Weekend Update – April 26, 2015

 

The question of how much longer this market rally can keep going is the same question that’s been asked ever since the last time the market had a 10% loss.

Actually even that time, way back in April 2102, it wasn’t quite a 10% loss. For that, you would have to go back to 2011.

But that’s splitting hairs.

I wish I would have known Michael Batnick, also know as “The Irrelevant Investor” on Twitter, back in those days.

He had the answer to that burning question that is every bit as applicable today as it was every time the market hit a new high over the past few years.

With each of those highs and the gap between corrections growing and growing, it reminded me of the fallacy of believing that after 8 straight spins of the roulette wheel falling on “red” the next spin just had to yield “black.”

The belief that “this time it’s going to be different” is frequently held by those who don’t get shamed even after having been already fooled twice.

Had I known Michael Batnick in 2011, 2012, 2013 or even 2014, he would have told me that it’s hard to make a bear case on the basis of the duration of any move, because the duration is never knowable.

Since I was one of those certain that the ninth spin would just have to fall on black, I’ve also been one of those waiting for a correction since having recovered from the one in 2012. Not only waiting, but convinced that with each and every week we were a week closer to that inevitable decline.

At least that logic wasn’t totally flawed, as we did get a week closer to everything. But mostly, what we’ve gotten closer to has been the next rally higher.

What do you say about a week that ends with the S&P 500 being 1.7% higher and closing at a new all time high, while at the same time the NASDAQ 100 closes at a 15 year high? Granted those S&P 500 highs have come fairly often and fairly regularly, so they don’t really mean very much, but for those that thought that the NASDAQ could never see 5000 again, a good case can be made for never giving up hope.

That’s why I never give up hope that there’s a correction coming.

NASDAQ has given me the strength.

This past week was one almost totally devoid of economic news. Instead, it was one fully dominated by earnings, as it was the first of the two most busy weeks of earnings reports every quarter.

The earnings pattern that has become clear is that revenues are down, but profits are up, especially if you focus on the “earnings per share” part of the report. The lesson to that may be that if you can’t grow your revenues simply find a strategy to shrink your share numbers.

Hashtag “buybacks.”

As long as revenues are lower as a result of the currency exchange issues that everyone has been expecting, the market has been kind. Surprisingly, however, the market has also been kind when companies have taken their guidance lower.

Next week, while still highly focused on earnings, two events within hours of one another may disrupt or enhance the party currently under way and take some attention away from earnings.

Just a few hours before an FOMC Statement release will be a GDP Report. Expectations are that the GDP report will be disappointing, particularly in light of earlier expectations for a consumer led surge in GDP. While disappointing GDP growth could quiet fears of an interest rate increase among those that are still hung up on that eventuality, it could also give FOMC doves another month to hold court.

Is that good news or bad news?

The longer the FOMC doves continue to influence monetary policy the more doubt there can be regarding the strength of economic recovery.

That can’t be good news.

Since it seems as if even bad news has been taken as good news for such a long time, it would seem natural to believe that sooner or later we would be due for some bad news to be finally taken as bad news.

You would think that sooner or later I would learn.

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

Among those not faring well this earnings season was General Motors (NYSE:GM), predominantly on disappointing foreign news that went beyond currency exchange. Following a boost in share price following
some quick activist intervention it has returned to a level that makes it more enticing to re-enter into a position.

Having spent only $400 million on its promised $5 billion in share buybacks through the first quarter, as part of its activist appeasement, there is at least something to keep share price artificially inflated as it also artificially inflates earnings per share.

What General Motors has offered amidst all of the uncertainty and bad news over the past year has been an attractive option premium and a good dividend that, thanks to the same activist, is now even better.

Ford Motor (NYSE:F) reports earnings this week and also goes ex-dividend.

I’m not terribly interested in taking earnings risk with Ford, but those earnings are reported the morning of the day before it goes ex-dividend. In the event of a downward move after earnings are released, I would be interested in buying shares if the move down strongly after earnings.

The options market is implying a move of only 3.5%. If it approaches or exceeds that to the downside, I might take that as an indication to buy shares, although I might consider using an extended weekly option, perhaps expiring May 8, 2015, rather than the weekly option that I would ordinarily use.

Also going ex-dividend this week and also having had a difficult time following its earnings release this week is Texas Instruments (NASDAQ:TXN).

In a market that suddenly seems to like “old tech,” what’s older than Texas Instruments? I can still remember buying the most rudimentary of calculators for about $150 more than 40 years ago and thinking that we had now seen everything.

What I didn’t think I would see was a nearly 8% decline on earnings last week. That leaves it still well above its yearly high, but may represent a good re-starting point, particularly as the dividend is at hand, as well. While semi-conductors may have had a hard go of things lately, if looking for a global correction in order to get a better entry point, you may be better served by settling for a more focused correction.

While I don’t like buying shares when they are near their yearly highs, Kinder Morgan (NYSE:KMI) may be an exception, particularly as it is ex-dividend this week.

In the world of energy related companies that have been under significant stress, Kinder Morgan has ironically been a breath of fresh air as it stores and transports combustible fuels for a nation that gets even more energy hungry as prices are dropping.

Cypress Semiconductor (NASDAQ:CY) is a company that I always like owning. Mostly it has been due to the admiration that I have for its CEO, TJ Rodgers, as long as he sticks to his CEO and incubator patron roles.

Occasionally he veers into other areas and then I have to remind myself that what I really admire is the ability to make money by investing in Cypress Semiconductor and that’s far more important than admiration or personal politics.

With its acquisition of Spansion being hailed by investors shares surged to a point that was well outside my comfort zone, but following a 20% decline in the past month, it is now at the upper level of that zone.

Cypress Semiconductor is often very volatile at earnings and this time will likely be no different. While I usually want to consider the sale of puts prior to earnings, in this case I would probably consider the purchase of shares, especially if they continue to move downward in the early part of the week and then consider a sale of June 2015 option contracts, rather than the May 2015 variety, thereby providing additional time for shares to recover if shares drop drastically.

Finally, I’ve been waiting for a chance to enter into a Twitter (NYSE:TWTR) position one way or another. In 2014 I had positions on 10 different occasionsand spent most of that time trying to avoid being assigned shares after having sold put contracts.

In hindsight, I don’t mind the very high maintenance that those positions required, however, the perception of Twitter has changed, as it seems to actually have a plan to monetize itself. More importantly it has the means and the people to execute on their strategies that continue to evolve.

Following a period of withering criticism of its leadership, the unequivocal show of support for its CEO, Dick Costolo by the Board as well as some Twitter founders, seemed to stem the tide of calls for his resignation.

That and earnings.

Following a large move higher after its last earnings report and then slowly migrating higher over the subsequent 3 months, the options market is implying an 11% move next week.

However, a 1% ROI may be possible if selling a weekly put contract even if shares fall by as much as 13.6%. If selling puts and faced with an adverse move beyond the range implied by the options market, my past experience with Twitter has shown that the options market is liquid enough to have a good chance of being able to roll over those puts if trying to avoid assignment and wait out the price cycle until it starts to show signs of recovery.

Alternatively, it has also offered a chance to assume ownership of shares and then generate income by selling calls, that always have premiums reflecting the underlying risk and volatility of the shares.

Traditional Stocks: General Motors

Momentum Stocks: none

Double Dip Dividend: Ford Motor (4/29), Kinder Morgan (4/28), Texas Instruments (4/28)

Premiums Enhanced by Earnings: Cypress Semiconductor (4/30 AM), Twitter (4/28 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.

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Week in Review – April 20 -24, 2015

 

Option to Profit

Week in Review

April 20 –  24,  2015

 

NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED
2 / 2 2 4 2  /  0 0 / 0 0

    

Weekly Up to Date Performance

April 20 – 24,  2015

This was another nice week, although a little unexpectedly so.

That was the case despite seeing the 2 new positions opened for the week having trailed the S&P 500.

With Friday’s fall in shares of Best Buy, the new positions opened for the week trailed the adjusted S&P 500 by 1.5% and the unadjusted S&P 500 by an even larger 2.0%

Those new positions lost 0.2% for the week. The unadjusted S&P 500 had another very good week, keeping the April trend alive. It was 1.7% higher, while the adjusted S&P 500 was 1,3% higher.

After last week’s very strong advance of existing positions over the S&P 500, this week they trailed slightly, despite having closed the week 1.3% higher.

With 2 positions closed out this week by assignment, the 34 lots closed in 2015 continue to out-perform the market. They are an average of 5.5% higher, while the comparable time adjusted S&P 500 average performance has been 1.6% higher. That 3.9% difference represents a 253.9% performance differential. While I hope to see more positions closed, I would expect that differential to fall considerably.

 

Last week was a satisfying one despite the market being 1% lower, as the OTP portfolio’s energy positions had enough strength to offset the broader weakness. Of course, that wasn’t a good thing when those stocks were falling.

This week was satisfying, even though existing positions trailed the market a little, as it  went 1.7% higher on the week. When using a covered option strategy, especially in a low volatility environment that typically uses strikes right near the share’s purchase price, it’s difficult to keep up with markets that exceed a 1% return on the week.

What made it satisfying is that there was a nice combination of trades for the week.

That combination was able to develop the income stream that I’ve become accustomed to and that causes me some stress if not seeming to develop.

Best of all, after the previous week’s 5 assignments, I didn’t have to dip too deeply into the cash reserves to generate that income and ended the week with enough assignments to bring that cash pile right back to where it had started.

The chance to sell some new call positions on some uncovered lots was something that’s always welcome, as I really do hate seeing positions not paying their way, but also hate the idea of selling their rights for too low of a return.

Additionally, the ability to rollover those positions not assigned and not having to add them to the “uncovered” pile, which is still far too large, made it a good week.

With a handful of positions set to expire next week and all being within the range of being assigned, I may look at both weekly options and extended weekly options for any new positions opened next week.

Volatility continues to head lower and lower, so that means it gets less and less lucrative to look beyond a single week for those contracts, unless earnings or some other event is part of the equation.

Next week, just as this one, will be a very busy one as far as earnings go.

There’s not too much doubt about it, but earnings completely monopolized this week.

Next week, however, as busy as earnings will be, won’t have the same absence of important economic news to send everyone’s attention to those earnings reports.

Next week has an FOMC Statement release due on Wednesday and that will be preceded by the GDP report.

That could make for a powerful combination, especially if the GDP report will reflect the lowered expectations that most have.

While lowered expectations have worked great as far as how stocks have reacted after this quarter’s earnings releases, it’s not so clear that a disappointing GDP report will be greeted with stocks finding another reason to party wildly.

At least I’m glad that the FOMC Statement release won’t be coming during the final week of a monthly option cycle, as it does so often, when there tends to be an accumulation of positions hoping to be rolled over or assigned.

There’s nothing like a disappointing market reaction to the FOMC right before a monthly expiration.

Not in a good way, though.

Hopefully next week will continue to see some market strength, as I would continue to like to continue building cash through assignments and the sale of new calls on uncovered positions over the purchasing of new positions.

In doing so, I don’t mind seeing paper gains grow, but would really like to be better positioned for the next buying opportunity, as every drop has brought that kind of opportunity over the past few years.

 



This week’s details may be seen in the Weekly Performance spreadsheet * or in the PDF file, as well as as in the summary.below

(Note: Duplicate mention of positions reflects different priced lots):



New Positions Opened:   ANF, BBY

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle:  GPS

Calls Rolled over, taking profits, into extended weekly cycle:  AZN (5/8). WFM (5/8)

Calls Rolled over, taking profits, into the monthly cycleBBY

Calls Rolled Over, taking profits, into a future
monthly cycle
:  none

Calls Rolled Up, taking net profits into same cyclenone

New STO:  BNO (6/19), MAT (6/19)

Put contracts expired: none

Put contracts rolled over: none

Long term call contracts sold:  none

Calls AssignedANF, ATVI

Calls Expired:  none

Puts Assigned:  none

Stock positions Closed to take profits:  none

Stock positions Closed to take losses: none

Calls Closed to Take Profits: none

Ex-dividend Positions: FAST (4/24 $0.28)

Ex-dividend Positions Next Week: none

 

 

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, ANF, BAC, CHK, CLF, COH, FAST, FCX, HAL, HFC, .INTC, JCP, JOY, LVSMCP, MOS,  NEM, RIG, WFM, WLT (See “Weekly Performance” spreadsheet or PDF file)



* If you don’t have a program to read or modify spreadsheets, you can download the OpenOffice Suite at no cost.



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Daily Market Update – April 24, 2015

 

 

 

Daily Market Update – April 24, 2015  (9:00 AM)

 

The Weekend in Review will be posted by 6 PM and the Weekend Update will be posted by Noon on Sunday.

 

The following trade outcomes are possible today:

Assignments:  Abercrombie and Fitch, Activision

Rollovers:  The Gap

ExpirationsAstra Zeneca, Best Buy, Whole Foods

 

The following were ex-dividend this week: Fastenal (4/24 $0.28)

The following will be ex-dividend next week: none

 

Trades, if any, will be attempted to be made prior to 3:30 PM EDT.

 

 

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Daily Market Update – April 23, 2015 (Close)

 

 

 

Daily Market Update – April 23, 2015  (Close)

 

The earnings keep pouring in this morning and the reactions were mixed, at least as far as the early bird traders were concerned..

With the general story continuing, that is that top line revenue is tending to be lower than expected, while bottom line profits are trending higher, for the most part those reports are being taken in stride.

Maybe even better than simply “taking it in stride,” as the S&P 500 was about 1.2% higher for the week as the morning was getting ready to begin and was within 0.5% of its all time closing high. By the time today came to its close, even off of its highs as ground was lost in the final hour, the market inched even closer to those highs.

Those highs are just a month old. Meanwhile the NASDAQ finally came to its new closing high some 15 years after the last one.

What this earnings season shows is that it’s amazing what can happen as you prepare yourself for the possibility of bad news. If you act adult-like, and the disappointments do come along as expected, there seems to be less of a reason to panic or over-react.

That has definitely been the case as this earnings season has gotten underway and is now in full swing. The expectations were low due to currency head winds and the relief has been palpable as the numbers are being released. Even decreasing forward guidance, which is usually a kiss of death, hasn’t been  keeping the market from moving forward.

When you are led to believe that the market values growth above everything else, it is a rare sight to see it moving higher even when prospects for growth are being dashed. But as long as that strategy of under-promising or having lowered expectations seems to be working, then imagine what the next earnings season could bring if results are better than we’ve been anticipating.

Interestingly, Caterpillar, which reported this morning and was up sharply in the pre-open trading said nothing about the singular factor that has been depressing top line revenues for just about everyone else.

With just about everyone else pointing a finger at currency exchange Caterpillar hasn’t said much about that and shares were soaring, perhaps because the market values immunity from natural laws.

That immunity seems odd, considering how much Caterpillar has a stake in all parts of the globe. That immunity didn’t last, though, as Caterpillar actually ended up spending a significant amount of time trading at a loss and closed almost unchanged.

Another form of immunity came as Dow Chemical reported its earnings this morning. Its CEO, Andrew Liveris, again reiterated that his company is essentially ambivalent about the price of oil. He said that a few months ago as Dow Chemical was getting caught up with the slide seen in energy prices, but based on its price actions, no one seemed to believe him.

It has been a case of “that’s my story and I sticking to it,” but lately it appears as if investors have come around to his logic, which presumably is based on more than just logic.

With now just 1 day left in this weekly cycle, there’s some opportunity remaining for some rollovers and perhaps even s
ome assignments. This morning’s early weakness in the futures made that prospect look less encouraging, but even with the gains having faded by the close, at least they were gains.

Without some continued strength, especially a strong pop higher, there’s not too much likelihood of being able to sell new calls on currently uncovered positions, so while I would like to see assignments, I may prefer now to have the opportunity to rollover some positions instead, so as to create the weekly income I’ve gotten accustomed to getting, as the bills won’t pay themselves.

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Daily Market Update – April 23, 2015

 

 

 

Daily Market Update – April 23, 2015  (8:15 AM)

 

The earnings keep pouring in this morning and the reactions  are mixed, so far.

With the general story continuing, that is that top line revenue is tending to be lower than expected, while bottom line profits are trending higher, for the most part those reports are being taken in stride.

Maybe even better than simply “taking it in stride,” as the S&P 500 is about 1.2% higher for the week and now is within 0.5% of its all time closing high.

It’s amazing what can happen as you prepare yourself for the possibility of bad news. If you act adult-like, and the disappointments do come along as expected, there seems to be less of a reason to panic or over-react.

That has definitely been the case as this earnings season has gotten underway and is now in full swing. The expectations were low due to currency headwinds and the relief has been palpable as the numbers are being released. Even decreasing forward guidance, which is usually a kiss of death, hasn’t been  keeping the market from moving forward.

When you are led to believe that the market values growth above everything else, it is a rare sight to see it moving higher even when prospects for growth are being dashed. But as long as that strategy of under-promising or having lowered expectations seems to be working, then imagine what the next earnings season could bring if results are better than we’ve been anticipating.

Interestingly, Caterpillar, which reported this morning and is up sharply in the pre-open trading said nothing about the singular factor that has been depressing top line revenues for just about everyone else.

With just about everyone else pointing a finger at currency exchange Caterpillar hasn’t said much about that and shares were soaring, perhaps because the market values immunity from natural laws.

That immunity seems odd, considering how much Caterpillar has a stake in all parts of the globe.

Another form of immunity came as Dow Chemical reported its earnings this morning. Its CEO, Andrew Liveris, again reiterated that his company is essentially ambivalent about the price of oil. He said that a few months ago as Dow Chemical was getting caught up with the slide seen in energy prices, but based on its price actions, no one seemed to believe him.

It has been a case of “that’s my story and I sticking to it,” but lately it appears as if investors have come around to his logic, which presumably is based on more than just logic.

With 2 days left in this weekly cycle, there’s some opportunity remaining for some rollovers and perhaps even some assignments. However, this morning’s early weakness in the futures, although improving a bit as earnings have been coming in, makes it a little more tenuous.

Without some continued strength, especially a strong pop higher, there’s not too much likelihood of being able to sell new calls on currently uncovered positions, so while I would like to see assignments, I may prefer now to have the opportunity to rollover some positions instead, so as to
create the weekly income I’ve gotten accustomed to getting, as the bills won’t pay themselves.

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