in Walter Energy is just a good opportunity for a quick trade, perhaps using the sale of puts rather than covered calls.

While not falling into the category of risky behavior, Intel’s (INTC) price movement this week certainly represents odd behavior. Not being prone to exceptionally large moves of late on Thursday it soared 3%, which by Intel’s standards really is soaring. It then fell nearly 6% the following day. While the fall was really not so odd given that Intel forecast flat revenues and flat operating profits, it was odd that the price had gone up so much the previous day. Buying on Thursday, in what may have been a frenzied battle for shares was a nice example of how to turn a relatively low risk investment into one that has added risk.

But with all of the drama out of the way Intel is now back to a more reasonable price and allows the ability to repurchase shares assigned the previous week at $24 or to just start a new position.

While I would have preferred that Joy Global (JOY) had retreated even further from its recent high, its one year chart is a nearly perfect image of shares that had spent the first 6 months of the year above the current price and the next 6 months below the current price, other than for a brief period in each half year when the relationship was reversed. Joy GLobal is an example of stock have a wide range of beta reported, as well, going from 1.14 to 2.17. However, it has also traded in a relatively narrow range for the past 6 months, albeit currently near the high end of that range.

With earnings scheduled later in the December 2013 option cycle there is an opportunity to attempt to thread a needle and capture the dividend the week before earnings and avoid the added risk. However, I think that Joy Global’s business, which is more heavily reliant on the Chinese economy may return to its recent highs as earnings are delivered.

Lowes (LOW) reported earnings this past week, and like every previous quarter since the dawn of time the Home Depot (HD) versus Lowes debate was in full force and for yet another quarter Lowes demonstrated itself to be somewhat less capable in the profit department. However, after its quick return to pricing reality, Lowes is once again an appealing portfolio addition. I generally prefer considering adding shares prior to the ex-dividend date, but the share price slide is equally compelling.

Hewlett Packard (HPQ) is one of those stragglers that has yet to report earnings, but does so this week. Had I known 35 years ago that a classmate would end up marrying its future CEO, I would likely not have joined in on the jokes. It is also one of those companies that I swore that I would never own again as it was one of my 2012 tax loss positions. I tend to hold grudges, but may be willing to consider selling puts prior to earnings, although the strike price delivering a 1% ROI, which is my typical threshold, is barely outside of the implied price move range of 8%. It’s not entirely clear to me where Hewlett Packard’s future path may lead, but with a time perspective of just a week, I’m not overly concerned about the future of the personal computer, even if Intel’s forecasts have ramifications for the entire industry.

Lexmark (LXK) is a company that I like to consider owning when there is also an opportunity to capture a dividend. That happens to be the case this week. When it announced that it was getting out of the printer business investors reacted much as you would have imagined. They dumped shares, which for most people are electronically maintained and not in printed form. After all, why own a printer company that says that printers are a dead end business? Who knew that Lexmark had other things in mind, as it has done quite nicely focusing on business process and content management solutions. While it has been prone to large earnings related moves or when shocking the investment community with such news as it was abandoning its most recognizable line of business, it has also been a rewarding position, owing to dividends and option premiums. However, always attendant is the possibility of a large news related move that may require some patience in awaiting recovery.

Finally, I find myself thinking about adding shares of eBay (EBAY) again this week, just as last week and 10 other times this past year. Perhaps I’m just obsessed with another CEO related missed opportunity. Shares didn’t fare too well based upon an analyst’s report that downgraded the company saying that shares were “range bound at $49-$54.” While that may have been the equivalent of a death siren, for me that was just validation of what had been behind the decision to purchase and repurchase shares of eBay on a regular basis. While being range bound is an anathema to most stock investors, it is a dream come true to a covered option writer.

Happy Thanksgiving.

Traditional Stocks: eBay, Intel, Lowes, Philip Morris

Momentum Stocks: Joy Global, Walter Energy

Double Dip Dividend: Lexmark (ex-div 11/26), Lorillard (ex-div 11/26), Molson-Coors (ex-div 11/26)

Premiums Enhanced by Earnings: Hewlett Packard (11/26 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.

Weekend Update – July 21, 2013

This week may have marked the last time Ben Bernanke sits in front of far less accomplished inquisitors in fulfilling his part of the obligation to provide congressional testimony in accordance with law.

The Senate, which in general is a far more genteel and learned place was absolutely fawning over the Federal Reserve Chairman who is as good at playing close to the vest as anyone, whether its regarding divulging a time table for the feared “tapering” or an indication of whether he will be leaving his position.

If anything should convince Bernanke to sign up for another round it would be to see how long the two-faced good will last and perhaps give himself the opportunity to remind his detractors just how laudatory they had been. But I can easily understand his taking leave and enjoying the ticker tape, or perhaps the “taper tick” parade that is due him.

But in a week when Treasury Secretary Jack Lew and Bernanke had opportunities to move the markets with their appearances, neither said anything of interest, nor anything that could be mis-interpreted.

Instead, at the annual CNBC sponsored “Delivering Alpha Conference” the ability of individuals such as Jim Chanos and Nelson Peltz to move individual shares was evident. What is also evident is that based upon comparative performance thus far in 2013, there aren’t likely to be many ticker tape parades honoring hedge fund managers and certainly no one is going to honor an index.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories. There are many potential earnings related trades this week beyond those listed in this article for those interested in that kind of trade. (see details).

A portion of this week’s selections reflect the recently wounded, but certainly not mortally, from recent disappointing earnings. While there may not be any victory tours coming anytime soon for some of them, it’s far too short sighted to not consider the recent bad news as a stepping stone for short term opportunism.

In terms of absolute dollars lost, it’s hard to imagine the destruction of market capitalization and personal wealth at the hands of Microsoft (MSFT), Intel (INTC) and eBay (EBAY). While no one is writing an epitaph for eBay, there are no shortage of obituary writers for Microsoft and Intel. However, although most all businesses will someday go that path, I don’t think that any of that triumvirate are going to do so anytime soon, although Microsoft’s nearly 11% drop on Friday was more than the option market anticipated. It was also more than an innocent cough and may not be good for Steve Ballmer’s health.

Since my timeframe is usually short, although I do currently have shares of Intel that will soon pass their one year anniversary, I don’t think their demise or even significantly more deterioration in share price will be anytime soon. All offer better value and appealing option premiums for the risk of a purchase. Additionally, both Intel and Microsoft have upcoming dividends during the August cycle that simply adds to the short term appeal. My eBay shares were assigned on Friday, but I have been an active buyer in the $50-52.50 range and welcomed its return to that neighborhood.

I currently own some shares of Apple (AAPL) and sold some $450 August 17, 2013 calls in anticipation of its upcoming earnings. While I normally prefer the weekly options, the particular shares had an entry of $445 and haven’t earned their keep yet from cumulative option premiums. The monthly option instead offered greater time protection from adverse price action, while still getting some premium and perhaps a dividend, as well. However, with earnings this week, the more adventurous may consider the sentiment being expressed in the options market that is implying a move of approximately 5% upon earnings. Even after Friday’s 1% drop following some recent strength, I found it a little surprising at how low the put premiums are compared to call options, indicating that perhaps there is some bullish sentiment in anticipation of earnings. I simply take that as a sign of the opposite and would expect further price deterioration.

I’m always looking to buy or add shares of Caterpillar (CAT). I just had some shares assigned in order to capture the dividend. After Chanos‘ skewering of the company and its rapid descent as a direct result, I was cheering for it to go down a bit further so that perhaps shares wouldn’t be assigned early. No such luck, even after such piercing comments as “they are tied to the wrong products, at the wrong time.” I’m not certain, but he may have borrowed that phrase from last year when applied to Hewlett Packard (HPQ). For me, the various theses surrounding dependence on China or the criticisms of leadership have meant very little, as Caterpillar has steadfastly traded in a well defined range and have consistently offered option premiums upon selling calls, as well as often providing an increasingly healthy dividend. To add a bit to the excitement, however, Caterpillar does report earnings this week, so some consideration may be given to the backdoor path to potential ownership through the sale of put options.

While Chanos approached his investment thesis from the short side, Nelson Peltz made his case for
Pepsico’s (PEP) purchase of Mondelez (MDLZ). My shares of Mondelez were assigned today thanks to a price run higher as Peltz spoke. I never speculate on the basis of takeover rumors and am not salivating at the prospect of receiving $35-$38 per share, as Peltz suggested would be an appropriate range for a, thus far, non-receptive Pepsico to pay for Mondelez ownership. Despite the general agreement that margins at Mondelez are low, even by industry standards, it has been trading ideally for call option writers and I would consider repurchasing shares just to take advantage of the option premiums.

Fastenal (FAST) is just one of those companies that goes about its business without much fanfare and it’s shares are still depressed after offering some reduced guidance and then subsequently reporting its earnings. It goes ex-dividend this week and offers a decent monthly option premium during this period of low volatility. Without signs of industrial slowdowns it is a good place to park assets while awaiting for some sanity to be restored to the markets.

Although I’ve never been accused of having fashion sense Abercrombie and Fitch (ANF) and Michael Kors (KORS) are frequently alluring positions, although always carrying downside risk even when earnings reports are not part of the equation. I have been waiting for Kors to return to the $60 level and it did show some sporadic weakness during the past week, but doggedly stayed above that price.

Abercrombie and Fitch is always a volatile position, but offers some rewarding premiums, as long as the volatility does strike and lead to a prolonged dip. It reports earnings on August 14, 2013 and may also provide some data from European sales and currency impacts prior to that. Kors also reports earnings during the AUgust cycle and ant potential purchases of either of these shares must be prepared for ownership into earnings if weekly call contracts sold on the positions are not assigned.

Finally, it’s hard to find a stock that has performed more poorly than Cliffs Natural Resources (CLF). Although no one has placed blame on its leadership, in fact, they have been lauded for expense controls during demand downturns, it didn’t go unnoticed that shares rallied when the CEO announced his upcoming retirement. It also didn’t go unnoticed that China, despite being in a relative downturn, purchased a large portion of the nickel, a necessary ingredient for steel, available on the London commodity market. For the adventurous, Cliffs reports earnings this week and seems to have found some more friendly confines at the $16 level. The option market expects a 9% move in either direction. A downward move of that amount or less could result in a 1% ROI for the week, if selling put options. I suspect the move will be higher.

Traditional Stocks: Caterpillar, eBay, Intel. Microsoft, Mondelez

Momentum Stocks: Abercrombie and Fitch, Michael Kors

Double Dip Dividend: Fastenal (ex-div 7/24 $0.25)

Premiums Enhanced by Earnings: Apple (7/23 PM), Cliffs Natural Resources (7/25 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Disclosure: I am long AAPL, FAST, CAT, CLF, INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

Weekend Update – February 24, 2013

We all engage in bouts of wishful thinking.

On an intellectual level I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.

I also understand why it is dangerous to extend yourself with the use of margin or leverage and why it’s beneficial to resist the need to pass up that opportunity.

What I don’t understand is why those opportunities always seem to arise at times when the well has gone dry and margin is the only drink of water to be found.

Actually, I do understand. I just wish things would be different.

I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.

But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.

On Wednesday the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month long decline of nearly 10%,beginning May 2012.

That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes and those were especially accentuated during the month long decline.

So what I’m trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don’t have anywhere near the money that I would typically have to plow in head first. I wish I did; but I don’t. I also wish I had that cash so that I wouldn’t necessarily be in a position to have it all invested in equities.

Although that margin account is overtly beckoning me to approach, that’s something that I’ve developed enough strength to resist. But at the same time, I’m anxious to increase my cash position, but not necessarily for immediate re-investment.

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

Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn’t meant to be. With earnings out of the way and some mild losses sustained during the past week, it’s just better priced than before.

Although there have been periods of time that I’ve owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock there has rarely been a time over the past 5 years that I haven’t owned at least one of them. This past week saw some retreat in their prices and they are getting closer to where I might once again be comfortable establishing ownership.

Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle this was one of my favorite stocks. This week it goes ex-dividend and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.

Dow Chemical (DOW) has been in my doghouse of late. That’s not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options and Dow Chemical didn’t join that party. More recently, as volatility has been low, it’s premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.

Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision there appeared to be a better opportunity. This week Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.

MetLife (MET) was on last week’s radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.

United Healthcare (UNH) simply continues the healthcare related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape and they moaned about how their business models would be destroyed. After 50 years of moaning you would think that we would all stop playing this silly game.

The Gap (GPS) reports earnings this week, along with Home Depot (HD) as opposed to most companies that I consider as potential earnings related trades, there isn’t a need to protect against a 10-20% drop. At least I don’t think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that’s not the case with these two. Even with unexpected price movements eventually ownership will be rewarded. The fact that Home Depot gained 2% following Friday’s upgrade by Oppenheimer to “outperform” always leads me to expect a reversal upon earnings release.

On the other hand, when it comes to MolyCorp (MCP) there’s definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week’s metal’s meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn’t have much in the way of good will on its side.

Nike (NKE) goes ex-dividend this week and its option premiums have become somewhat more appealing since the stock split.

Salesforce.com (CRM) is another of those companies that I’m really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff and Oracle’s mercurial CEO, Larry Ellison, to get people’s attention and become the basis of speculation. I just love those sort of side stories, they’re so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.

Finally, two banking pariahs are potential purchases this week. I’ve owned both Citibank (C) and Bank of America (BAC) in the past month and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase they have now become reasonably priced again.

Although Friday’s trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short term prospects. I emphasize “short term” because I am mindful of a repeat of the pattern of May 2012 and am looking for opportunities to move more funds to cash.

I don’t know if Friday’s recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.

For that reason I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.

I’ve done that before and don’t feel like having to do it again.

Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare

Momentum Stocks: Citibank

Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)

Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.