Daily Market Update – April 7, 2014 (Close)

Another weekend of nothing really happening to be of sufficient reason to move the markets to start the week. Nonetheless, the early impression was that there would be some very mild follow through to Friday’s very unexpected sell-off.

That would be wrong.

What also was wrong was the throng of voices who predicted, as the market was hitting it’s lows for the day, that the market would move even further lower going into the close. They were looking to see a test of the 1830 level on the S&P 500, which would have required about another 15 point drop, or about another 120 points on the DJIA.

Instead, things did tighten up a bit and for a very brief while even looked as if a triple digit loss would be erased.

With the turnaround in fortunes on Friday I felt very fortunate to have seen most of the anticipated assignments occur and have more cash on hand than when the week started, especially after having to dip into reserves to buy anything last week following only one assignment the prior week.

It’s far better to have the cash unencumbered by stock ownership when the market appears headed lower than having to go into reserves to put even more at risk. Recycling cash from assignments just doesn’t seem to psychologically carry the same level of risk, although it certainly does in reality,  where it counts.

While happy to have the cash, on the other hand, I was disappointed that some of the rollovers I felt fairly certain might get done, perhaps even turn into assignments, instead expired, leaving more uncovered positions that need to be looked after.

Still, not a bad way to start a week that begins with some added uncertainty that may be compounded as earnings begin anew this week and we get to see whether the weather has already been fully discounted in reporting for the past quarter.

Deep down you know that for some companies the bad weather excuse was simply an excuse. Some will take the opportunity with the current earnings reports to guide higher coming off a lower quarter and see their stocks rise and others will have to admit that there is something fundamentally wrong and not the weather at all. They will see their stocks drop.

Good luck trying to figure out which company will take which route.

Earnings season always requires the added attention to when the reports will be delivered. For those having been buy and hold investors it was predominantly earnings that made you wonder why you didn’t take profits sooner or made you wonder why you sold your shares so early. Rarely, if you were a long term holder, did earnings reports consistently move any individual stock in the same direction. One quarter’s nice advance may have been followed by another, but rarely a third and with it evaporation of those unrealized profits.

I used to hate earnings season. Now, it just means a l
ittle more work and trying to either avoid some positions or position yourself for whatever news may come your way and hope that whatever that news will be, it will be within reason.

That may be a little more challenging if there is any erosion in the market itself.

With cash near 40% to start the week the temptation to go shopping is definitely there. With a decent number of positions already having contracts expiring this Friday I would like to see any new purchases look at the possibility of going more forward, but that’s been easier to say lately than to do, as the premiums have been very low. I’ve been wanting to diversify in time for a few weeks now and haven’t had much luck in doing so. Friday’s drop did drive volatility a little higher so maybe there will be a better opportunity to do so this week.

What was interesting was that for some deep in the money strike levels for various stocks the premiums were in contango. That doesn’t happen very often and suggests that the options market was pricing in price drops going forward. Conceivably, someone looking to rollover a position at the same strike level would only have been able to do so at a net debit.

That’s not a very powerful motivator.

As with any market drop, especially after setting record highs, it’s only natural to wonder whether the drop was simply a blip or the start of something more omenous.

For the Momentum stocks that get so much attention the “omenous” seems to have already started.

Just look at the charts of SolarCity, Netflix, Amazon and LinkedIn, all from about March 19-20, 2014.

This morning that’s what I’ll likely be doing. Looking.

I’d like to see a little bit more of a sell-off before adding new positions, although some have taken enough of a decline, with no really obvious reason that it may be difficult to resist the opportunities.

It’s the age old battle of “Fear versus greed.” Only the week is new.

What surprised me is just how many new positions I did decide to open. The sell-off didn’t feel really terribly bad.

The only thing that did feel bad was watching everyone sell their stocks and rotate into what are thought to be safe and high yielding positions. Unfortunately, one of those was Verizon, which goes ex-dividend tomorrow. At about 12:25 PM it reversed its direction, going from well outside the possibility of being assigned early to likelihood of that happening. While I wanted to do the rollover to capture the dividend there just weren’t any good trades to be made, as it is one of those dividend arbitrage stocks that I referred to the other day. Trying to buy back the shares would have ended up being no different from offering to pay full value for the dividend the more deeply it was in the money.

About 15 minutes before the closing bell shares took a dip and there was an opportunity to get some scant premium through a rollover. I was, however, ambivalent about the trade as the April 25th contract expiration is a day after earnings are announced and I generally don’t like to be in that kind of position.

I did want the dividend, though.

In this case, it’s FOMO (fear of missing out) versus greed, and those two are really one and the same.







 

 

 

 

 

 

 

 

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