Weekend Update – January 10, 2016

new year starts off with great promise.

If seems so strange that the stock market often takes on a completely different persona from one day to the next.

Often the same holds true for one year to the next. despite there being nothing magical nor mystical about the first trading day of the year to distinguish it from the last trading day of the previous year.

For those that couldn’t wait to be finally done with 2015 out of the expectation conventional wisdom would hold and that the year following a flat performing year would be a well performing year, welcome to an unhappy New Year.

2015 was certainly a year in which there wasn’t much in the way of short term memory and the year was characterized by lots of ups and downs that took us absolutely nowhere as the market ended unchanged for the year.

While finishing unchanged should probably result in neither elation nor disgust, scratching beneath the surface and eliminating the stellar performance of a small handful of stocks could lead to a feeling of disgust.

Or you could simply look at your end of the portfolio year bottom line. Unless you put it all into the NASDAQ 100 (NDX) or the ProShares QQQ (NASDAQ:QQQ), which had no choice but to have positions in those big gainers, it wasn’t a very good year.

You don’t have to scratch very deeply beneath the surface to already have a sense of disgust about the way 2016 has gotten off to its start.

There are no shortage of people pointing out that this first week of 2016 was the worst start ever to a new year.

Ever.

That’s much more meaningful than saying that this is the worst start since 2019.

A nearly 7% decline in the first week of trading doesn’t necessarily mean that 2016 won’t be a good one for investors, but it is a big hole from which to have to emerge.

Of course a 7% decline for the week would look wonderful when compared to the situation in Shanghai, when a 7% loss was incurred to 2 different days during the week, as trading curbs were placed, markets closed and then trading curbs eliminated.

If you venture back to the June through August 2015 period, you might recall that our own correction during the latter portion of that period was preceded by two meltdowns in Shanghai that ultimately saw the Chinese government enact a number of policies to abridge the very essence of free markets. Of course, the implicit threat of the death penalty for those who may have knowingly contributed to that meltdown may have set the path for a relative period of calm until this past week when some of those policies and trading restrictions were lifted.

At the time China first attempted to control its markets, I believed that it would take a very short time for the debacle to resume, but these days, the 5 months since then are the equivalent of an eternity.

While China is again facing a crisis, the United States is back to the uncomfortable position of being the dog that is getting wagged by the tail.

US markets actually resisted the June 2015 initial plunge in China, but by the time the second of those plunges occurred in August, there was no further resistance.

For the most part the two markets have been in lock step since then.

Interestingly, when the US market had its August 2015 correction, falling from the S&P 500 2102 level, it had been flat on the year up to that point. Technicians will probably point to the fact that the market then rallied all the way back to 2102 by December 1, 2015 and that it has been nothing but a series of lower highs and lower lows since then, culminating in this week.

The decline from the recent S&P 500 peak at 2102 to 1922 downhill since then is its own 8.5%, putting us easily within a day’s worth of bad performance of another correction.

Having gone years without a traditional 10% correction, we’re now on the doorstep of the second such correction in 5 months.

While it would be easy to thank China for helping our slide, this past week was another of those perfect storms of international bad news ranging from Saudi-Iran conflict, North Korea’s nuclear ambitions and the further declining price of oil, even in the face of Saudi-Iran conflict.

Personally, I think the real kiss of death was news that 2015 saw near term record inflows into mutual funds and that the past 2 months were especially strong.

I’ve never been particularly good at timing, but there may be reason to believe that at the very least those putting their money into mutual funds aren’t very good at it either.

If I still had a shred of optimism left, I might say that the flow into mutual funds might reflect more and more people back in the workforce and contributing to workplace 401k plans.

If that’s true, I’m sure those participants would agree with me that it’s not a very happy start to the year. For those attributing end of the year weakness to the “January Effect” and anticipating some buying at bargain prices to drive stocks higher, that theory may have had yet another nail placed in its coffin.

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

2015 turned out to be my least active year for opening new positions since I’ve been keeping close track. Unfortunately, of those 107 new positions, 29 are still open and 15 of those are non-performing, as they await some opportunity to sell meaningful calls against them.

If you would have told me a year ago that I would not have rushed into to pick up bargains in the face of a precipitous 7% decline, I would have thought you to be insane.

While I did add one position last week, the past 2 months or so have been very tentative with regard to my willingness to ease the grip on cash and for the moment there’s not too much reason to suspect that 2016 will be more active than 2015.

With that said, though, volatility is now at a level that makes a little risk taking somewhat less of a risk.

While volatility has now come back to its October 2015 level, it is still far from its very brief peak in August 2015, despite the recent decline being almost at the same level as the decline seen in August.

Of course that 2% difference in those declines, could easily account for another 10 or so points of volatility. Even then, we would be quite a distance from the peak reached in 2011, when the market started a mid-year decline that saw it finish flat for the year.

The strategy frequently followed during periods of high volatility is to considering rolling over positions even if they are otherwise destined for assignment.

The reason for that is because the increasing uncertainty extends into forward weeks and drives those premiums relatively higher than the current week’s expiring premiums. During periods of low volatility, the further out in time you go to sell a contract, the lower the marginal increase in premium, as a reflection of less uncertainty.

For me, that is an ideal time and the short term outlook taken during a period of accelerating share prices is replaced by a longer term outlook and accumulation of greater premium and less active pursuit of new positions.

The old saying “when you’re a hammer, everything looks like a nail,” has some applicability following last weeks broad and sharp declines. If you have free cash, everything looks like a bargain.

While no one can predict that prices will continue to go lower as they do during the days after the Christmas shopping season, I’m in no rush to run out and pay today’s prices because of a fear that inventory at those prices will be depleted.

The one position that I did open last week was Morgan Stanley (NYSE:MS) and for a brief few hours it looked like a good decision as shares moved higher from its Monday lows when I made the purchase, even as the market went lower.

That didn’t last too long, though, as those shares ultimately were even weaker than the S&P 500 for the week.

While I already own 2 lots of Bank of America (NYSE:BAC), the declines in the financial sector seem extraordinarily overdone, even as the decline in the broader market may still have some more downside.

As is typically the case, that uncertainty brings an enhanced premium.

In Bank of America’s case, the premium for selling a near the money weekly option has been in the 1.1% vicinity of late. However, in the coming week, the ROI, including the potential for share appreciation is an unusually high 3.3%, as the $15.50 strike level offers a $0.19 premium, even as shares closed at $15.19.

With earnings coming up the following week, if those shares are not assigned, I would consider rolling those contracts over to January 29, 2016 or later.

At this point, most everyone expects that Blackstone (NYSE:BX) will have to slash its dividend. As a publicly traded company, it started its life as an over-hyped IPO and then a prolonged disappointment to those who rushed into buy shares in the after-market.

However, up until mid-year in 2015, it had been on a 3 year climb higher and has been a consistently good consideration for a buy/write strategy, if you didn’t mind chasing its price higher.

I generally don’t like to do that, so have only owned it on 3 occasions during that time period.

Since having gone public its dividend has been a consistently moving target, reflecting its operating fortunes. With it’s next ex-dividend date as yet unannounced, but expected sometime in early February, it reports earnings on January 28, 2015.

That presents considerable uncertainty and risk if considering a position. I don’t believe, however, that the announcement of a decreased dividend will be an adverse event, as it is both expected and has been part of the company’s history. WHat will likely be more germane is the health of its operating units and the degree of leverage to which Blackstone is exposed.

If willing to accept the risk, the premium reward can be significant, even if attenuating the risk by either selling deep in the money calls or selling equally out of the money put contracts.

I’m already deep under water with Bed Bath and Beyond (NASDAQ:BBBY), but after what had been characterized as disappointing earnings last week, it actually traded fairly well, despite the overall tone of the market.

It is now trading near a multi-year low and befitting that uncertainty it’s option premiums are extraordinarily generous, despite having a low beta,

As is often the case during periods of heightened volatility, consideration can be given to the sale of puts options rather than executing a buy/write.

However, given its declines, I would be inclined to consider the buy/write approach and utilize an out of the money option in the hopes of accumulating share appreciation and dividend.

If selling puts, I would sell an out of the money put and settle for a lower ROI in return for perhaps being able to sleep more soundly at night.

During downturns, I like to place some additional focus on dividends, but there aren’t very many good prospects in the coming week.

One ex-dividend position that does get my attention is AbbVie (NYSE:ABBV).

As it is, I’m under-invested in the healthcare sector and AbbVie is currently trading right at one support level and has some additional support below that, before being in jeopardy of approaching $46.50, a level to which it gapped down and then gapped higher.

It has a $0.57 dividend, which means that it is greater than the units in which its strike levels are defined. While earnings aren’t due to be reported until the end of the month, its premium is more robust than is usually the case and you can even consider selling a deep in the money call in an effort to see the shares assigned early. For what would amount to a 2 day holding, doing so could result in a 1.2% ROI, based upon Friday’s closing prices and a $55 strike level.

Finally, retail was especially dichotomous last week as there were some very strong days even during overall market weakness and then some very weak days, as well.

For those with a strong stomach, Abercrombie and Fitch (NYSE:ANF) is well off from its recent lows, but it did get hit hard on Friday, along with the retail sector and everything else.

As with AbbVie, the risk is that while shares are now resting at a support level, the next level below represents an area where there was a gap higher, so there is really no place to rest on the way down to $20.

The approach that I would consider for an Abercrombie and Fitch position to sell out of the money puts, where even a 6% decline in share price could still provide a return in excess of 1% for the week.

When selling puts, however, I generally like to avoid or delay assignment, if possible, so it is helpful to be able to watch the position in the event that a rollover is necessary if shares do fall 6% or more as the contract is running out.

Traditional Stocks: Bank of America, Bed Bath and Beyond

Momentum Stocks: Abercrombie and Fitch, Blackstone

Double-Dip Dividend: AbbVie (1/13 $0.57)

Premiums Enhanced by Earnings: none

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.

Week in Review – January 4 – 8, 2016

 

Option to Profit

Week in Review

 

JANUARY 4 – 8, 2016

 

NEW POSITIONS/STO NEW STO ROLLOVERS CALLS ASSIGNED/PUTS EXPIRED CALLS EXPIRED/PUTS ASSIGNED CLOSED EX-DIVIDEND
1  /   1 0 0 0   /   0 4   /  0 0 2

 

Weekly Up to Date Performance

January 4 – 8, 2016


It doesn’t get much worse than this past week.

In fact, if you’re talking about the worst week ever to start a new year, it has nver been worse than this past week.

There was just one new position opened on the week and that was one position too many, even as it looked as if it may have been a good decision for just a few hours.

That position ended the week 6.1% lower while the adjusted and unadjusted S&P 500 were both 5.9% lower.

The only shred of good news was that as bad as the week was, the existing positions still fared better than the overall market, but that is rarely any real solace.

Existing positions outperformed the S&P 500 by 1.8%, but that still meant that they were 4.1% lower on the week.

A loss is a loss.

There were no assignments on the week. No surprise, there.

The loss for this week was pretty stunning, especially since so many were of the belief that the flatness of 2015 was bound to translate into a good 2016.

That still may be the case, but the hole dug in the first week of the year is a pretty deep one.

So deep, that no first week of the year has ever witnessed those kind of depths.

There was absolutely nothing of virtue to report upon for the week.

With only one new purchase and 2 ex-dividend positions, there was no generation of meaningful income and any hope of rollovers was dashed by mid-week, as the losses piled on and on.

That leaves us with next week.

That’s the final week of the January 2016 option cycle and things don’t look very optimistic.

With a fair number of positions set to expire next week, I already had my thoughts on early rollovers, but there wasn’t a single moment during the course of the week that offered any opportunity to push your troubles down the line.

With an avalanche of bad news this week it’s not too surprising that our markets swooned.

We were through this barely 6 months ago when China went south and are now back again.

At that time I was expecting that the respite we saw was going to be short lived. I really didn’t expect it to have lasted this long.

Now the question is when we will realize that we are the dog and that the tail shouldn’t be wagging us.

With no assignments this week and with relatively little cash, I don’t expect to be on the lookout for any places to part with my money.

With no sign of relief and selling getting worse and worse as the final day of the week wore on, there’s no reason to think that we’re at the end of the selling and we certainly didn’t see very many people showing their bravery during the course of the week.

Those that did probably have some regrets about having done so.

With today’s drop we’re again 10% below the August high, but we’re also about 9% below the recovery high in November 2015.

Those mental landmarks in charts can either be support or can offer no resistance at all.

Back in August there was no resistance at all and it pretty much came in one big swoop.

This week there were lots of those swoops, but the numbers to be on the lookout for on the S&P 500 are 1913, then 1884 and then 1867.

I’d prefer not to see those get tested and would trade off some of the increased volatility for some price recovery.


.

 

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

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



New Positions Opened:  MS

Puts Closed in order to take profits:  none

Calls Rolled over, taking profits, into the next weekly cycle: none

Calls Rolled over, taking profits, into extended weekly cycle:  none

Calls Rolled over, taking profits, into the monthly cycle: none

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

Calls Rolled Up, taking net profits into same cyclenone

New STO:  none

Put contracts expired: none

Put contracts rolled over: none

Long term call contracts sold:  none

Calls Assigned: none

Calls Expired:  BAC, BBBY, DOW, MS

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  CSCO (1/4 $0.21), GPS (1/4 $0.23)

Ex-dividend Positions Next Week: WFM (1/13 $0.135)

For the coming week the existing positions have lots that still require the sale of contracts:   AGQ, ANF, AZN, BBY, CHK, CLF, COH, CY, FAST, FCX, GDX, GPS, HAL, HPQ, JCP, JOY, KMI, KSS, LVS,  M, MCPIQ, MOS, NEM, RIG, WFM, WLTGQ (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.



Daily Market Update – January 8, 2016

 

 

 

Daily Market Update -January 8, 2016 (7:00 AM)

The Week in Review will be posted by 10 PM and the Weekend Update will be posted by Noon on Sunday.

The following trade outcomes are possible today:

Assignments:  none

Rollovers:   none

Expirations:  BAC, BBBY, DOW, MS

The following were ex-dividend this week:  CSCO (1/4 $0.21), GPS (1/4 $0.23)

The following will be ex-dividend next week: WFM (1/13 $0.135)

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

Daily Market Update – January 7, 2016 (Close)

 

 

 

Daily Market Update -January 7, 2015 (Close)

Looking at the futures this morning in yet another free fall, this may be the worst start to a new year that I can recall.

I’m certain that if someone hasn’t already looked back at the data, they will do so by the end of the week.

With China down another 7% overnight and closing the market after just 29 minutes of trading and oil futures plummeting some more this morning, as well, it’s a double hit on our market, as the S&P futures are down more than 2% and just adding to their abysmal state for the week.

They ended up the day down 2.4%, although there was an attempt in the late morning to make things right. It was valiant, but a failure.

To add to worries, there’s now second guessing about the FOMC’s decision to increase interest rates and what could they possibly do in the event of a sudden turn down in the US, at this point.

There’s not too much doubt that some serious economic expansion would have been necessary to give the FOMC the chance to reload its tools and keep their inventory at high enough levels to use, if needed.

It’s not necessarily a good idea to project a crisis on the basis of just a few days of trading, but the situation in China was bound to happen, as the strict restrictions they put on trading was coming to its end and you can bottle up and contain things for only so long.

When China went through its market crisis back in July and August of 2015, we definitely felt it here and finally went into our own first real correction in more than 3 years.

With China again seeming to be in a position to wag the US, we may be held hostage to some degree by what policy decisions they may make.

Just like the FOMC, they may be running out of tools on their side of the Pacific, as well.

At this point we are probably going to be wondering what the Chinese government will do next and how much it may attempt to actually throttle free markets.

While prices are looking better and better, there hasn’t been too much of a rush to pick up seeming bargains. The buying seen during the final hour of trading on Monday and Wednesday may have been very poorly timed, so it’s not too likely that there will be eager people looking to commit to what they think is a bargain, only to find it much more of one the following day.

That includes me.

While I like to buy on market weakness, I’ve had a somewhat uneasy feeling for about a month and haven’t jumped in at some signs of early in the week weakness as often as I might have previously.

For now, there has to be some evidence of stability creeping in and some demonstration that perhaps a bottom has been made.

That certainly didn’t come today.

With what may be another big drop in the DJIA and S&P 500 the chartists will be furiously looking for where the next level of support may be, as one after another gets obliterated.

I’m just going to stay tuned for now.

Tomorrow will sadly be a day to watch positions expire and very little chance of being able to do much to milk some more premiums out of the system.

Daily Market Update – January 7, 2016

 

 

 

Daily Market Update -January 7, 2015 (7:30 AM)

Looking at the futures this morning in yet another free fall, this may be the worst start to a new year that I can recall.

I’m certain that if someone hasn’t already looked back at the data, they will do so by the end of the week.

With China down another 7% overnight and closing the market after just 29 minutes of trading and oil futures plummeting some more this morning, as well, it’s a double hit on our market, as the S&P futures are down more than 2% and just adding to their abysmal state for the week.

To add to worries, there’s now second guessing about the FOMC’s decision to increase interest rates and what could they possibly do in the event of a sudden turn down in the US, at this point.

There’s not too much doubt that some serious economic expansion would have been necessary to give the FOMC the chance to reload its tools and keep their inventory at high enough levels to use, if needed.

It’s not necessarily a good idea to project a crisis on the basis of just a few days of trading, but the situation in China was bound to happen, as the strict restrictions they put on trading was coming to its end and you can bottle up and contain things for only so long.

When China went through its market crisis back in July and August of 2015, we definitely felt it here and finally went into our own first real correction in more than 3 years.

With China again seeming to be in a position to wag the US, we may be held hostage to some degree by what policy decisions they may make.

Just like the FOMC, they may be running out of tools on their side of the Pacific, as well.

At this point we are probably going to be wondering what the Chinese government will do next and how much it may attempt to actually throttle free markets.

While prices are looking better and better, there hasn’t been too much of a rush to pick up seeming bargains. The buying seen during the final hour of trading on Monday and Wednesday may have been very poorly timed, so it’s not too likely that there will be eager people looking to commit to what they think is a bargain, only to find it much more of one the following day.

That includes me.

While I like to buy on market weakness, I’ve had a somewhat uneasy feeling for about a month and haven’t jumped in at some signs of early in the week weakness as often as I might have previously.

For now, there has to be some evidence of stability creeping in and some demonstration that perhaps a bottom has been made.

With what may be another big drop in the DJIA and S&P 500 the chartists will be furiously looking for where the next level of support may be, as one after another gets obliterated.

I’m just going to stay tuned for now.