Mar52014

Daily Market Update – March 5, 2014 (Close)

Daily Market Update

 

  

 

Daily Market Update – March 5, 2014 (Close)

With no news to wake up to from Crimea this morning and no blaring headlines, it’s back to a normal post-earnings season kind of stock market.

As much as I don’t like boring days of there’s going to be one, it may as well be on a Wednesday, which is generally a low activity day for me.

So today really didn’t disappoint.

This morning’s news was a completely uninteresting, maybe slightly disappointing ADP Employment report that normally serves as a prelude to Friday’s Employment Situation Report, regardless of whether it actually is able to accurately reflect non-farm payroll statistics.

After two successive disappointing months that were nonetheless greeted with enthusiasm by the markets, this month everyone has toned down their employment estimates as weather is still the easy culprit.

Yet despite mediocre earnings and an extraordinarily slow recovery the market reached another new high yesterday, completely erasing the Crimea induced loss from Monday and then some.

There was no new high today, but there was certainly no reason to believe that tomorrow won’t bring another one.

While it wasn’t too unusual to see a snapback rally on the interpretation of good news, the most surprising thing so far this week is how muted the decline was on Monday and how tentative the fear was on the preceding Friday.

By all rights the responses should have been much more pronounced.

That Friday offered a great excuse for a sell off of a market that had been strongly higher, as rumors of a confrontation were making the rounds. While the early part of the final trading hour saw the entire gain being lost lost, a meaningful portion was recovered before the close, allowing the market to end the day with a gain. Doing so going into the weekend and especially a weekend of international uncertainty is not the sort of thing that frightened markets do.

Monday’s losses on the news of the reality on the ground were also muted, especially considering the stock market’s level and its quick ascent from its recent 7% correction. That sort of rise higher is the sort of thing that could easily have been deflated and in a big way.

But it wasn’t. The market saw a decline, but by any post-2007 standard, that decline was really very small and then subsequently erased on the flimsiest of news.

The difference between a market that’s giddy and a market that is simply optimistic may not be easy to define. Yesterday seemed giddy insofar as performance, but not insofar as volume. Importantly, there wasn’t a “blow off top,” which would have seen everyone piling aboard a market perceived to be rocketing higher.

This morning’s flat market is far more healthy than any alternative following two entirely different days.The way in which the market simply went on its business as the day progressed, with not a single meaningful individual stock story was surprising, but even that was welcome.

As things appear to be, at least temporaril
y quieting down on the news front and perhaps making way for diplomatic efforts, any kind of negotiated outcome in that regard can only be positive for the markets, even if negative for either of the directly involved nations.

At the moment, with cash still in hand, and the prospects of potentially having a number of assignments at the end of this week if all goes quietly, I continue to have an optimistic near tern outlook.

While I have no hesitancy in spending down cash reserves going forward, there still remains that pesky matter of finding positions that either haven’t benefited as much from the recent market strength or are in their own peculiar price cycles, awaiting a chance to move higher.

Additionally, while that optimism is still there, I’m not particularly interested in tempting fate and looking to higher beta names to offset the low option premiums. Where possible, dividends still hold greater appeal, which is why I decided to rollover the Coach position yesterday, so as to retain the dividend.

As next week’s weekly options will be opened up for many stocks that don’t have expanded weekly options I may also look to initiate new positions, despite it being the end of the week, which is usually a time for considering rollovers.

Part of that possibility is the very fact that this Friday is an Employment Situation Report. If you were geeky enough to have been interested in the statistics behind an analysis of the market’s response to the monthly Employment Situation Report you know that there’s an increased likelihood of a higher moving market on Friday, regardless of what the report says.

So if the opportunities are there, why think change is coming and miss the chance to be a participant?

 

Mar52014

Daily Market Update – March 5, 2014

Daily Market Update

 

  

 

Daily Market Update – March 5, 2014 (9:15 AM)

With no news to wake up to from Crimea this morning and no blaring headlines, it’s back to a normal post-earnings season kind of stock market.

This morning’s news was a completely uninteresting ADP Employment report that normally serves as a prelude to Friday’s Employment Situation Report, regardless of whether it actually is able to accurately reflect non-farm payroll statistics.

After two successive disappointing months that were nonetheless greeted with enthusiasm by the markets, this month everyone has toned down their employment estimates as weather is still the easy culprit.

Yet despite mediocre earnings and an extraordinarily slow recovery the market reached another new high yesterday, completely erasing the Crimea induced loss from Monday and then some.

While it wasn’t too unusual to see a snapback rally on the interpretation of good news, the most surprising thing so far this week is how muted the decline was on Monday and how tentative the fear was on the preceding Friday.

That Friday offered a great excuse for a sell off of a market that had been strongly higher, as rumors of a confrontation were making the rounds. While the early part of the final trading hour saw the entire gain being lost lost, a meaningful portion was recovered before the close, allowing the market to end the day with a gain. Doing so going into the weekend and especially a weekend of international uncertainty is not the sort of thing that frightened markets do.

Monday’s losses on the news of the reality on the ground were also muted, especially considering the stock market’s level and its quick ascent from its recent 7% correction. That sort of rise higher is the sort of thing that could easily have been deflated and in a big way.

But it wasn’t. The market saw a decline, but by any post-2007 standard, that decline was really very small and then subsequently erased on the flimsiest of news.

The difference between a market that’s giddy and a market that is simply optimistic may not be easy to define. Yesterday seemed giddy insofar as performance, but not insofar as volume. Importantly, there wasn’t a “blow off top,” which would have seen everyone piling aboard a market perceived to be rocketing higher.

This morning’s flat market is far more healthy than any alternative following two entirely different days.

As things appear to be, at least temporarily quieting down and perhaps making way for diplomatic efforts, any kind of negotiated outcome in that regard can only be positive for the markets, even if negative for either of the directly involved nations.

At the moment, with cash still in hand, and the prospects of potentially having a number of assignments at the end of this week if all goes quietly, I continue to have an optimistic near tern outlook.

While I have no hesitancy in spending down cash reserves going forward, there still remains that pesky matter of finding positions that either haven’t benefited as much from the recent market strength or are in their own peculiar price cycles, awaiting a chance to move higher.

Additionally, while that optimism is still there, I’m not particularly interested i
n tempting fate and looking to higher beta names to offset the low option premiums. Where possible, dividends still hold greater appeal, which is why I decided to rollover the Coach position yesterday, so as to retain the dividend.

As next week’s weekly options will be opened up for many stocks that don’t have expanded weekly options I may also look to initiate new positions, despite it being the end of the week, which is usually a time for considering rollovers.

Part of that possibility is the very fact that this Friday is an Employment Situation Report. If you were geeky enough to have been interested in the statistics behind an analysis of the market’s response to the monthly Employment Situation Report you know that there’s an increased likelihood of a higher moving market on Friday, regardless of what the report says.

So if the opportunities are there, why think change is coming?

 

 

 

 

 

 

Mar42014

Daily Market Update – March 4, 2014 (Close)

Daily Market Update

 

  

 

Daily Market Update – March 4, 2014 (Close)

Waking up this morning and seeing the pre-open futures having completely erased yesterday’s 153 point loss had me believing something substantive happened while others were awake.

Actually, that wasn’t really the case. Nothing is really different, yet, although some have hopes for everything returning back to whatever normal happened to have been a few days ago.

While President Putin did say “military force is the last option,” he did say that in Russian, so there may be some vagaries in the translation. Of course, when you say “no use of force at this time” that still leaves some important issues open, like “how about tomorrow?”

For some reason, while under the same breath the right to use force in response to what was described as a “coup” in Ukraine has been discounted

Reportedly Russian troops that are still on the Russian side of the border, having been engaged in “exercises” are retreating. Meanwhile, those in Crimea are showing no signs of doing the same

Actually, as the day wore on, it was denied that they were even Russian forces.

Huh?

Reportedly, Germany’s Chancellor Angela Merkel questioned whether “Putin was in touch with reality.”

That’s comforting to think that a reportedly analytical world leader would question the ability of another world leader to engage in rational thought.

A rational market would wait for some tangible action before retreating from an initial response that at least was predicated on actions on the ground rather than rumor.

Given how easily the market turns on a dime in response to news, rumors and the interpretation of the spoken word, caution is probably a good idea when it comes to chasing the promise of “normalcy.” As opposed to the weather, which may impact markets and company performance, at least you have an idea that it will at some point stop being an issue. Events of nature have a way of being self-limiting, even if recurrent. Invariably spring comes along and things get better.

But when man made events come along you just don’t have the same certainty, because the actors don’t even know what they’re going to do next. While you would like to think that there’s a rational basis for actions, maybe only the initial actions are truly rational, as the reactions to those initial actions may utilize a lower state of rational thought, which in turn may evoke even lesser rational responses.

Who knows what a single nervous Ukrainian military recruit could trigger when a adrenaline rushed Russian recruit is polishing his rifle?

While I did see yesterday as offering a cautious opportunity, this morning I think the “cautious” part is likely to require more emphasis.

If indeed this morning’s move higher is the beginning
of the return to the move higher from the correction of just 3 weeks ago, then you simply take pleasure in watching the gains and wait for the next opportunity to spend some money.

For a brief moment yesterday volatility had started moving higher and with it came prospects of looking at premiums with some variation in their expiration terms. This morning, however, the volatility is going right back to its perma-low levels. With a large number of positions set for expiration this coming Friday the problem with adding new positions is that if premiums in forward weeks are very low the tendency is to add to positions expiring this week, instead. That adds to the risk of holding too many potentially uncovered positions in the event of a sudden turndown by the end of the week.

On the other hand, that may provide greater rational for waiting until Thursday or Friday when next week’s option contracts will appear for many positions. A few additional days to assess events and essentially getting a weekly premium and an additional day or two, as the more near the term of the option contract the greater the time adjusted premium. In essence, there is little advantage right now to selling a contract for two weeks as opposed to selling a contract for 1 week and 2 days. While Einstein’s Theory of Relativity still holds, in this case time is constant, but is just valued less as it increases in length.

Finally, while this is an Employment Situation Reports week and that usually means a net market gain for the week, extraneous events may trump the recent historical pattern of the report. In the event that international events do cool down heading into that report, then there may truly be reason to be optimistic, at least for a day.

 

P.S. Finally, for those that owned shares of Lorillard, the decision to close the deep in the money position was because the  option market gave an opportunity to buy back options without paying a large time premium to do so. The actual time premium paid for about 2 1/2 weeks remaining on the contract amounted to about 0.2%. That meant that the option market was not envisioning much in the way of further volatility in the position. That offered to the opportunity to get money out of the position and redeploy it elsewhere, such as Family Dollar Store.

By contrast, I would have liked to close out the $37 Abercrombie and Fitch. However, the option market was implying some additional volatility and I couldn’t get a trade that fell inside of the 0.2 to 0.3% ROI reduction range that I target. Sometimes I may be willing to pay more, but if the price goes higher on ANF, in an environment of low market volatility, the time premium on the contracts will actually go lower, making closing out the position at a fair price easier to do.

Another somewhat unusual trade today was the rollover in Coach, which goes ex-dividend tomorrow. As its price turned around from below the threshold price of $48.34, meaning that it was more likely to now be assigned early, came the opportunity to buy back those contracts at a small net debit and then roll up the contract to a higher strike. By so doing the ROI was changed from an already good 1.5% in the event of early assignment of the $48 strike to an even better 3.1% if the position is assigned next Friday.

 

 

 

Mar42014

Daily Market Update – March 4, 2014

Daily Market Update

 

  

 

Daily Market Update – March 4, 2014 (9:30 AM)

Waking up this morning and seeing the pre-open futures having completely erased yesterday’s 153 point loss had me believing something substantive happened while others were awake.

Actually, that wasn’t really the case. Nothing is really different, yet, although some have hopes for everything returning back to whatever normal happened to have been a few days ago.

While President Putin did say “military force is the last option,” he did say that in Russian, so there may be some vagaries in the translation. Of course, when you say “no use of force at this time” that still leaves some important issues open, like “how about tomorrow?”

For some reason, while under the same breath the right to use force in response to what was described as a “coup” in Ukraine has been discounted

Reportedly Russian troops that are still on the Russian side of the border, having been engaged in “exercises” are retreating. Meanwhile, those in Crimea are showing no signs of doing the same

A rational market would wait for some tangible action before retreating from an initial response that at least was predicated on actions on the ground rather than rumor.

Given how easily the market turns on a dime in response to news, rumors and the interpretation of the spoken word, caution is probably a good idea when it comes to chasing the promise of “normalcy.” As opposed to the weather, which mat impact markets and company performance, at least you have an idea that it will at some point stop being an issue. Events of nature have a way of being self-limiting, even if recurrent. Invariably spring comes along and things get better.

But when man made events come along you just don’t have the same certainty, because the actors don’t even know what they’re going to do next. While you would like to think that there’s a rational basis for actions, maybe only the initial actions are truly rational, as the reactions to those initial actions may utilize a lower state of rational thought, which in turn may evoke even lesser rational responses.

Who knows what a single nervous Ukrainian military recruit could trigger when a adrenaline rushed Russian recruit is polishing his rifle?

While I did see yesterday as offering a cautious opportunity, this morning I think the “cautious” part is likely to require more emphasis.

If indeed this morning’s move higher is the beginning of the return to the move higher from the correction of just 3 weeks ago, then you simply take pleasure in watching the gains and wait for the next opportunity to spend some money.

For a brief moment yesterday volatility had started moving higher and with it came prospects of looking at premiums with some variation in their expiration terms. This morning, however, the volatility is going right back to its perma-low levels. With a large number of positions set for expiration this coming Friday the problem with adding new positions is that if premiums in forward weeks are very low the tendency is to add to positions expiring this week, instead. That adds to the risk of holding too many potentially uncovered positions in the event of a sudden turndown by the end of the week.

On the other hand, that may provide greater rational for waiting until Thursday or Friday when next week’s option contracts will appear for many positions. A few additional days to assess events and essentially getting a weekly premium and an additional day or two, as the more near the term of the option contract the greater the time adjusted premium. In essence, there is little advantage right now to selling a contract for two weeks as opposed to selling a contract for 1 week and 2 days. While Einstein’s Theory of Relativity still holds, in this case time is constant, but is just valued less as it increases in length.

Finally, while this is an Employment Situation Reports week and that usually means a net market gain for the week, extraneous events may trump the recent historical pattern of the report. In the event that international events do cool down heading into that report, then there may truly be reason to be optimistic, at least for a day.

 

 

 

Mar32014

Daily Market Update – March 3, 2014 (Close)

Daily Market Update

 

  

 

Daily Market Update – March 3, 2014 (Close)

It has been a while since there have been any international events that have influenced the markets.

In the past three years most of those events have centered around the European Union and its banking system.

This time the European Union is only indirectly involved and its banking system or impending default by one of its member nations has nothing to do with events. Instead this weekend had a feeling of the 1950s. Old nemeses are exerting their will in a manner that seems foreign to many.

Except back then the  stand-off between the East and the West was long in the making and we spent our time practicing hiding underneath school desks. It has been a generation since we’ve had the slightest concern about anything going on in that part of the world.

The events between Russia and Ukraine may have been simmering for a while below our vantage point, but seem a sudden conflagration for which we weren’t prepared.

Going back a bit further in history, the pretext by which one nation invades another in order to protect an ethnic population has its counterpart in Sudentenland in the 1930s. It appears, based on the initial success of Russia in taking control in Crimea, without having fired a shot and faced only by worldwide condemnation, the next step is just as was taken more than 75 years ago, realizing that such moves can be done with impunity.

While neither the world nor the markets may like those prospects, they are limited, as was an incursion in Georgia just a few years ago. Whether justified or not, life goes on and becomes the new normal.

This morning’s market was looking for a negative opening to the week, although not as badly as one could have reasonably expected. Although there was always a chance that may have changed once the opening bell would ring, I wasn‘t likely to be rushing into any quick decisions with the cash on hand. I surprised myself, however, ultimately opening a few new positions as it was hard to imagine any kind of physical confrontation that would pull in anyone other than the direct parties. It seemed that markets would only be impacted by financial and trade considerations, including the flow and availability of oil and gas.

But if that is the case there shouldn’t be large and lasting adverse impact on US markets, so why not dip a toe in and test the waters?

Watching the morning ticker the moves in individual stocks was fairly pronounced even for the more traditional and safe positions, yet they seemed to be a better place to consider short term parking than anything else for the moment. While some Momentum positions had some potential appeal as last week ended, they suddenly have lost that appeal for now, except perhaps for the most adventurous of traders.

With cash available and suddenly more appealing prices getting ready to appear the question was simply whether what we’re seeing this morning is self-limited.

It seems that we were going through this same process just a few weeks ago as the market came upon a 7% or so loss in very quick order. As with the previous drops the most recent one was simply an opportunity to buy stocks as the time frame for the declines had consistently been so short lived.

However, as with other recent price drops the reasonable thing to do is to not rush in, at least not in a big way and instead wait for some price stability both in events and prices. There is no requirement to spend cash reserves just because they exist.

The next few days promise to be full of news, perhaps rapidly alternating between offering optimism and pessimism. The markets may reflect that kind of atmosphere,as it did in the final hour of Friday’s trading.

What may look like a great decision to enter a position may then look like an exercise in terrible timing, or the decision to wait may end up appearing as having squandered an opportunity.

While all weeks are interesting, or at least start with that potential, this one may be more than the usual.