Daily Market Update – January 27, 2014 (Close)

 

  

(see all trades this option cycle)

 

Daily Market Update – January 27, 2014 (Close)

While everyone has been spending their time loving to hate Caterpillar, they may owe an apology to the company for perhaps being what stood between a 300 point down day on Friday and its continuation today, as overseas markets opened the week much lower.

At a time when earnings may actually matter nothing speaks more loudly than a company that gets dirt under their fingernails and is actually making profits, particularly if those profits have some tie to China.

Thank you, Caterpillar. That was the most unnerving 3% market drop ever.

Not really, but memory is short and when it comes to the past only yesterday really matters.

However, with recent news of a deterioration in the Chinese economy also comes a deterioration of the emphasis that the Chinese economy has had on Caterpillar’s fortunes. For the past couple of years Caterpillar’s reliance on China has been overly exaggerated and shares have been adversely impacted well out of proportion to the company’s exposure when bad news was reported.

That link may now take a little bit of a break, but it’s still likely that Caterpillar’s detractors will still help keep a floor on shares as earnings news becomes dated.

In a way, I’m happy to see the good performance this morning, but I was hoping to be able to pick up shares below $85 on earnings news.

In the big picture, I’d rather see Caterpillar add some stability to the market than brood over losing an opportunity to pick up shares.

The market’s inconsistencies never cease to amaze me. In this case, besides the China thesis being conveniently being discarded, some may remember that barely a weak ago the Caterpillar CEO, Doug Oberhelman was being broadly pilloried, for among other things accusations that he engaged in share buy backs at too high prices specifically to prop up share price.

Yet today the market applauds the announcement of a new $10 billion share buyback as Caterpillar is hitting recent highs.

The only lesson to be learned is that it doesn’t really pay to pay attention.

This week will be one that is likely to be entirely defined by earnings and may see a number of gyrations as the numbers come across. Although there will be an FOMC meeting and minutes released on Wednesday, it’s likely to be the third consecutive meeting with little to no real impact on the market.

We start this week with prices looking much better, but the market’s stability at the opening today may actually just muddle the picture. I would have preferred some continuing weakness, albeit in a slow and methodical way. The problem with abrupt changes is that you really don’t have any inkling of whether there is reason to keep going in the same direction. Are you seeing an aberration or the beginning of a trend?

By the time you often feel comfortable enough to answer that question it’s likely to be too late.

While I like to exercise caution I don’t like to be frozen in place and always feel a need to put idle funds to work, as best as possible.

This week, however, just as the prior week, I didn’t see as many assignments as I would have expected and am sitting with a smaller cash reserve than usual to start the week.

For those that do have cash in reserve the question is whether you want to risk the strategic build up of that pile at a time when it isn’t clear where the direction is going.

I’m not very willing to go below 20%, which would mean on the order of 5 new positions this week.

Looking at those positions that are set to expire this Friday I’m encouraged that there’s a chance to replenish reserves, but that’s how I felt the previous two weeks, as well. As we get closer to the end of the week and the likelihood of assignments looks better, that may loosen up some of my inhibitions.

To start this week I’m mindful that several trading days last week started off on a positive note, but turned around fairly quickly and decidedly. So while encouraged by the morning’s trend, it’s probably best to wait to see if the commitment is really there once the bell rings.

While there may be some room for some more speculative trades this week, specifically earnings related, it’s probably a good idea to focus again on dividends and more staid stories.

Sometimes excitement is totally unnecessary.

 

.

 

 

  

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 27, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this mo
nthly option cycle

  
 

   

Click here for reuse options!
Copyright 2014 TheAcsMan

Daily Market Update – January 27, 2014

 

  

(see all trades this option cycle)

 

Daily Market Update – January 27, 2014 (9:15 AM)

While everyone has been spending their time loving to hate Caterpillar, they may owe an apology to the company for perhaps being what stood between a 300 point down day on Friday and its continuation today, as overseas markets opened the week much lower.

At a time when earnings may actually matter nothing speaks more loudly than a company that gets dirt under their fingernails and is actually making profits, particularly if those profits have some tie to China.

Thank you, Caterpillar. That was the most unnerving 3% market drop ever.

However, with recent news of a deterioration in the Chinese economy also comes a deterioration of the emphasis that the Chinese economy has had on Caterpillar’s fortunes. For the past couple of years Caterpillar’s reliance on China has been overly exaggerated and shares have been adversely impacted well out of proportion to the company’s exposure when bad news was reported.

That link may now take a little bit of a break, but it’s still likely that Caterpillar’s detractors will still help keep a floor on shares as earnings news becomes dated.

In a way, I’m happy to see the good performance this morning, but I was hoping to be able to pick up shares below $85 on earnings news.

In the big picture, I’d rather see Caterpillar add some stability to the market than brood over losing an opportunity to pick up shares.

This week will be one that is likely to be entirely defined by earnings and may see a number of gyrations as the numbers come across.

We start this week with prices looking much better, but the market’s stability at the opening today may actually just muddle the picture. I would have preferred some continuing weakness, albeit in a slow and methodical way. The problem with abrupt changes is that you really don’t have any inkling of whether there is reason to keep going in the same direction. Are you seeing an aberration or the beginning of a trend?

By the time you often feel comfortable enough to answer that question it’s likely to be too late.

While I like to exercise caution I don’t like to be frozen in place and always feel a need to put idle funds to work, as best as possible.

This week, however, just as the prior week, I didn’t see as many assignments as I would have expected and am sitting with a smaller cash reserve than usual to start the week.

For those that do have cash in reserve the question is whether you want to risk the strategic build up of that pile at a time when it isn’t clear where the direction is going.

I’m not very willing to go below 20%, which would mean on the order of 5 new positions this week.

Looking at those positions that are set to expire this Friday I’m encouraged that there’s a chance to replenish reserves, but that’s how I felt the previous two weeks, as well. As we get closer to the end of the week and the likelihood of assignments looks better, that may loosen up some of my inhibitions.

To start this week I’m mindful that several trading days last week started off on a positive note, but turned around fairly quickly and decidedly. So while encouraged by the morning’s trend, it’s probably best to wait to see if the commitment is really there once the bell rings.

While there may be some room for some more speculative trades this week, specifically earnings related, it’s probably a good idea to focus again on dividends and more staid stories.

Sometimes excitement is totally unnecessary.

 

.

 

 

  

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 24, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 

   

Click here for reuse options!
Copyright 2014 TheAcsMan

Weekly Prospects (January 27-31, 2014)

 

 

 

 

 

MONDAY: So far, thanks to Caterpillar, the stock everyone loves to hate, the market delays any follow through to Friday’s sell off, as earnings may truly matter.

TUESDAY:     A nice pre-market opening erased by disappointing durable goods report> Luckily Apple stopped being a market leader a few years ago

WEDNESDAY:  Turkish Central Bank raises overnight lending rate by 4 1/2% and FOMC today. Meanwhile S&P 500 turned around 15 points overnight and not in a good way.

THURSDAY:   Barely one day later and it’s as if nothing happened yesterday. More earnings and not much news to end the week, hopefully on an up note for a change.

FRIDAY:  Strap on. This looks to be the third consecutive down draft Friday.

                                                                                                                                                  

” *SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS *

Sneak Peek

* Sneak Peek selections subject to change before final Sunday posting

 

  

Click here for reuse options!
Copyright 2014 TheAcsMan

Week in Review – January 26, 2014

What a Surprise.

Barely a week ago as the earnings season was about to begin it seemed perplexing that there was talk of seeing a 6% increase in comparable earnings. Based on retail earnings and performance from my personal barometers, Grainger (GWW) and Fastenal (FAST), there didn’t seem to be much adding to the integrity of the foundation.

As with the two previous earnings seasons the financials leading off the reporting season had reasons to be proud but there was little glory to be trickled down. It probably takes more than a growing Netflix (NFLX) subscription base to create optimism among traders, although there were some who were eager to use that news as being a sign of an improving economy, apparently believing that the first thing a newly employed individual does is to activate a Netflix subscription.

However, even with some favorable earnings reports to end the week the constellation of news coming from the rest of the world, including Chinese production disappointments, Turkey’s monetary woes and Argentinean debt had to come as a surprise as the DJIA fell over 300 points, never even making a feeble attempt to stem the flow of losses.

What we discovered about ourselves is that we much prefer the false security offered by believing that Chinese economic reports are accurate than their actual accuracy. Report after report that has final results perfectly aligned with projections should have been an early clue that perhaps the books are occasionally cooked. But as long as they supported a thesis of a growing worldwide economy there was reason to be optimistic.

That changed this week, and somehow we were surprised. What will be the ultimate question as the coming week begins is whether those new prices represent values or value traps.

Just a few days ago there was every reason to believe that the current market was beginning to settle into an historical mode, when earnings actually mattered and were what moved markets. With questions regarding tapering largely thought to have been resolved and with the worldwide economy, currencies and debt markets being reasonably calm, it seemed as if fundamentals would be back in vogue.

Surprise.

Never get too comfortable or believe what you are seeing. Increasingly, it feels as if everything that you believe to be the case should be considered as being on par with Chinese economic reports.

This week offers challenges that weren’t present last week. For the second consecutive week I had fewer positions assigned than I had anticipated and have less in cash reserves to take advantage of lowered prices than I would have liked.

However, I’m not anxious to go on a buying spree quite yet and will likely wait for some sign of stabilization in the overall market, rather than attempting to thread a needle with trades in the mistaken belief that outliers can be found in what may be a developing vortex.

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).

Among companies beating analyst’s expectations and not having done so through the optics of share buybacks were Baxter International (BAX) and Bristol Myers Squibb (BMY). Both were included in Friday’s down draft and both appear to have been impacted out of proportion to their historical volatility. While that doesn’t preclude further journeys lower it does give me some basis for believing that new positions may be better suited to outperform the S&P 500 going forward. Both offer expanded options, thereby creating greater opportunities to diversify risk on the basis of time.

A frequent candidate for share ownership is Coach. It fell, as so often has happened over the past 18 months after its earnings report last week. That shouldn’t have been too great of a surprise. What is a surprise, however, is that despite universal condemnation, it has been incredibly resilient. I sold puts last week after earnings that subsequently expired and now believe that shares, if not bridled by a lower moving market, are going to stay at this level or move higher. As a covered option position either of those are perfectly acceptable outcomes and Coach has proven itself to be more than an acceptable covered option holding ever since it has fallen out of favor.

While retail has been an abysmal place to park money, it’s hard to not finally consider shares of Kohls (KSS). In the past I would typically only consider shares in advance of the dividend and was reluctant to do so otherwise, because Kohls only offered monthly options. However, it has now joined the growing number of expanded option stocks and has many more strike levels available than before, thereby offering greater flexibility in designing exit strategies. It’s shares have fallen over 12% in the past two weeks, reportedly due to concerns over weather related sales decreases.

Fastenal , which I often look toward as a measure of how well economic growth is trickling down to smaller value added components reported earnings recently. Since they had previously guided lower the results shouldn’t have been too surprising, yet they were. It didn’t take long for shares to recover from earnings. However, with Grainger reporting its own disappointments Fastenal felt the fury. With its ex-dividend date this coming week I see it as an opportunity to add shares at what has been a safe level. Despite a somewhat higher beta, it, too appears to have been disproportionately victim of the market decline and that may offer some relative immunity in coming days.

MetLife (MET) is one of those companies, as with most financials, that should benefit from a rising interest rate environment. Like others in the sector it fell mightily on Friday and is getting to a point of again being interesting. Like many other stocks this very recent fall brings them closer to appealing prices. In this case I would prefer getting even closer to the $48 level. However, I am considering a longer term option contract, such as the March 22, 2014, which would encompass both an ex-dividend date and earnings, which take place between now and February 12, 2014 and provide some time for share recovery in the event of an adverse reaction to the report.

International Paper (IP) is similar to MetLife insofar as its share price has come down to a more realistic level and that it will be going ex-dividend and reporting earnings during the February 2014 option cycle. Recently, shares appear to have been trading in a 4 month cycle from low to low and we are approaching that 4 month period again, just as shares are also heading toward its lows. As with many stocks this coming week there is heightened concern that they will break below support levels and International Paper is among that group. It’s attractive dividend, and again, similar to MetLife, the use of a longer term option may provide a nice combination of dividends, option income and price protection during a period that the market may be at risk to under-perform.

Texas Instruments (TXN) reported earnings earlier last week that were in-line with estimates. That alone was reason to reward shares, as the bar may be set increasingly lower. It didn’t fare terribly during the market meltdown and that may be its theme during any upcoming market weakness. Shares go ex-dividend this week and still offer a option premium that warrants attention in light of its low beta.

The coming week is a busy one for earnings. A more detailed look at this week’s earnings considerations provides some of the criteria used in filtering companies from one another. Of a number prospects that I screened for this week the two that stand out as opportunities by virtue of meeting my criteria (give link) are Facebook (FB) and Seagate Technology (STX).

Seagate Technology, rather than becoming a dinosaur, has had been envisioned in the post-PC world has been thriving, as has its share price. Its trajectory higher is alone cause for concern, whether at earnings, during a market decline or at any other time. The options market is implying a 6.5% price movement, which would envision a lower price strike of $55. Meanwhile, a 1% ROI can be potentially obtained at the $54.5 level. That’s not a terribly wide margin of safety, so any potential seller of puts should be prepared for the possibility of assignment.

Finally, as Facebook prepares to report earnings, its scant history of doing so has been a story of monetization of the mobile interface and in general the story has been continued surprise of how well they have been able to develop that revenue source. The options market appears to be expect significant price movement upon earnings, as the implied volatility is 11%, taking shares as low as $48.50. However, a 1% ROI can potentially be obtained at a strike level as low as $47 for those with some adventure in their character. Facebook’s more rationale price trajectory and occasional pauses may however make it a less adventurous earnings related trade than compared to Seagate Technology

Traditional Stocks: Baxter International, Bristol Myers Squibb, International Paper, Kohls, MetLife

Momentum Stocks: Coach

Double Dip Dividend: Fastenal (ex-div 1/29), Texas Instruments (ex-div 1/29)

Premiums Enhanced by Earnings: Facebook (1/29 PM), Seagate Technology (1/27 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.

Click here for reuse options!
Copyright 2014 TheAcsMan

Earnings Finally Matter

 
A couple of years ago I finally realized that I like earnings season.

Part of that realization was out of necessity as it seems that earnings season never ends, so it just can’t be avoided. Of the companies that I regularly follow, no sooner does LuLuLemon Athletica (LULU) report its earnings that Alcoa (AA)traditionally kicks off the next season just two weeks later.

The way I now look at things earnings season accounts for about 85% of the year, so it has become a case of just learning to live with it instead of fearing the potential for swings. The problem with a buy and hold approach is that the investor is often held hostage to the wild price swings that accompany earnings and can see paper profits quickly erased as the mountain has to be newly re-climbed.

One of the nice things about using a covered option strategy is that you can, to a degree, determine what your exposure to earnings risk or reward is through the use of varied expiration dates. For existing holdings that you believe may have difficulty withstanding an earnings report the use of a longer option contract can give you more downside protection due to the larger premium, as well as additional time for shares to recover, if indeed they fail to hold the line.

You can also use shorter term options in the hope of being assigned out of a position in advance of earnings.

Of course, there is the more adventurous route, akin to being a storm chaser. You can meet earnings head on and purposefully trade in a stock just for the earnings related move.

While there are many ways to do so, I prefer the sale of out of the money put options and use the “implied volatility” as my guide, along with my objective of a 1% ROI on an investment that is hoped to last only for the week. Where possible I try to find a strike price that is outside the range suggested by the implied volatility, yet still offers a 1% or greater ROI.

Generally, only stocks that ordinarily trade with a high degree of volatility will be candidates for such an earnings related trade and have exhibited very large earnings related moves in the past.

This coming week is going to be a busy one as far as high profile companies go that may fit the above criteria. Among the companies that I am considering this coming week are Apple (AAPL), Amazon (AMZN), Blackstone (BX), Chipotle Mexican Grill (CMG), Facebook (FB), Las Vegas Sands (LVS), MasterCard (MA), Phillips 66 (PSX), Seagate Technology (STX), VMware (VMW) and Yahoo! (YHOO).

One thing that really appeals to me about earnings season is that it’s a time that I don’t really think about macroeconomic nor microeconomic issues. I simply focus on the numbers and the past history of price movements in that particular stock, especially in the aftermath of previous earnings reports.

The ultimate question is distilled to a very simple core. Is there an indication that the potential reward is sufficient for the potential risk?

As a general rule my preference is to sell puts when there is already an indication of price weakness. I look at any decline in share price in advance of earnings to be similar to a down payment and the sentiment that evolves as shares are already moving lower is often to increase the premium that can be obtained for the sale of puts and may also allow the use of even lower strike prices while getting a relatively larger option premium. Following this past Friday’s (January 24, 2014) 300 point loss in the DJIA, that isn’t terribly difficult.

The caveat is that you must be either willing to own the shares if assigned or be willing to manage the options contract until some resolution is achieved. That could mean rolling the option contract forward and hopefully to a lower strike or accepting assignment and then selling calls until assignment of shares.

The table above may be used as a guide for determining which of selected companies may meet the risk-reward parameters that an individual sets.

However, there are also times when, despite what appear to be acceptable rewards I don’t make the trade prior to earnings, but rather look for companies on the radar screen that find their shares on the losing end after announcement and guidance. That is especially true for those positions that don’t meet criteria or only do so marginally.

In such cases, I consider the sale of puts after the initial plunges, as often the premium is enhanced as sentiment assumes the importance that uncertainty previously held in maintaining the premium level.

Just a few days ago it appeared that the market was going to solely focus on earnings and fundamentals, just like in the old days. The coming week, in addition to perhaps being more responsive to earnings than in the past years, is suddenly also subject to many other winds, including more fallout from China, Turkish monetary woes, Argentinian debt and worries regarding the FOMC response to the current snapshot of the economy.

As a result, earnings related trades may also be impacted by those macroeconomic factors and I would be inclined to stay away from “marginal” selections and be increasingly inclined to consider trades after earnings, especially if prices have taken a strong downward move in response.

 

Click here for reuse options!
Copyright 2014 TheAcsMan