Monthly Archives: December 2014

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.

No matter.

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.

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

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 may be achieved this morning as oil is headed higher in the futures markets and Vladimir Putin, already in the third hour of his annual address to the Russian nation is providing a calming tone to markets, while pointing his finger at “external sources” for his nation’s economic woes.

No matter.

On the heels of yesterday’s FOMC which made a further commitment to low interest rates, the pre-open trading is showing another strong gain. Not quite the almost 300 points that were added yesterday, but a good gain, nonetheless. That gain, if it turns out to be real, added to yesterday’s is especially good as coming at the end of a monthly cycle and possibly helping in the objective of seeing some assignments and rollovers.

For the next two days 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. 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.

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.

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.

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.

Daily Market Update – December 17, 2014 (Close)

Yesterday, as far as volatility goes, would be a really hard day to match.

While the big story of the day was the collapse of the Russian Ruble, it was still the price of oil that dictated in which direction the market went, and as oil waxed and waned during the day, so did the market.

Going from the various peaks to troughs and back throughout the day, without regard to any minor moves back and forth, the DJIA moved about 700 points, finally finishing with a tripe digit loss after having been more than 200 points higher.

Lately the day before an FOMC Statement release day has been inexplicably a strong day for markets. For a while some were crediting that phenomenon for the market’s strength yesterday, but it became clear that oil was still in charge of everything. The recovery in oil earlier in the day, beginning before the opening bell helped to greatly reduce the losses in the futures trading as reactions were coming in to the 65% increase in the Bank of Russia’s key lending rate and the collapse of the Ruble.

This morning oil is again down sharply, yet the futures are pointing higher, maybe as there’s some optimism regarding the FOMC and then looking ahead another hour or so, when Janet Yellen begins her press conference.

Other than on the occasion of her very first press conference when she made some vague comments regarding timeframes for action, she has done nothing but lift markets during her question and answer sessions.

Today was a little different, though.

Not only was the market nicely higher before the FOMC, but it skyrocketed after the release, as nothing really changed with regard to interest rates.

What did change was that during the press conference the market gave up about 100 points, falling to only about 150 points higher and then immediately made it all back and more as soon as she finished the press conference.

Go figure.

Today, the issue at hand was whether the FOMC would drop its “considerable time” language, which would indicate that interest rate hikes were going to be coming sooner, rather than later.

After today’s really big shocker regarding Cuba, maybe the phrase should have been “tiempo considerable.”

Since the FOMC is admittedly “data drive,” it’s hard to see how they could ignore last week’s decreases in PPI and the dropping rate on 10 Year Treasuries. While decreased energy costs and an increasing employment rate should send prices and wagers higher, that’s still a theoretical outcome, whereas the actual data isn’t looking as if it shows inflation in the immediate future.

Yesterday did look promising for a while as the rebounds were all across the board, but that sea of green faded very decisively, although the energy sector did maintain its gains, just at levels far lower than they had been earlier in the day.

Not today.

Both days, though, It was tempting to consider selling some DOH calls on some positions, but in the back of your mind you have to be concerned about a sudden pop higher in prices, especially through the energy sector and the chance of seeing positions assigned away when you would really prefer that not be the case.

As long as the option market continues to have very light volume the ability to rollover such positions in order to prevent assignment is difficult and so the risk-reward proposition becomes more risky, even as the reward, in the form of option premiums, climbs along with the volatility.

Still, even if there is another strong spike higher today and even if coming before and then again after the FOMC, there may not be too much justification in taking the kind of risk associated with DOH Trades.

And so it was.

Given that there has been considerable gaps down in the prices of many stocks it wouldn’t be inconceivable that there could also be gap ups once the fire is lit, so it seems only right to give it yet another day and maybe look at selling DOH calls for next week, which is a trade shortened one, anyway.

As we got set to begin trading for this morning, the S&P 500 was about 5% off from its recent highs, which has been the average for these every other month declines. The last one, however, was almost a bona fide correction, approaching 10%, so it was hard to have the same confidence that this is just another in a series of mini-corrections over nearly the past 3 years that will simply end up taking us to even more new highs.

This afternoon’s explosive move higher, very much on the back of stronger oil prices first and then a more dovish FOMC, gave some confidence that this was, indeed, one of those mini-corrections. If so, the next few weeks could achieve the kind of December everybody had been expecting, especially if retail holds up.

But if oil has further downside potential there has to be some concern that the market will continue to follow lower, despite the logic that such decreases should end up being a net positive. The one saving grace is that energy sector prices tend to recover more quickly than the underlying commodity and any economic news that indicates that falling energy prices are actually the tonic for the economy that we thought it would be should send stock prices broadly higher.

A one day move, like today, could be a taste for what’s in store, if only we knew when it would be for real and sustained.

Daily Market Update – December 17, 2014 (8:30 AM)

Yesterday, as far as volatility goes, would be a really hard day to match.

While the big story of the day was the collapse of the Russian Ruble, it was still the price of oil that dictated in which direction the market went, and as oil waxed and eaned during the day, so did the market.

Going from the various peaks to troughs and back throughout the day, without regard to any minor moves back and forth, the DJIA moved about 700 points, finally finishing with a tripe digit loss after having been more than 200 points higher.

Lately the day before an FOMC Statement release day has been inexplicably a strong day for markets. For a while some were crediting that phenomenon for the market’s strength yesterday, but it became clear that oil was still in charge of everything. The recovery in oil earlier in the day, beginning before the opening bell helped to greatly reduce the losses in the futures trading as reactions were coming in to the 65% increase in the Bank of Russia’s key lending rate and the collapse of the Ruble.

This morning oil is again down sharply, yet the futures are pointing higher, maybe as there’s some optimism regarding the FOMC and then looking ahead another hour or so, when Janet Yellen begins her press conference.

Other than on the occassion of her very first press conference when she made some vague comments regarding timeframes for action, she has done nothing but lift markets during her question and answer sessions.

Today, the issue at ahnd is whether the FOMC will drop its “considerable time” language, which would indicate that interest rate hikes were going to be coming sooner, rather than later.

Since the FOMC is admittedly “data drive,” it’s hard to see how they would ignore last week’s decreases in PPI and the dropping rate on 10 Year Treasuries. While decreased energy costs and an increasing employment rate should send prices and wagers higher, that’s still a theoretical outcome, whereas the actual data isn’t looking as if it shows inflation in the immediate future.

Yesterday did look promising for a while as the rebounds were all across the board, but that sea of green faded very decisively, although the energy sector did maintain its gains, just at levels far lower than they had been earlier in the day.

It was tempting to consider selling some DOH calls on some positions, but in the back of your mind you have to be concerned about a sudden pop higher in prices, especially through the energy sector and the chance of seeing positions assigned away when you would really prefer that not be the case.

As long as the option market continues to have very light volume the ability to rollover uch positions in order to prevent assignment is difficult and so the risk-reward proposition becomes more risky, even as the reward, in the form of option premiums, climbs along with the volatilty.

Still, even if there is another strong spike higher today and even if coming before and then again after the FOMC, there may not be too much justification in taking the kind of risk associated with DOH Trades.

Given that there has been considerable gaps down in the prices of many stocks it wouldn’t be inconceivable that there could also be gap ups once the fire is lit.

At the moment, as we get set to begin trading for this morning, the S&P 500 is about 5% off from its recent highs, which has been the average for these every other month declines. The last one, however, was almost a bona fide correction, approaching 10%, so it’s hard to have the same confidence that this is just another in a series of mini-corrections over nearly the past 3 years that will simply end up taking us to even more new highs.

As long as oil has further downside potential there has to be some concern that the market will continue to follow lower, despite the logic that such decreases should end up being a net positive. The one saving grace is that energy sector prices tend to recover more quickly than the underlying commodity and any economic news that indicates that falling energy prices are actually the tonic for the economy that we thought it would be should send stock prices broadly higher.

Daily Market Update – December 16, 2014 (Close)

While our stock market has been struggling at a time when logic would have it thriving, except for the energy sector, it has been going lower and lower, as energy prices continue to decline and take all stocks along for the ride.

Thus far, though, the overall decline is about 4%, although depending on an individual portfolio’s exposure to oil and commodities, it can be much more. The declines in the energy sector have been absolutely stunning and sudden and there’s no indication of when they end is at hand.

The longest period of declining energy prices in the last 30 years lasted for about 2 years and took oil prices down by 50%. Interestingly, energy stocks didn’t stay in their funk anywhere near that long, starting their recovery at the 4 month period.

Additionally, the most steep decline was just 6 years ago, going from $133 to $41 over a period of 6 months.

Yesterday, at least for a little while it appeared as if there would be some bounce from the past Friday’s 300+ point loss, but that disappeared, then came back and then disappeared again, ending just a hair shy of another triple digit loss.

That’s volatility and it appeared to be related to a reversal in oil, which had shown some stability early in the session and then went on to rack up even more losses.

But that volatility was just a prelude to that seen in this morning’s early futures trading, as oil was again lower. The difference is that it probably wasn’t what drove the market to change its course.

This morning the very early futures trading was indicating a moderate advance and then suddenly turned around.

It did so as the aftermath of the Bank of Russia’s move to raise its key interest rate by 650 bps overnight, bringing the rate up to 17%, reminiscent of the late 1970s in the US.

What happened afterward, and which spooked the market was another plunge in the Ruble, adding onto yesterday’s large devaluation against the US Dollar. This morning, and it’s a rapidly changing picture, the Ruble was down to an exchange rate approaching 75 per USD, almost reaching 80 at one point, having stabilized yesterday at 60, despite massive Russian intervention.

For those that remember the late 1990s, before the dot com bubble was the Russian Ruble Crisis, which is eerily reminiscent of what may be unfolding right now. During what what also known as “The Russian Flu,” the S&P 500 dropped nearly 20% in less than 2 months, but was fully recovered about 3 months after those lows.

Probably not too coincidentally, the price of oil had dropped by nearly 50% from 1996 to 1998 and the recovery from that “flu” only began as oil prices started climbing.

This morning’s news and events represent another hurdle, but as the morning progressed heading into the opening bell the selling was moderating and hopefully some sanity and even more importantly, buyers, will re-appear and snap up what they believe to be bargains.

I, for one, was grateful as that turned out to be the case, but it was certainly not the theme for the day.

That was reserved for reversals, as the market steadily alternated between large gains and losses.

Going from peak to trough and trough to peak and over again, the DJIA moved about 700 points on the day.

While the Ruble stabilized, oil which had reversed its decline then went on the decline again.

Today, though was a good day not to chase the oil stocks, which went nicely higher and then gave up about 50% of their gains. They probably were propelled higher as most traders realize that historically the stocks move higher before the beaten down commodities do, as in 1998, but today, if just getting into positions, was a day to add to losses by the time the day came to its end.

As a holder of positions, I’m certainly not looking to lighten up on energy stocks, as they are the very definition of what being cyclical is all about.

If only someone could now define the time frame, that would be nice.

Tomorrow will bring the FOMC statement, which was all but forgotten today, as Russia, the Ruble and oil stole all attention.

Hopefully Janet Yellen will be able to put a positive spin on things as she closes out the year with a press conference and can inject some calm into a very uncetain environment.