Daily Market Update – December 18, 2014 (Close)
Yesterday was a nice day and did a little bit to make up for the recent 5% decline in the S&P 500, but if you’re holding energy sector stocks, there’s still a long way to go.
Some of that way looked like it could be achieved this morning as oil was headed higher in the futures markets and Vladimir Putin, already in the third hour of his annual address to the Russian nation was providing a calming tone to markets, while pointing his finger at “external sources” for his nation’s economic woes.
On the heels of yesterday’s FOMC which made a further commitment to low interest rates, the pre-open trading was showing another strong gain. Not quite the almost 300 points that were added yesterday, but a good gain, nonetheless. That gain, as it turned out was real, and was 400 points higher and more than added to yesterday’s gain.
It was especially good coming at the end of a monthly cycle and possibly helping in the objective of seeing some assignments and rollovers.
For the last two days of this monthly cycle that’s where the focus will be.
With yesterday’s gain, as well as the head fake gains that were lost on Tuesday, the temptation was to try and make some DOH Trades, but for now, there’s reason to resist those temptations, even as the market had a great gain today.
While premiums are showing some evidence of increase, there;’s still too much of a chance of seeing the same kind of gap movements, this time higher, as have been seen, especially the kind that took the energy sector lower.
That was especially true today, as the gains kept on going even after the gains in oil reversed themselves.
For the first time in a couple of weeks has come the realization that lower energy costs are great for the market and for everyone in the US.
Just wait until next week as the GDP data and revisions are released.
Today was a good day to avoid the risks associated with DOH Trades and instead just enjoy the ride.
The problem with having a DOH Trade position in the event of a gap higher is that as the volatility then falls and the trading volume dries up, as it has, it is difficult to get a rollover trade executed and you are left in a position of either taking a year end loss or not participating in the upward climb of shares that were disproportionately beaten down
However, if the march higher continues, especially if lucky enough to see prices approaching pre-plunge levels, or at least approaching the breakeven price of a position, there may be reason to start looking at those opportunities to add half of a percent here and there.
But today didn’t seem like that day, either, as it was an especially good sign to see an uncoupling between energy prices and the overall market. Even energy stocks, which had initially reversed as did the underlying commodity, went on to recover a good portion of their gains.
Another trade that I may resist making are for those positions that have only monthly contracts and may be a little too expensive to buy back relative to the premium received for selling new positions. That includes such stocks as Fastenal, Kellogg, Lexmark, Mattel and Sinclair Broadcasting. I may rather see them expire and hope to be able to sell new calls on them, if not assigned, as the new monthly option cycle begins.
Today’s gains, however, left Fastenal and Kellogg in position to be assigned, which would be a good outcome, if it can end up that way.
Normally I look at expired positions as a failure, but sometimes they are just an expression of not wanting to endure the expense of the rollover, especially if the cost of buying back the short position is unduly high, as it often is on those relatively thinly traded monthly positions.
Meanwhile, as another earnings season begins in a month or so, some of those monthly positions may look at a February 2015 expiration date, particularly if there’s a dividend that may also be up for capture, such as is the case with Fastenal, although assignment is still a possibility.
For now, I hope that some of these market gains continue as the realization that low energy prices can only move the economy forward as GDP can only grow when the fourth quarter statistics are released. Ultimately, the energy sector will eventually catch up, as it always does.
That may be little solace for holding positions in that sector now, but nothing defines what cycles are all about better than commodities.
But as long as oil looks as if it as some point of stability, or maybe even climbing higher, there’s still some time to actually get that Christmas Rally that everyone has been expecting. Add to that some good retail numbers, and we’ve heard almost nothing about holiday sales as all news has been oil-centric, and you have the makings for some nice moves higher in the last 2 weeks of 2014.