Daily Market Update – August 19, 2014

 

 

 

 

Daily Market Update – August 19, 2014 (9:15 AM)

Well, yesterday was a surprise, but it does seem to go along with the recent pattern that the market basically hates getting news and loves existing in either ignorance or denial.

The reaction last Friday to news or at least what was passed off as news contrasted sharply to the reaction yesterday to nothing.

It’s hard to understand how the market could be so fragile as to flee on any bad geo-political news, but then to flock back when there is no news. It doesn’t even take good news, it just takes no news.

That’s especially confusing when you realize that the story is far from being done and any day, especially any Friday the way the pattern seems to be going, can bring a new series of investor rattling bits of news.

While every one still believes that the market looks out into the future by a 6 month period, that’s increasingly hard to accept, given the way daily events or non-events rock the markets and can change the entire tone in an instant.

After seeing yesterday’s gain it’s hard to not want to be part of the revelry and today looks like it may add to those gains.

The one bit of good news coming from the market before the opening was Home Depot.

It reported earnings the way any company would like to see itself report. It beat on every single metric and it guided even stronger for the next quarter.

If looking for good economic news, or at least any news that doesn’t have the word “geo-political” attached to it, the news from Home Depot  seems to be just the right kind. Of course, it will be put into better context tomorrow when Lowes reports. Then, at least will know whether Home Depot’s good fortunes have come at the expense of its competition or whether the pie just got larger.

Ultimately, good news from both of those companies has to be good news for the economy as a whole. While there may be various theories about what strength at Home Depot and Lowes means for the home builders, which are often thought of as the real measures of the economy,those theories are just that and not necessarily having much in the way of validity.

Too often mutual exclusivity is believed to be a rule in so many aspects in life. Home Depot can thrive even as home builders do, as well. SO I think that if the pie is expanding that is more likely to be good news for all.

While the market’s early morning gain may extend yesterday’s rally I plan to still practice the “prove it to me” approach and may again be content with little new purchase activity, but not very content if unable to find opportunity to sell new calls on existing positions.

On a very positive note, after last week’s inability to keep up with the market, even with yesterday 1% gain existing positions kept pace.

Sometimes the tide is good, but I’d much rather swim free and see the market tread water for  a bit.

 

 

 

Daily Market Update – August 18, 2014 (Close)

 

 

 

 

Daily Market Update – August 18, 2014 (Close)

The world was reasonably quiet over the weekend despite some suggestion that events might begin to ratchet higher in the Ukraine – Russia conflict.

While there’s plenty of reason to believe that the quiet could easily dissolve, that’s tomorrow’s problem and not one for today, at least as far as the S&P futures seem to be concerned.

There is an FOMC statement on the calendar this week, but as many parts of the country return to school next week, this week is an understandably extraordinarily quiet one, otherwise.

In fact, there is absolutely nothing on the calendar for Friday, which is extremely unusual other than on a holiday. But even federal bureaucrats and traders have families. Or their spending the weekend in Jackson Hole.

With it becoming increasingly clear that the market is very nervous and very willing to give up some gains I’m not terribly anxious to add too many new positions this week. What complicates the decision, though, is that it’s also equally clear that the market really does want to go higher. Every attempt at a pullback is shallow and brief.

Today’s eventual climb higher, a nearly 1% climb in the DJIA, brings the market within easy striking range of its all time high.

And remember all of that talk about how volatility had climbed 30% in a week? Well, it’s back to its lows.

The fact that each pullback has been met with the market setting a series of new high shows just how emboldened investors and traders have become, gaining confidence with each battle.

Although by now you would think that we would all be getting use to this Teflon kind of market, it still remains odd and uncharted kind of territory, despite all of the experience over the past two years. Somewhere, maybe deep in the recesses of our awareness is the thought that there might be unforeseen land mines out there.

That may be the case, but I’m less concerned about the unseen than I am about the disregarded.

Last week did see a few assignments, but fewer than I would have expected, thanks to the sudden decline when word was released of an attack on some kind of Russian convoy. nearly 60 hours later, in this age of 24/7 news and video documentation at everyone’s fingertips, it seems odd that there hasn’t been much in the way of confirmation of that attack.

So no one really knows what may be the next logical step, neither in response, nor as part of a natural follow-up to the original action, since the very existence of that original action is becoming more and more suspect.

None of this really inspires too much confidence, but as opposed to wanting to see the week get off to a slow or weak start, as I usually do, I would be happy to see some strength and the pos
sibility of being pulled along for the ride, especially since I missed it last week.

Despite having had a few weeks of really strong out-performance in prior weeks, I tend to focus on things the way most people do. I tend to ask “what have you done for me, lately.”

With last week being one of relative under-performance that’s where my focus begins this week, so I was hoping for some strength to begin the week and some opportunity to simply sell calls on positions now laying fallow.

That didn’t really happen, as premiums are generally very low at the moment and there may be reason to wait for some capital gains from the shares as the amount of income or price protection is relatively low and makes it hard to justify selling away the rights for some of those capital gains.

What would have been especially nice was some indication that the early strength in the market had some staying power. The best indication of all is that it did.

In the past few months these kind of early indications had a way of quickly running their course, so there wasn’t too much reason to chase anything until there’s a sense that it was for real, this time around.

And it was.

But even then, there wasn’t much reason to chase. Despite making a couple of purchases today, ultimately, I expect this week to be relatively slow as it comes to any more of those new positions being opened.

The cash generation has to come from somewhere, though.

Part of it will come from losers such as Target and Transocean, which both go ex-dividend this week and have reasonably generous dividends, but dividends are really illusory, as far as net assets go. It is cash, but it comes at a tangible price.

With a number of positions already set for expiration this week there will hopefully be some combination of rollover and assignment opportunities to create real income and re-supply cash reserves, respectively, while waiting for the right opportunities to spend cash reserves down.

At the moment that aspect of things looks very good, but as last week demonstrated it’s probably not a good idea to take too much for granted.

 

 

 

 

 

 

 

Daily Market Update – August 18, 2014

 

 

 

 

Daily Market Update – August 18, 2014 (8:00 AM)

The world was reasonably quiet over the weekend despite some suggestion that events might begin to ratchet higher in the Ukraine – Russia conflict.

While there’s plenty of reason to believe that the quiet could easily dissolve, that’s tomorrow’s problem and not one for today, at least as far as the S&P futures seem to be concerned.

There is an FOMC statement on the calendar this week, but as many parts of the country return to school next week, this week is an understandably extraordinarily quiet one, otherwise.

In fact, there is absolutely nothing on the calendar for Friday, which is extremely unusual other than on a holiday. But even federal bureaucrats and traders have families.

With it becoming increasingly clear that the market is very nervous and very willing to give up some gains I’m not terribly anxious to add too many new positions this week. What complicates the decision, though, is that it’s also equally clear that the market really does want to go higher. Every attempt at a pullback is shallow and brief.

The fact that each pullback has been met with the market setting a series of new high shows just how emboldened investors and traders have become, gaining confidence with each battle.

Although by now you would think that we would all be getting use to this teflon kind of market, it still remains odd and uncharted kind of territory, despite all of the experience over the past two years. Somewhere, maybe deep in the recesses of our awareness is the thought that there might be unforeseen land mines out there.

That may be the case, but I’m less concerned about the unseen than I am about the disregarded.

Last week did see a few assignments, but fewer than I would have expected, thanks to the sudden decline when word was released of an attack on some kind of Russian convoy. nearly 60 hours later, in this age of 24/7 news and video documentation at everyone’s fingertips, it seems odd that there hasn’t been much in the way of confirmation of that attack.

So no one really knows what may be the next logical step, neither in response, nor as part of a natural follow-up to the original action, since the very existence of that original action is becoming more and more suspect.

None of this really inspires too much confidence, but as opposed to wanting to see the week get off to a slow or weak start, as I usually do, I would be happy to see some strength and the possibility of being pulled along for the ride, especially since I missed it last week.

Despite having had a few weeks of really strong out-performance in prior weeks, I tend to focus on things the way most people do. I tend to ask “what have you done for me, lately.”

With last
week being one of relative under-performance that’s where my focus begins this week, so I would like to see some strength to begin the week and some opportunity to simply sell calls on positions now laying fallow.

What would be especially nice is some indication that the early strength in the market has some staying power.

In the past few months these kind of early indications had a way of quickly running their course, so there’s not too much reason to chase anything until there’s a sense that it is for real, this time.

Ultimately, I expect this week to be relatively slow as it comes to new positions being opened.

The cash generation has to come from somewhere, though.

Part of it will come from losers such as Target and Transocean, which both go ex-dividend this week and have reasonably generous dividends, but dividends are really illusory, as far as net assets go. It is cash, but it comes at a tangible price.

With a number of positions already set for expiration this week there will hopefully be some combination of rollover and assignment opportunities to create real income and re-supply cash reserves, respectively, while waiting for the right opportunities to spend cash reserves down.

 

 

 

 

 

 

Dashboard – August 18 – 22, 2014

 

 

 

 

 

Selections

MONDAY:  A quiet weekend may get the market off to a good start for the week, with not much more than an FOMC statement to contend with for the rest of the week.

TUESDAY:     Maybe Home Depot should show everyone else how earnings are supposed to be done, beating on every metric. That will help the DJIA more than the S&P 500 but a healthy Home Depot is generally good news all around, unless it comes at the expense of its competition. We’ll know that tomorrow

WEDNESDAY:  Market looks to start of trading quietly today ahead of what should be a non-consequential FOMC statement release this afternoon.

THURSDAY:    With the market already up 1.6% for the week it couldn’t be blamed for taking a break today before tomorrow’s festivities from Jackson Hole. Still with money fleeing precious metals this morning and interest rates so low, where else are you going to go? At least for today.

FRIDAY:  All eyes on Jackson Hole and it’s Friday, so no surprises if any surprise comes out of the Ukraine – Russia conflict

 



 

                                                                                                                                           

Today's TradesCash-o-Meter

 

 

 





 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak PeekPie Chart Distribution

 

 

 

 

 

 

 

Weekly Summary

  

Weekend Update – August 17, 2014

It’s hard to know whether the caption seen with this screen capture this past Friday morning was just an unfortunate mistake or an overly infatuated producer trying to send a not so subtle message to an on air personality who may not be that exciting when the teleprompter isn’t present.

There’s also the possibility that it was simply a reflection of the reality for the week. Coming to the mid-point of August and people every where grasping for the last bits of summer, it was an extraordinarily slow week for scheduled economic news and a slow week for trading. The most prevalent stories for the week were regarding the death of a beloved comic genius and that of a national figures and unknowns injecting a little icy cold fun into supporting research into the mysteries of a horrible disease.

In that vacuum the stock market was on its way to having its best week in nearly two months.

In that context, there was no doubt that boring was indeed, sexy.

For me, not so much. Boring was more like a full length burlap sack that was far too tight around the neck. Just a few short weeks ago after a deluge of market moving news I found myself wishing for quietude, only to learn that you do have to be careful what you wish for.

As a covered option trader I much prefer weeks that the market is struggling or flat. Even mild to moderate declines are better than strong moves forward, if my covered positions cause me to be left behind. I can usually do without those “best weeks ever” kind of hyperbole.

Luckily, lately Fridays have had a way of shaking things up a little bit, particularly when it comes to reversing course.

Although its probably a coincidence but seemingly market moving news from Russia seems to prefer Fridays, something noted a few months ago and not having slowed down too much.

That was certainly the case to end out the week where I was getting left behind. News, however, of a possible military action cast a pall on the markets and quickly reversed a decent gain earlier in the day.

In the perverse world of hedging your bets, sometimes those surprises are the antidote to getting left behind, so what is likely bad news for many may be more happily received by others. In some cases it’s really that bad news that’s sexy.

By the same token I wasn’t overly pleased when the market regained much of what it had lost. For me, in addition to renewing the gap between personal performance and the market, it also pointed to a market unclear as to its direction.

Even though it’s volatility that drives the premiums that can make the sale of options enticing, I really like clarity. After Friday’s events there was no clarity, other than the validation of the belief that the market is clearly on edge. At best, the market demonstrated ambivalence and that is far from being sexy.

What may be sexy is a recognition of the market’s unwillingness to give into the jitteriness and its continuing to pursue a climb higher. But then again, that wouldn’t be the first time something stupid was done in pursuit of something alluring.

I wouldn’t mind it being on the edge or deigning to walk on the wild side. That’s understandable, maybe even sexy. What is much less understandable is how forgiving the market has been, especially as it entered yet another weekend of uncertainty, yet pulled back from its retreat in a show of confidence.

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

When the market first caught word of the possible military action in Ukraine the response was fairly swift and saw nearly a 200 point market reversal.

While that move may reflect investor jitteriness and a disdain for the uncertainty that may be in store, the broad brush was fairly indiscriminate and not only took stocks with significant international exposure lower, but also took those relatively immune for a ride, even if they were already well off of their previous highs.

While I understand why MasterCard (MA) and its shareholders may have particular angst about events in Russia, I’m not certain that the same should have extended to those with interests in Best Buy (BBY) or Fastenal (FAST).

They all fell sharply and didn’t share in the subsequent recovery later in the day.

I already own Best Buy and anticipated it being assigned this past week, only to have to roll the option contracts over. While it does report earnings next week and is frequently a candidate for large moves, I think that at its Ukraine depressed price there is some spring back to supplement the always healthy option premium.

Fastenal is a very unsexy kind of stock and it does seem quite boring. I suppose that for some people its stores and catalogue of thousands of handy items may actually be very exciting. It is, however, a very exciting stock if you learn to look beyond the superficial. As a buy and hold position it has had a few instances of opportune buying over the past year. However, as a vehicle for a covered option strategy it has had many of those opportunities and I regret not having taken more advantage.

During a trading period of 14 months, while the S&P 500 has gone 18% higher, while Fastenal had gone nearly 14% lower. Not exactly the kind of stock you would find very appealing, even in very low light and deprived of oxygen. However, being opportunistic and using a covered option strategy it has delivered a 43% ROI in that period.

While Best Buy and Fastenal may have been innocent victims of Friday’s decline, MasterCard has been battling with Russian related problems for the
past few months, as there had been some suggestion that the Russian banking system would create its own network of credit cards. That notion has since been dismissed, but there may be little emanating from Russia at the moment that could be taken at face value.

MasterCard shares are still a little higher than I find attractive, but it’s always in the eye of the beholder. Ever since its stock split it has traded in a nicely defined range and has moved back and forth with regularity within that range. If you like covered options, that is a really sexy characteristic.

I also understand why MetLife (MET) fell precipitously on Friday. Already owning shares and having expected its assignment, I rolled it over prematurely as it started to quickly lose altitude as the 10 year Treasury rate started plummeting. The thesis with MetLife, that has been consistently borne out is that it prospers with a rising rate environment.

Shares did recover by the close of the session and despite it being near the top of the range that I would consider a share purchase, I may be ready to add to my existing position.

I also understand why Starbucks (SBUX) may be at risk with any escalation of events in Europe. It is also a potential victim to an Italian recession and declining German GDP. However, despite those potential concerns, it actually withstood the torrents of Friday’s trading and I think is poised to trade near its current levels, which s ideal for use in a covered option trade.

I have been sitting on shares of both Freeport McMoRan (FCX) and Mosaic (MOS) for quite a while. Although the former shares are in profit they are still greatly lagging the S&P 500 for the same period. The latter is still at a loss, not having recovered from the dissolution of the potash cartel, but I’ve traded numerous intermediate positions, as is frequently done to support a paper loss.

Both, however, I believe are ready to move higher and at the very least offer appealing dividends if forced to wait. That has been a saving grace for my existing shares and could easily be so with future shares, that also provide attractive premiums. If finding entry at just the right price that combination can truly be sexy.

I’m not really certain why GameStop (GME) is still in business, but that’s been the conventional wisdom for years. The last time I was involved in shares was through the sale of puts after a plunge when Wal-Mart (WMT) announced that it would intrude of GameStop’s business and offer Wal-Mart store credits for used games. Based upon their own earnings report last week, looks like that strategy didn’t move the needle very much, however.

Still, GameStop keeps on going. It reports earnings this coming week and it was 5% lower in Friday’s trading. If considering the sale of puts before earnings, I especially find those kinds of plunges before earnings to be very sexy. With an implied move of about 7.8%, a 1% ROI may be able to be achieved by selling a put contract at a strike level 9.2% below Friday’s closing price.

In the event of an impending assignment, however, I would look for any opportunity to roll over the put contracts, but would also be mindful of an upcoming dividend payment sometime in September, which could be a good reason to take possession of shares if unable to get extricated from the short put position.

Finally, after a week of retailers reporting their sales and earnings figures, it’s not really clear whether the increased employment numbers are creating a return to discretionary spending. It’s equally not clear that Sears Holdings (SHLD), which reports earnings this week is really a retailer, but it reports earnings this week, as well. 

For years, and possibly still so, it has been extolled for its real estate strategies as it spins off or plans to spin off the only portions of its retail operations that seem to work.

However, in the world of trading for option income none of that really matters, although it may be an entertaining side bar. 

The option market is currently assigning an implied price move of approximately 9.4%, while a 1% ROI for the week may potentially be made by selling a put contract 11.8% below Friday’s closing price.

As I knew deep down in high school, even losers can be sexy in the right light. Sears Holdings could be one of those losers you can learn to love.

 

Traditional Stocks: Fastenal, MasterCard, MetLife, Starbucks

Momentum: Best Buy, Freeport McMoRan, Mosaic

Double Dip Dividend: none

Premiums Enhanced by Earnings: GameStop (8/21 PM), Sears Holdings (8/21 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.