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Weekend Update – October 19, 2014

 After Friday’s nearly 300 point move higher, it’s absolutely inconceivable that anyone can have a clear idea of what comes next.

Even during the climbs higher over the past two years no one really had a clue of what the next day would bring, but there was an entirely different “gestalt” about the market than we have now.

During that earlier time the sum of its parts seemed somewhat irrelevant as the market as a whole was just greater than those parts and had a momentum that was impervious to the usual challenges and patterns.

The most obvious of those challenges that hadn’t come to a fruition was the obligatory periodic 10% correction. Instead, while we really didn’t know what was coming next, at least we had a clear idea of what was not coming next.

Can you say the same today?

After a month of the kind of daily moves that we really haven’t seen since the latter half of 2011, their alternating basis can only keep people off guard.

People generally fall into two categories on days when the market spikes as it did on Friday, particularly after a torrent of plunges. They either see that as evidence that we’ve turned the corner or that it’s just another trap to lure you in so that your money can wither away while feeding the beast.

For some, those optimists among us, they will have identified a capitulation as having occurred this week. They believe that kind of blow off selling marks the beginning of a return to a climb higher.

For the pessimists among us, they see that most every out-sized market one day gain has occurred during an overall downtrend.

While I remain confused about what the next week will bring, I’m not too confused about what my course of action is likely to be.

I don’t agree with the optimists that we’ve seen a capitulation. Those tend to be marked by a frenzy of selling. It’s not just a 400 point decline, it’s the rapid acceleration of the losses that shows no evidence of letting up that is usually the hallmark. The following day is also usually marked by selling during the open and then cautious buying that becomes a flood of bargain hunters.

So capitulation? Probably not, but the market very well still could have found a near term bottom this week as that 400 point loss did evaporate. That near bottom did bring us to about a 9% overall decline in the S&P 500 over the past 4 weeks, so perhaps you might hear the optimists asking “can a brother get some slack on 1%?” in the hopes that we can all move on and return to the carefree ways of 2012 and 2013.

On the other hand, those pessimists do have data on their side. You don’t need very fancy kinds of analysis to show that those 200, 300 and higher point moves over history have only served to suck money out of people’s pockets under false pretenses.

Over the past four weeks with the possible exception of the advances higher in the latter half of this past week, every strong advance led to disappointment. Every time it looked as if there was value to be had it was another value trap, as a whole.

My course of action last week was one that still has me in shock.

I didn’t execute a single new position trade last week, after having only added 2 new positions the previous week.

I’d better get used to that shock, because I don’t expect to add many, if any, new positions this week, unless there’s some reason to believe that a period, even if very short, of stability will step in.

Perhaps continuing good earnings news will be the catalyst for the market to take a breather from its recent mindless journeys to the depths and to the heights. Good news form the financial sector, some good indications from industrials and some good news from the technology companies that really matter could be a wonderful prelude to improved retail earnings.

Or maybe none of that will matter and we’ll again focus on things like moving averages, support levels, mixed messages from Federal Reserve Governors and news of continuing economic dysfunction in the European Union, all while watching the smartest guys in the room, the bond traders have their own gyrations as interest rates on 10 Year Treasury notes resemble a yo-yo, having had an enormous 10% spread in the past week.

Most of all, I want to focus on not being duped and trying to put uncovered positions to work. That means continuing to try and resist what appear to be screaming bargains, even after Friday’s march higher and higher.

But, we’re only human and can only resist for so long.

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

As I look at prices, even after some runs higher on Friday, what’s not to like? That still doesn’t mean, however, that you have to end up committing to anything.

What makes the temptation even stronger, despite a big drop in volatility on Friday, are the option premiums that can now be had when selling. The challenge, however, is finding the option buyer, as call volume is diminished, probably reflecting a paucity of belief that there will be sudden price jumps in underlying shares.

Part of the strategy accommodation that may be made if grappling with paper losses following the past four weeks is to now consider using out of the money strike prices that will still return the same ROI on the premium portion, but also potentially add some meaningful capital gains on the shares.

As with last week, I’m not terribly interested in the back story behind the week’s selections, but more in the recent price history, with particular attention to those that may have been overly and inappropriately punished.

MetLife (MET) is one of those among so many, that l have been waiting to repurchase. With the recent interest rate gyrations that actually brought the 10 Year rate below 2% there may be some rational to the price drop seen in MetLife, but with the 10% increase in rates some life was breathed back into floundering shares.

eBay (EBAY) is still a company that is always on my radar screen. Whether that will continue to be the case after the PayPal spin-off may be questionable, but for now, at its new low, low price, having taken a little bit of a beating from its just posted earnings, it really is beginning to feel irresistible.

Among sectors getting my attention this week is Healthcare. Following the drop in Merck (MRK), Baxter International (BAX) and the continued weakness of Walgreen (WAG).

With a 10% drop in shares of Merck in the past week, taking it to an 8 month low in the absence of any meaningful news one has to wonder when will the craziness end? Now
in
its own personal correction phase it wouldn’t be entirely an ill-conceived idea to believe that shares have either no reason to continue under-performing the market. With an attractive dividend and option premiums reflecting that downward spiral, Merck is one position that could warrant resisting the need to resist.

Baxter International is also in its own personal correction, although its time frame as been a month for that 10% decline. Despite having just released earnings and offering improved guidance shares continued to flail even as most everything else was showing some recovery. While there may be some logical explanation my interest in entertaining it may be subsumed by an interest in picking up shares.

Walgreen continues to be mired down at a price level to which it plunged after calling off any potential tax inversion plans. Being stuck in that trading range, however, has helped Walgreen to outperform the S&P 500 since it hit its highs last month. For it to continue trading in that range might be the kind of comfort that could provide some smiles even while everything else around is crumbling, particularly if the upcoming dividend is captured, as well.

Marathon Oil (MRO) is just another of those really hard hit energy stocks that has to cause some head shaking as it is in a personal correction and then some, even after 2 days of strength. The list need not end with Marathon Oil if considering adding energy sector positions, as there is no shortage of viable candidates. FOr me, Marathon Oil is one position that I’ve longed to return to my portfolio, but do understand that there may continue to be some downward pricing pressure in oil, before the inevitable bounce higher.

FInally, how can you not at least consider taking sides in the great Apple (AAPL) saga? Whether there will be a gold mine ahead as the new products hit the stores or deep disappointment, its earnings report this week is not likely to reflect anything other than great phone sales and lagging sales in most, if not all other product lines.

The option market, however, isn’t expecting too much action, with an implied price movement of only 4.4% next week. With barely a 1% premium at a strike level right at the lower edge defined by the implied move there isn’t really any enhancement in its premiums, especially as there is a general increase in volatility buoying most option premiums.

However, the sale of puts at the lower level strike may offer the opportunity to enter a position, particularly in front of the upcoming dividend at a better price than has been seen in over 2 months, or may simply offer a decent one week return.

Traditional Stocks: Baxter International, eBay, Marathon Oil, Merck, MetLife, Walgreen

Momentum: none

Double Dip Dividend: none

Premiums Enhanced by Earnings: Apple (10/20 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 12, 2013

There’s certainly no way to deny the fact that this has been an impressive first 4 months of the year. The recently touted statistic was that after 4 months and one week the market had gone up 13%.

To put that into the perspective the statistic wanted you to have, the statistical factoid added that for all of 2012 the market was up only 7.2%. That certainly tells you not only how impressive this gain has been but how 2013 will undoubtedly leave 2012 in the dust.

What is left unmentioned is that in 2012, in a period of only 3 months and 1 week the market was up 12.9%.

What happened? Could that happen again? Those are questions asked by someone who turned cautious when the market was up less than 8% in 2013 and wasn’t adequately cautious in 2012.

SInce 1970, the S&P 500 has finished the year with gains of greater than 14% on a total of 16 occasions, so there could easily be more to come. That can easily be a justifiable perspective to hold unless you also look at the margins by which 14% was exceeded. In that event, the perspective becomes less compelling. It’s still possible to end the year substantially higher than 14%, just not as likely as such a great start might suggest.

But remember, statistics don’t mislead people. People mislead people.

There was little to no substantive news this past week as the market just continued on auto-pilot. If you owned shares of any of the stocks that had super-sized moves after earnings, such as Tesla (TSLA) or Green Mountain Coffee Roasters (GMCR), that was news enough. But for the rest of us it was quiet.

What was interesting, however, was the behavior of the market during the final hour of Thursday’s trading.

That period marked a turnaround sending the market quite a bit lower, at least based on recent standards when only higher seems to be the order of the day. Initially, the drop was ascribed to a strengthening of the dollar and further drop in gold. Those, however, had been going on for a while, having started earlier in the trading session.

What came to light and whose timing was curiously coincident with the market change in direction was a rumor of a rumor that someone from within JP Morgan (JPM) was suggesting that the Federal Reserve was ready to begin tapering its Treasury purchases, those signaling the beginning of an end to Quantitative Easing.

For the growing throng that believe that QE has been responsible for the market’s climb higher, life after QE couldn’t possibly be rosy.

First comes an errant AP Tweet, then an unconfirmed rumor of a rumor. Those incidents would seem to indicate vulnerability or at least an Achilles heel that could stand in the way of this year becoming the 17th in the list.

Easily said, but otherwise, there’s really not much else on the radar screen that appears poised to interfere with the market’s manifest destiny. Unless of course, Saturday’s Wall Street Journal report that the Federal Reserve has indeed mapped out a strategy for winding down QE, transforms rumor into potential reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories (see details). Additionally, as the week unwinds, I may place relatively greater emphasis on dividend paying stocks and give greater consideration to monthly contracts, in order to lock into option premiums for a longer period in the event that 2012 is the order of the day.

This week’s selections seem to have more healthcare stocks than usual. I know that healthcare may have already run its course as it was a market leader through the first 4 months of 2012, but some individual names haven’t been to the party or have recently fallen on hard times.

Amgen (AMGN) didn’t react terribly well following its recent earnings report, having fallen 6%. That’s not to say that it hadn’t enjoyed a nice gain in 2013. However, it does offer an attractive short term option premium, despite also being ex-dividend this week. That’s a combination that I like, especially when I still remain somewhat defensive in considering opening new positions.

Eli Lilly (LLY) is also trading ex-dividend this coming week. It has under-performed the S&P 500 this year, but still, a 10% gain YTD isn’t a bad four months of work. It has fallen about 7% since reporting its most recent quarter’s earnings.

Merck (MRK) isn’t joining the ex-dividend parade this week, but will do so during the June 2013 option cycle for those a little more long term oriented than I typically tend to be. However, during a period of having repositioned myself defensively, the longer term options have utility and can provide a better price cushion in the event of adverse market moves.

I’ve owned shares of Conoco Phillips (COP) only once since the spin-off of its refinery arm, Phillips 66 (PSX). It used to be a very regular part of my portfolio prior to that occasion. The parent certainly hasn’t fared as well as the child in the 15 months since Phillips 66 has traded as a public company. The 80% difference in return is glaring. But like so many stocks, I think Phillips 66 isn’t priced for a new purchase, while Conoco Phillips represents some opportunity. Additionally, though not yet announced, there should be a dividend forthcoming in the next week or two.

I don’t recall why I didn’t purchase shares of Marathon Oil (MRO) last week after a discussion of its merits, but it probably had to do with the limited buying I was doing across the board. It reported earnings last week, perhaps that was a risk factor that didn’t have commensurate reward in the option premiums offered. But this week, with that risk removed, it goes ex-dividend and the consideration begins anew.

Although I already own shares of JP Morgan, I would consider adding to that position. Regardless of what your opinion is on the issue of separating the roles of Chairman and CEO, there’s not too much disagreement that Jamie Dimon will forever be remembered as one of the supporting pillars during and in the immediate aftermath of our financial meltdown. The recent spate of diversions has kept JP Morgan from keeping pace with the S&P 500 during 2013, but I believe it is capable of cutting that gap.

Autodesk (ADSK) reports earnings this week and is down about 4% from its recent high. I often like to consider earnings trades on shares that are already down somewhat, however, shares are up quite a bit in the past 3 weeks. While the options market was implying about a 6% move upon earnings, anything less than a 7% move downward could offer a 1.1% option premium for the week’s exposure to risk.

Salesforce.com (CRM) is another of those rare companies that haven’t kept up with market lately. That’s been especially true since its recent stock split. Although it does offer a an attractive weekly premium, the challenge may lie the possibility that shares are not assigned as the May 2013 option cycle ends, because earnings are reported during the first week of the June 2013 cycle. Barring a large downward move prior to earnings, there would certainly be ample time to re-position with another weekly or even monthly option contract prior to earning’s release.

To round off my over-exposure to the technology sector, I may consider either adding more shares of Cisco (CSCO) or selling puts in advance of this week’s earning’s report. I’ve added shares in each of three successive weeks and don’t believe that Cisco’s earnings will reflect some of the woes expressed by Oracle (ORCL). My only personal concern is related to the issue of diversification, but for the moment, technology may be the sector in which to throw caution to the wind.

US Steel (X) has been one of those stocks that I’m not terribly happy about, although that really only pertains to the current lot that I hold. Along with pretty much everything in the metals complex, US Steel hasn’t fared very well the past few months. However, I think that I am ready for a resurgence in the sector and am hoping that the sector agrees with me, or at least continues to show some strength as it has this past week.

Finally, despite having owned Facebook (FB) since the IPO and currently owning two individual lots, priced at $29 and $27.17, it remains one of my favorite new stocks. Not because I can count on it going to $30, but because I can count on it staying in a reasonable pricing neighborhood and becoming a recurrent stream of option income.

Traditional Stocks: Cisco, Conoco Phillips, Merck, Salesforce.com

Momentum Stocks: Facebook, US Steel

Double Dip Dividend: Amgen (ex-div 5/14), Eli Lilly (ex-div 5/14), Marathon Oil (ex-div 5/14)

Premiums Enhanced by Earnings: Autodesk (5/16 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.

 

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Weekend Update – May 5, 2013

ADP. ISM. FOMC. ECB

They came one after another at us last week. Not to mention the Jobless Report and the Employment Situation Reports to end the week.

Following the previous week where I had temporarily gone on one of my wild and drunken spending ways buying new shares with assignment proceeds, I returned to a more cautious note this past week.

Maybe it was the soup. While I have much greater comfort when on a shopping spree, usually borne out of a bullish view of the world, this week even the comfort food was sending me some kind of misleading message, spoonful after spoonful. I don’t always listen to my soup, but when I do, I know that things are serious. This week’s message wasn’t exactly cryptic in nature. For certain, the message wasn’t “Buy, Buy, Buy.”

But to simply assume the message is correct is bordering on lunacy, so I just decided not to buy quite as much, proving that we can all get along. Besides, “sell, sell, sell,” seemed so draconian.

Although so often a drastically sharp move downward comes from unexpected or lightly regarded catalysts, there’s not too much of an excuse to overlook some potentially obvious catalysts when the market appears to be in an overbought condition. For me, already sensitized to a possible drop, the FOMC, ECB and Employment Situation were individually capable of initiating and speeding a sudden descent.

Aligned? Had the Federal Reserve given a strong hint of an end to Quantitative Easing, had they suggested an earlier timetable for interest rate hikes, or had the European Central Bank not lowered rates that combination had the makings of a nasty punch. Throw a second successive month of disappointing employment numbers, perhaps with downward revisions of previous months and now you’ve got a party.

For short sellers, at least.

While the market did have a slightly delayed reaction to the FOMC minutes, it was fairly mute, despite doubling the early losses. The following day, which is often the day the real action occurs after an FOMC meeting, had its tone already set earlier by the ECB decision to drop rates.

That just left Friday, with a little hint from Wednesday’s release of the ADP statistics. that job growth may be slowing due to some headwinds in the economy. Much of the talk on Wednesday was how fearful everyone was that the number on Friday would be terribly negative.

The fact that the number was, in fact, an indication of a growing economy and there were massive upward revisions to earlier months was the surprise that should never have been a surprise, as thesis changing revisions are routine.

So all of the important letters were aligned, as no one really cares about ISM, and there was reason for a party. The order of the day on Friday was “buy, buy, buy,” once again delaying the “Sell in May” crowd’s ascent and giving me cause to reflect as the majority of my monthly covered call positions are now in the money and do not stand to further profit in the event of a continued market rise.

Of course, if I wanted to continue the lunacy, I would simply rationalize it all and convince myself that I now have a nice cushion between share and strike prices to withstand a fall between now and May 18, 2013. Sooner or later my call for a significant market drop will have to take on broken clock qualities.

Yet, the rationalizations aren’t working. Maybe I need another spoonful of soup.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend or Momentum categories, with no selections in the “PEE” category, despite earnings season still going strong (see details). Additionally, this week the emphasis is once again on dividend paying stocks and still giving greater consideration to monthly contracts, in order to lock into option premiums for a longer period in order to ride out any pauses in the runaway train. Of course, after Friday’s run higher capping off a week when the S&P 500 moved 2% higher, good luck finding any bargain priced shares. Bargains may be justifiably so. Sometimes there’s a reason no one asks you to dance. You just refuse to look in the mirror, justifiably so.

I jumped the gun a bit on Friday afternoon and purchased shares of Pfizer (PFE). After a very impressive share run higher, which hasn’t really occurred in the post-Viagra era, Pfizer reported earnings last week and continued the weakness that immediately preceded the report, after some European regulatory disappointments. A case of too much and too fast from my perspective, but the shares appear as a reasonably low risk over the coming weeks, particularly with a safe and healthy dividend and an upcoming ex-dividend date this week.

Wells Fargo (WFC) has been a frequent purchase target. While I do like shares, it along with so many others is more expensive than I would like. However, it has proven resilient in defending its share price when tested and the test levels have been slowly climbing higher. That’s certainly a more healthy way to see appreciation and I think offers less risk in what may become a risky environment. Additionally, their new ad campaign, “At least we’re not JP Morgan” (JPM) speaks volumes with regard to superfluous risk. As often before, my entry point is not so coincidentally synchronized with an ex-dividend date.

Weyerhauser (WY) is not a stock that I buy very often, but in hindsight I wonder why. Not because it does anything spectacular, but rather because it is so unspectacular that it has the core requirements of being an ideal covered call stock. It generally trades in a narrow range, has an options premium that is more than symbolic and pays a competitive dividend. What’s not to like, especially this week as it also goes ex-dividend.

Although I don’t have any “PEE” selections this week, Marathon Oil (MRO) does report earnings on May 7, 2013. However, unlike the usual earnings related plays that I prefer, it isn’t expected to trade in a wide range after the announcement. It’s implied move is far less than the 10% or greater that I usually look for while still offering a 1% ROI. Instead, it’s just like any other stock that happens to be reporting earnings, except that it’s approximately 5% off of its recent high, satisfying another of the criteria I look for when considering the risk associated with trading around earnings season.

I already own shares of St. Jude Medical (STJ) at a price slightly higher than Friday’s close. I rarely think about adding additional shares unless the price has had a significant drop. However, St. Judes Medical has had a fall relative to the market and certainly to the heath care sector. I don’t envision it as being at undue risk in the event of a market downturn, due to its modest existence during the upturn.

Parker Hannefin (PH) and W.W. Grainger (GWW) both go ex-dividend this week. Although their share rise on Friday adds to some reluctance to add them to the portfolio next week, if the Employment Situation statistics and the revisions are any guide, there may be very good reason to suspect that industrials and the companies that support the industrials may be ready for a little bit of a resurgence. Neither offer incredibly exciting dividends, but share appreciation may be more a part of the equation than it is for most stocks that I consider due to their option and dividend income potential.

I’ve been looking for a re-entry point in Goldman Sachs (GS) for a while. Again, hindsight told me that may have been a couple of weeks ago as shares were a relative bargain. The fact that shares have greatly under-performed the S&P 500 over the past 12 weeks has appeal for me, as I believe it marks a company that may be better equipped to out-perform going forward, particularly in a downturn.

Finally, Abercrombie and FItch (ANF) is an always exciting stock to own, especially as earnings are approaching. In this case earnings aren’t expected until May 15, 2013, so there is a little bit of breathing space to consider shares before the added volatility kicks in. When it moves, the moves are spectacular and certainly the option premiums reflect that kind of risk. My bias at the moment is that if an opportunity will arise it will likely take the form of put sales. However, that is only something that I would do if emotionally prepared to hold shares going into earnings if assigned. If so, a bit of luck may be necessary to turn the tables and sell call contracts going into earnings or sell additional puts if you’re really adventurous.

Traditional Stocks: Goldman Sachs, Marathon Oil, St. Jude Medical

Momentum Stocks: Abercrombie and Fitch

Double Dip Dividend: W.W. Grainger (ex-div 5/9), Parker-Hannefin (ex-div 5/8), Pfizer (ex-div 5/8), Wells Fargo (ex-div 5/8), Weyerhauser (ex-div 5/8)

Premiums Enhanced by Earnings: none

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.

 

Visits: 12