Daily Market Update – September 22, 2015

 

 

 

Daily Market Update – September 22,  2015  (8:30 AM)

 

This morning’s sharp decline in the futures is probably an invalidation of yesterday’s decent gain coming after a sharp reversal in fortunes last week.

Yesterday seemed like a day that traders were getting back to their previous behavior that welcomed the delay of any interest rate increase because it extended their handout, which was good for equity trading. They were more than happy to continue receiving that handout rather than seeing the economy show the kind of tangible and sustained improvement that would slow down the flow of those handouts.

That initial reversal of fortune was directly tied to the realization that no one of importance over at the FOMC could sway enough other voting members to vote to finally increase interest rates. That inability was a reflection of the belief that not enough of those people believed that the economy was showing enough building strength to warrant even the tiniest of taps on the brakes

More importantly, as the FOMC has indicated that it wants to finally push through a rate increase and that it has indicated that it would do so ahead of the curve, that seems to send a message that the kind of improvement in the economy to warrant a rate increase isn’t necessarily right around the corner.

Too bad that had to happen just at the same time that the market came to the realization that a rate increase wouldn’t mark the end of the world and instead had set its hopes up for that rate increase after years of pinning everything on the continuation of the Zero Interest Rate Poiicy.

Funny how those sort of things seem to happen.

For people who are supposed to understand the economy and investor psychology they certainly don’t do a very good job of it.

It continues to amaze me that there would ever be such sharp moves, especially on an alternating basis, as even the most clueless person would know that the basic health of the market and the economy could never change on a dime and then do so again in a back and forth manner. But it also still amazes me that there can be such large moves seen in so many individual stocks, given how many analysts follow so many of those companies and have as much of an informed position as almost anyone else in the world.

Yet, they get it wrong all the time.

So what does this morning’s marked weakness mean?

I’m looking at it, for the moment, as nothing more than a potential buying opportunity, as we again approach a correction on the S&P 500 if the decline holds up.

What may be important this week, maybe more so than usual, will be Friday’s GDP release.

With some discussion that a rate hike may still be on the table in October, perhaps even before the next FOMC meeting, another strong GDP statistic could send an “all’s clear” to investors who now want to see a rate hike and would welcome that strong GDP number.

History shows that September is generally a very weak month and October not much better.

As we approach the end of September it would be nice to see an October that if not moving the market higher, at least continues this volatile kind of back and forth. The trick will be to attempt to capitalize on any strong move higher by finding any opportunity to sell some calls and also finding some of the braveness necessary to buy something on the way down.


 

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Daily Market Update – September 21, 2015 (Close)

 

 

 

Daily Market Update – September 21,  2015  (Close)

 

Last week the market finally started doing the right thing and followed the logical direction with regard to their expectations for the FOMC’s action.

It’s just that the FOMC didn’t do what everyone had only very recently come to expect. Even more recent than that expectation was the decision to act accordingly.

Acting accordingly meant sending the market higher in advance of the expected announcement of that initial interest rate increase and then sending stocks lower when that expectation was dashed.

This morning’s futures were indicating a recovery of at least the further loss that occurred on Friday, although that still leaves us in the hole for the very large reversal that took place during the course of Janet Yellen’s press conference.

Normally, when Janet Yellen has spoken at the post-FOMC press conferences, her words have either supported the initial rise higher in stocks after the announcement or sent them even higher, so this past week’s reversal of fortune was a real surprise.

What seems to have occurred is that traders felt disappointed, but for the right reason.

Over the past 18 months as expectations for an eventual rate increase began, the disappointments that were expressed all had to do with fearing the end of the Federal Reserve’s handout through their Zero Interest Rate Policy. Now the concern seems to have become that the economy may not be as strong as we had hoped and was unable to withstand an increase in interest rates.

This morning’s futures bounce didn’t really provide much in the way of sentiment. It could easily be nothing more than some bargain hunting on small volume.

The way the day traded you could interpret it any way you pleased. Most of all it was some kind of ambivalence and maybe some kind of fear of missing out.

The market kept its triple digit gain for much of the session, having been up nearly 200 points at one point and then gave it all back, only to end the day right where the futures said it was going to be.

That doesn’t happen too often, but it definitely wasn’t a very direct route.

The story, as it almost always does, began for real at the opening bell and while I was hopeful that the next series of sustained moves would be higher and move us further away from the line between correction and no correction, it’s just not that clear that will be the case, despite the gain on the day.

At least China wasn’t a factor as this week has now begun, as Shanghai moved higher to open their week, but lately our own markets have discounted their wild swings.

Instead, we seem much more likely to start focusing on economic news and fundamentals.

This week brings a GDP report, but not much else.

Earnings start again in about 3 weeks, but otherwise it may just be a period of time for investors to either tread water or speculate over the meaning of every bit of economic news.

With some more cash in hand after a couple of assignments last week and with only one position set to expire this week and only a single ex-dividend position, I wouldn’t mind adding some new positions in an effort to create some income for the week.

Ordinarily, I’d like to do that with weekly expirations in mind, but a number of the potential trades this week may require the use of expanded weekly options due to the dividend dates involved in those stocks and while providing income may make it more difficult to be prepared to open even more new positions the following week if  those positions aren’t assigned early to capture dividends.

I expect th
is to be another relatively quiet week with regard to personal portfolio trading, but would be very anxious to capitalize on any opportunity to sell some calls on unhedged positions, especially after some rebound in volatility to close the week.

That would likely also look to see whether it makes sense to use some longer term contracts, as was the case with the new position opened in Cypress Semiconductor today, in an effort to lock in some higher premiums while awaiting some long overdue price rebounds as 2015 is now heading into the final stretch.

Let’s see if tomorrow brings any more clarity, but at least there wasn’t reason to continue the pessimism of the latter part of last week.

Who knows, maybe what little is left in the month of September can do something to dispel the reality that September tends not to be a very good month to count on market gains.

 

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Daily Market Update – September 21, 2015

 

 

 

Daily Market Update – September 21,  2015  (8:30 AM)

 

Last week the market finally started doing the right thing and followed the logical direction with regard to their expectations for the FOMC’s action.

It’s just that the FOMC didn’t do what everyone had only very recently come to expect. Even more recent than that expectation was the decision to act accordingly.

Acting accordingly meant sending the market higher in advance of the expected announcement of that initial interest rate increase and then sending stocks lower when that expectation was dashed.

This morning’s futures are indicating a recovery of at least the further loss that occurred on Friday, although that still leaves us in the hole for the very large reversal that took place during the course of Janet Yellen’s press conference.

Normally, when Janet Yellen has spoken at the post-FOMC press conferences, her words have either supported the initial rise higher in stocks after the announcement or sent them even higher, so this past week’s reversal of fortune was a real surprise.

What seems to have occurred is that traders felt disappointed, but for the right reason.

Over the past 18 months as expectations for an eventual rate increase began, the disappointments that were expressed all had to do with fearing the end of the Federal Reserve’s handout through their Zero Interest Rate Policy. Now the concern seems to have become that the economy may not be as strong as we had hoped and was unable to withstand an increase in interest rates.

This morning’s futures bounce doesn’t really provide much in the way of sentiment. It could easily be nothing more than some bargain hunting on small volume.

The story, as it almost always does, begins for real at the opening bell and while I’m hopeful that the next series of sustained moves will be higher and move us further away from the line between correction and no correction, it’s just not that clear.

At least China wasn’t a factor as this week is set to begin, as Shanghai moved higher to open their week, but lately our own markets have discounted their wild swings.

Instead, we seem much more likely to start focusing on economic news and fundamentals.

This week brings a GDP report, but not much else.

Earnings start again in about 3 weeks, but otherwise it may just be a period of time for investors to either tread water or speculate over the meaning of every bit of economic news.

With some more cash in hand after a couple of assignments last week and with only one position set to expire this week and only a single ex-dividend position, I wouldn’t mind adding some new positions in an effort to create some income for the week.

Ordinarily, I’d like to do that with weekly expirations in mind, but a number of the potential trades this week may require the use of expanded weekly options due to the dividend dates involved in those stocks and while providing income may make it more difficult to be prepared to open even more new positions the following week if  those positions aren’t assigned early to capture dividends.

I expect this to be another relatively quiet week with regard to personal portfolio trading, but would be very anxious to capitalize on any opportunity to sell some calls on unhedged positions, especially after some rebound in volatility to close the week.

That would likely also look to see whether it makes sense to use some longer term contracts in an effort to lock in some higher premiums while awaiting some long overdue price rebounds as 2015 is now heading into the final stretch.

 

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Dashboard – September 21 – 24, 2015

 

 

 

 

 

SELECTIONS

MONDAY:   With the disappointing end to last week as a backdrop, it’s likely that even more attention is going to be paid to economic reports, such as this week’s GDP and more on earnings as they begin again if a few weeks. Otherwise, there’s not much to think about as a small rebound may be in the making this morning.

TUESDAY:   There isn’t really too much reason for this morning’s sharp decline in the futures trading, other than it being a continuation of the disappointment that the economy may not be healthy enough to justify an interest rate increase. Friday’s GDP may be more important than usual as long as an October increase is still on the table

WEDNESDAY:  After yesterday’s plunge, which showed that Monday’s bounce was no more than a bounce, this morning’ futures are again flat as Asia was once again very weak. The only good news in sight could have to wait until Friday’s GDP is released.

THURSDAY:  More large losses appear to be in store this morning as maybe only tomorrow’s GDP data may be able to stem the recent tide, but only if they show some real economic growth.

FRIDAY:. The market is continuing yesterday’s late day recovery with a nice advance in the futures prior to this morning’s GDP release which could really send stocks soaring if the number is strong, as that would possibly provide some justification for a rate increase.

 

 

 

 

 



 

                                                                                                                                           

Today's TradesCash-o-Meter

 

 

 





 “SNEAK PEEK AT NEXT WEEK” APPEARS ON FRIDAYS

Sneak PeekPie Chart Distribution

 

 

 

 

 

 

 

Weekly Summary

  

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Weekend Update – September 20, 2015

This past Monday, prior to the market’s opening, I posted the following for Option to Profit subscribers:

“In all likelihood, at this point there are only two things that would make the market take any news badly.

The first is if no interest rate increase is announced.

Markets seem to have finally matured enough to understand that a rate hike is only a reflection of all of the good and future good things that are developing in our economy and are ready to move on instead of being paralyzed with fear that a rate hike would choke off anemic growth.

The second thing, though, is the very unlikely event of a rate hike larger than has been widely expected. That means a 0.5% hike, or even worse, a full 1% hike.

That would likely be met with crazed selling.”

Based on the way the market was trading this week as we were awaiting the FOMC Statement which was very widely expected to announce an interest rate increase, you would have been proud.

The proudness would have arisen as it seemed that the market was finally at peace with the idea that a small interest rate increase, the first in 9 years, wouldn’t be bad news, at all.

Finally, it seemed as if the market was developing some kind of a more mature outlook on things, coming to the realization that an interest rate hike was a reflection of a growing and healthy economy and was something that should be celebrated.

It always seemed somewhat ironic to me that the investing class, perhaps those most likely to endorse the concept of teaching a man how to fish rather than simply giving a handout, would be so aghast at the possibility of a cessation of a zero interest rate policy (“ZIRP”), which may have been tantamount to a handout.

The realization that ours was likely the best and most fundamentally sound economy in the world may have also been at the root of our recent disassociation from adverse market events in China.

So while the week opened with more significant weakness in China, our own markets began to trade as if they were now ready to welcome an interest rate increase and seeing it for what it really reflected.

All was well and in celebration mode as we awaited the news on Thursday.

As the news was being awaited, I saw the following Tweet. 

I don’t follow many people on Twitter, but Todd Harrison, the founder of Minyanville is one of those rare combinations of humility, great personal and professional successes, who should be followed.

I have an autographed copy of his book “The Other Side of Wall Street,” whose full title really says it all and is a very worthwhile read.

Like the beer pitchman, Todd Harrison doesn’t Tweet much, but when he does, it’s worth reading, considering and placing somewhere in your memory banks.

Many people in their Twitter profiles have a disclaimer that when they re-Tweet something it isn’t necessarily an endorsement.

When I re-Tweet something, it is always a reflection of agreement. There’s no passive – aggressiveness involved in the re-Tweet by saying “I endorse the re-Tweeting of this, but I don’t necessarily endorse its content.”

I believed, as Todd Harrison did, some 4 minutes before the FOMC statement release, that the knee jerk reaction to the FOMC decision wasn’t the one to follow.

But a funny thing happened, but not in a funny sort of way.

For a short while that knee jerk reaction would have been the right response to what should have been correctly viewed as disappointment.

What was wrong was a reversion back to a market wanting and believing that it was given another extension of the ZIRP handout. That took a market that had given up all of its substantial gains and made another reversal, this time going beyond the day’s previous gains.

With past history as a guide, going back to Janet Yellen’s predecessor, who introduced the phenomenon of the Federal Reserve Chairman’s Press Conference, the market kept going higher during the prepared statement portion of the conference and continued even higher as some clarification was sought on what was meant by “global concerns.”

Of course, everyone knew that meant China, although one has to wonder whether those global concerns also included the opinions held and expressed by Christine Legarde of the International Monetary Fund and others, who believe that it would be wrong for the FOMC to introduce an interest rate increase in 2015.

While some then began to wonder whether “global concerns” meant that the Federal Reserve was taking on a third mandate, it all turned suddenly downward.

With the exception of a very early Yellen press conference when she mischaracterized the FOMC’s time frame on rate increases and the market took a subsequent tumble, normally, Yellen’s dovish and dulcet tones are like a tonic for whatever may have been ailing the market/ This week, however, the juxtaposition of dovish and hawkish sentiments from the FOMC Statement, the subsequent press conference prepared statement and questions and answers may have been confusing enough to send traders back to their new found friend.

Logic.

Perhaps it was Yellen’s response that she couldn’t give a recipe to define what would cause the FOMC to act or perhaps it was the suggestion that the FOMC needn’t wait until their next meeting to act that sent markets sharply lower as they craved some certainty.

Or maybe it was a sudden realization that if markets had gone higher on the anticipation of a rate increase, logic would dictate that it go lower if no increase was forthcoming.

And so the initial response to the FOMC decision was the right response as the market may have shown earlier in the week that it was finally beginning to act in a mature fashion and was still capable of doing so as the winds shifted.

Perhaps the best question of that afternoon was one that pointed out an apparen
t inconsistency between expectations for full employment in the coming years, yet also expectations for inflation remaining below the Federal Reserve’s 2% target.

Good question.

Her answer “If our understanding of the inflation process is correct……we will see further upward pressure on inflation, may have represented a very big “if” to some and may have deflated confidence at the same time as a re-awakening was taking place that suggested that perhaps the economy wasn’t growing as strongly as had been hoped to support continued upward movement in the market.

That’s the downside to focusing on fundamentals.

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

As the market continues its uncertainty, even as it may be returning more to consideration of fundamentals, I continue to like the idea of going with some of the relative safety that may be found with dividends.

Last week I purchased more shares of General Electric (GE), hoping to capture both the dividend and the volatility enhanced premium. Those shares, however were assigned early, but having sold a 2 week option the ROI for the 3 days of holding reflected that additional time value and was a respectable 1.1%.

Even though I still hold some shares with an October 2, 2015 $25 expiration hanging over them, this week I find myself wanting to add shares of General Electric, once again, as was the case in each of the last two weeks.

Although there is no dividend in sight for another 3 months, the $25 neighborhood has been looking like a comfortable one in which to add shares as volatility has made the premiums more and more attractive and there may also be some short term upside to shares to help enhance the return.

A covered option strategy is at its best when the same stock can be used over and over again as a vehicle to generate premiums and dividends. For now, General Electric may be that stock.

Verizon (VZ) doesn’t have an upcoming dividend this week, but it will be offering one within the next 3 weeks. In addition to its recently increased dividend, the yield was especially enhanced by its sharp decline in share price at the end of the week as it gave some dour guidance for 2016.

There’s not too much doubt that the telecommunications landscape is changing rapidly, but if I had to put my confidence in any company within that smallest of sectors to survive the turmoil, it’s Verizon, as long as their debt load isn’t going to grow by a very unneeded and unwanted purchase of a pesky competitor that has been squeezing everyone’s margins.

I see Verizon’s pessimism as setting up an “under promise and over deliver” kind of scenario, as utilities typically find a way to thrive, but rarely want to shout up and down the streets about how great things are, lest people begin taking notice of how much they’re paying for someone else’s obscene profits.

Among those being considered that are going to be ex-dividend this week are Cypress Semiconductor (CY) and Green Mountain Keurig (GMCR).

I already own shares of Cypress Semiconductor and have a way to go to reach a breakeven on those shares which I purchased after its proposed buyout of another company fell through. I’ve held shares many times over the years and have become very accustomed to its significant and sizable moves, while somehow finding a way to return back to more normative pricing.

Following this past Friday’s decline its well below the $10 level that I’ve long liked for adding shares. With an ex-dividend date on Tuesday, if the trade is to be made, it will be likely done early in the week.

However, the other consideration is that Cypress Semiconductor is among the early earnings reporters and it will be reporting  on the day before its next option contract expires. For that reason, if considering a share purchase, I would probably look at a contract expiration beyond October, in the event of further price erosion.

Also going ex-dividend but not until Monday of the following week are Deere (DE) and Dow Chemical (DOW).

Like so many other stocks, they are badly beaten down and as a result are featuring an even more alluring dividend yield. However, their Monday ex-dividend date is something that can add to that allure, as any decision to exercise the option has to be made on the previous Saturday.

That presents opportunity to look at strategies that might seek to encourage early assignment through the sale of in the money call options utilizing expanded weekly options.

While Caterpillar (CAT) and others are feeling the pain of China’s economic slowdown, that’s not the case for Deere, but as is often the case, there are sympathy pains that become all too real.

Dow Chemical, on the other hand has continued to suffer from the belief that its fortunes are closely tied to oil prices. It;s CEO refuted that barely 9 months ago and subsequent earnings reports have borne out his contention, yet Dow Chemical continues to suffer as oil prices move lower.

If looking for a respite from dividends, both Bank of America (BAC) and Bed Bath and Beyond (BBBY) may be worth a look this week.

The financial sector was hard hit the past few days and Bank of America was additionally in the spotlight regarding the issue of whether its CEO should also hold the Chairman’s title.

As with Jamie Dimon before him who successfully faced the same shareholder issue and retained both designations, no one is complaining about the performance of Brian Moynihan.

Even as I sit on some more expensive shares that have options sold on them expiring in two weeks, I have no reason to complain.

Following a second consecutive day of large declines, Bank of America is trading near its support that has seemed to hold up well under previous assault attempts. As with other stocks that have suffered large declines, there is greater ability to attempt to capitalize on price gains without giving up much in the way of option premiums.

Bed Bath and Beyond reports earnings this week and has seen its price in steady decline for the past 4 months. Unlike others that have had a more precipitous decline as they’ve approached the pleasure of a 20% decline, Bed Bath and Beyond has done it in a gradual style.

While those intermediate points along the drop down may represent some resistance on the way back up, that climb higher is made easier when the preceding decline
wasn’t vertical.

When considering an earnings related trade I usually look for a weekly return of 1% or greater by selling put options at a strike price that’s below the bottom range implied by the option market. The preference is that the strike price that provides that return be well below that lower boundary, The lower, the better the safety cushion.

For Bed Bath and Beyond the implied move is about 6.3%, but there is no safety cushion below a $56.50 strike level to yield that 1% return. Therefore, instead of selling puts before earnings, I would consider, as has been the predominant strategy of the past two months, of considering the sale of puts after earnings are announced, but only if there is a significant price decline.

Finally, Green Mountain Keurig is going ex-dividend this coming week, but it hardly qualifies as being among the relatively safe universe of stocks that I would prefer owning right now.

I usually like to think about opening a position in Green Mountain Keurig through the  sale of puts. However, with the ex-dividend date this week that would be like subsidizing someone who was selling those puts for the dividend related price decline.

Other than the dividend, there’s is little that I could say to justify a long term position on Green Mountain and even have a hard time justifying a short term position.

However, Green Mountain’s ex-dividend day is on Friday and expanded weekly options are available.

I would consider the purchase of shares and the concomitant sale of deep in the money expanded weekly calls in an attempt to see those shares assigned early.

As an example, with Green Mountain closing at $56.74 on Friday, the October 2, 2015 $54.50 call option would have delivered a premium of $3.08.

For a rational option buyer to consider early exercise on Thursday, the price of shares would have to be above $54.79 and likely even higher than that, due to the inherent risk associated with owning shares, even if only for minutes on Friday morning after taking their possession.

However, if assigned early, there would be a 1.5% ROI for the 4 days of holding even if the shares fell somewhat less than 3.4%.

Their coffee and their prospects for continued marketplace success may both be insipid, but I do like the tortured logic and odds of the dividend related trade as we look ahead to a week where logic seeks to re-assert itself.

 

Traditional Stock: General Electric, Verizon

Momentum Stock: Bank of America

Double-Dip Dividend: Cypress Semiconductor (9/22), Deere (9/28), Dow Chemical (9/28), Green Mountain Keurig (9/25)

Premiums Enhanced by Earnings: Bed Bath and Beyond (9/24 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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