If you follow the various winning themes for the past year, any past year for that matter, the one thing that seems fairly consistent is that the following year is often less than kind to the notion that good things can just keep happening unchanged.
Often the crowd has a way of ruining good things, whether it’s a pristine and previously unknown hidden corner of a national park or an obscure trend or pattern in markets.
Back in the days when people used to invest in mutual funds the sum total of many people’s “research” was to pick up a copy of Money Magazine and see which was the top performing fund or sector for the year and shift money to that fund for the following year.
That rarely worked out well.
You don’t have to think too far back to remember such things as “The January Effect” or “Dogs of the Dow.” The more they were written about and discussed, and the more widely they were embraced, the less effective they were.
The “Santa Claus Rally” wasn’t very different, at least this year, even as the final day of that period for a brief while looked as if it might end with an upward flourish, but that too disappointed.
Remember “Sell in May and then go away”?
Like most things, the more you anticipate joining in on all of the fun that others have been having, the more likely you’re going to be disappointed.
The latest patterns getting attention are the “years ending in 5” and “Presidential election cycles in years ending in 5.” They may have some history to back up the observations, but seemingly overlooked is the close association between those two events, that are not entirely independent of one another.
Since 2015 happens to be both a year ending in “5” and the year preceding a presidential election, it is clear that the only direction can be higher. What that leaves is the debate over how to get to the promised land. That, of course, is the issue of the merits of active versus passive management of stock portfolios.
For purposes of clarity, the only “merit” that really matters is performance.
Those who have used a simple passive strategy over the past two years, perhaps as simple as being entirely invested in the SPDR S&P 500 Trust (NYSEARCA:SPY) to the exclusion of everything else, would have been hoisted on the shoulders of the crowd while hedge fund managers would have been trampled underneath.
The past two years haven’t been especially kind to hedge fund managers, b
ut they have been trampled for very different reasons in that time.
In 2013 who but a super-human kind of investor could have kept up with the S&P 500 while also trying to decrease risk? It’s not terribly easy to match a 30% gain. Hedging has its costs and if markets go only higher those costs simply eat into profits.
In 2014, though, it was a different issue, as the only people who really prospered, in what was still a good year, were those who didn’t try to outsmart markets, as it was almost impossible to even begin classifying the market in 2014. The continual sector rotation either required lots of luck to be continually on the right side of trades or lots of real skill and talent.
Luck runs out. Skill and talents have greater staying power and there’s a reason that only a handful of money managers are well known and regarded for more than a year at a time.
What is fascinating about the market is that even as it ended the year with a very respectable gain those who tried to finesse the market by actively trading don’t have the same kind of elation about its performance.
Just ask them.
So the question is whether the simplicity of a passive strategy is going to again be superior to an active strategy in 2015
As an active trader I’d like to think that passivity will be passé as the new year begins. Of course, you do have to wonder how that arbitrary divide that begins after New Years can actually create an environment with a different character, but somehow that arbitrary divide creates a situation where very few years are like the year preceding it.
I have reason to believe that I have neither skill nor luck, so can only count on the observation that a good thing becomes less of a good thing with time.
Popularity is superficial, while history runs deep.
As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I also like to think that I’ve never really had an original thought.
This week’s potential stock selections to begin 2015 may be an excellent example of the lack of originality, as all of the names are either recent selections, purchases or assigned positions. Add to that their general lack of exciting qualities and you have a really impotent one – two punch to start the year.
With earnings season set to begin the week after this coming week there’s plenty of time for excitement. However, with the upcoming week featuring an FOMC Statement release and the Employment Situation Report, there’s already enough excitement in the upcoming week to want to add to it.
The scheduled events of this week also offer more than enough opportunity to add to this past week’s broad weakness, particularly if the FOMC emphasizes strong GDP data or there is unusually large employment growth, either of which could signal interest rate increases ahead.
In that kind of environment, even if widely expected, the immediate reaction would likely be a shock to the system and I would prefer my exposure to be offset by the security of size and quality. Characteristics that coincidentally may be found in components of the S&P 500, so favored by passivists.
Among those are three members of the DJIA.
General Electric (NYSE:GE), Intel (NASDAQ:INTC) and Verizon (NYSE:VZ) are among this week’s list.
Intel is a little bit of an anomaly to be included in the list, as it was the best performing of the DJIA stocks in 2014 and might, therefore, be reasonably expected to lag in 2015. However, I think that those who would have been prone to pile into the stock because of its performance in the past year would have already done so, as its most recent performance has trailed the S&P 500.
What appeals to me about Intel’s shares for a very short term trade is that the crowd turned very suddenly on them on Friday, giving up nearly all of an almost 3% gain earlier in the trading session. With that arbitrary divide creating its own unique trading dynamics, Intel may not receive quite the same attention as General Electric and Verizon, as those may garner notice because they are among those “dogs” that still have faithful adherents.
But beyond that, Intel still has a fundamentally positive story behind its climb in 2014 and may again be well aligned with the fortunes of a Microsoft (NASDAQ:MSFT), as it continues on its return to relevance. For a short term trade in advance of its upcoming earnings report on January 15, 2015, I wouldn’t mind it trading listlessly in return for the option premium.
General Electric is simply at a price point that I find attractive, having recently had shares assigned. It certainly hasn’t been a very attractive stock over the years for much of anything other than a covered option strategy, but it has been well suited for that, as long as it can continue to trade in a relatively narrow range.
Verizon will be ex-dividend this week and is down nearly 9% from its high in November. Bruised a little due to increasing competition among mobile providers and sustaining the expenses of subsidizing the iPhone, it will report earnings in less than 3 weeks and I might want to either be out of any position prior to then, or if not, use an extended weekly option if having to rollover a position to acquire some additional premium in protection, in the event of an adverse response to earnings.
Dow Chemical (NYSE:DOW) has had its fortunes most recently closely aligned to the energy sector. WHile owning a more expensive lot, I’ve traded other lots as shares have fallen in an effort to generate quick returns from option premiums and share appreciation.
As those shares again approach $45.50 I would like to do so again, but recognizing that oil is at a precarious level, as it gets closer to the $50 level, which if breached, could pull Dow Chemical even lower.
That increased volatility due to the uncertainty in the energy sector has made the option premiums much more appealing. However, even with that challenge, Dow Chemical has the advantage of a highly competent and long serving CEO who is increasingly responsive to the marketplace as he has activists breathing down his neck.
The Mosaic (NYSE:MOS) story isn’t one of being held hostage by an energy cartel and falling prices, as is the case with Dow Chemical, but rather it fell prey to the collapse of the much less well known potash cartel.
Hopefully, the time frame will be far shorter for Dow Chemical than it has been for Mosaic, as I’ve been sitting on some much more expensive shares for quite a while. In the interim, however, Mosaic has offered many opportunities for entering into new positions in the hopes of quick assignment and capturing option premiums, dividends and some occasional capital gains on shares.
While its next dividend is till some months away, it is now quickly again in the price range at which I like to consider adding shares again, although it could still go even lower. However, as long as it does continue trading in this relatively narrow range, it is capable of generating serial option premiums and even if its performance may seem mediocre on a yearly basis, its ROI can be very attractive.
I don’t get terribly excited about food stocks, but when looking for some relative calm, both Campbell Soup (NYSE:CPB) and Kelloggs (NYSE:K) may offer some respite from any tumult that may confront the market next week.
Both were recently assigned and at these levels I wouldn’t mind owning them again. In the case of Campbell Soup, that means the opportunity to capture its dividend and not be concerned about its next earnings until the March 2015 option cycle.
Kellogg is a stock that I would consider buying more often, however, the decision is related to how closely its price is to one of the strike levels on its monthly options.
Unlike Campbell Soup which has strikes at $1 intervals and many weekly options have $0.50 intervals, Kellogg options utilize $2.50 intervals, which can make the premiums relatively unattractive if the share price is at a distance from the strike at the time of the proposed sale of option contracts.
Finally, my plan to add shares of eBay (NASDAQ:EBAY) a couple of weeks agowent unrequited. The fact that its shares are now 2% lower doesn’t necessarily make me salivate over the prospects about adding shares now, as the past two weeks could have represented lost opportunities to generate option premiums and in a position to do so again in the coming week, as shares seem to be settling in at this higher level.
The coming year may be a fascinating one for eBay as the speculation grows about the planned spin off of PayPal, which may never make it to an IPO as it may be coveted by another company.
Of course, who might benefit from that detour is also open to question as eBay itself may be in the crosshairs of an acquiring behemoth.
For now, I still like owning eBay shares and usually selling near or in the money calls, but I would increasingly consider setting aside a portion of those shares for the kind of capital gains that so many have moaned about not having seen over the years as slings and arrows have consistently been thrown in eBay’s direction.
Traditional Stocks: Dow Chemical, eBay, General Electric, Intel, Kellogg, Mosaic
Momentum Stocks: none
Double Dip Dividend: Campbell Soup (1/8), Verizon (1/7)
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.
December 29 – January 2, 2015
