Mar62014

Daily Market Update – March 6, 2014

Daily Market Update

 

  

 

Daily Market Update – March 6, 2014 (9:30 AM)

The Jobless Claims number is already in and says nothing of real interest. Taken together with the seeming quiet coming from Crimea all points toward a quiet trading day today, or at least none with any known catalysts.

Despite what looks like an inevitable further dissolution of the Ukraine, which will likely see the creation of an autonomous Crimea or one given to Russia as an EU prize of sorts, today may be nothing more than a conduit to tomorrow’s Employment Situation Report. Ultimately, no one really cares about the nature of an area that is rarely thought about due to its insignificance regarding world-wide stock markets. Who owns Crimea will be irrelevant to most people and traders as long as it’s not the nidus for armed confrontation.

The last time we were awaiting a report it seemed pretty clear that Richard Fisher, who is a fairly vocal Reserve Reserve Governor, and one of those described as being a “hawk,” seemed to strongly hint that the numbers would be on the low side, as he repeatedly emphasized the impact of weather, in an appearance prior to the numbers being released.

He was right, at least on the numbers being on the low side, although there is still debate over the exact role of the weather, which at some point can no longer be blamed for malaise and decreased economic activity.

Today, there are no fewer than three current Federal Reserve Governors speaking to various groups, although only one is occurring after regular market hours. It may be interesting to see whether the markets take any cues from their cues.

Given past history of the market’s reaction to the Employment numbers there’s little reason to fear their release, regardless of where they may come in or regardless of whether they are perceived in a positive or negative light.

If the European situation is taken off the table, as it seems only the threat of actual military confrontation is what will move the market in the short term, there’s also no reason to believe that as earnings season is coming to an end, that the market won’t find some reason to move higher.

It has been doing that for a long time, as we, coincidentally come up to the 5th anniversary of the market bottom, occurring 5 years ago. Within that remarkable 5 year period the past 20 months have been fairly memorable in their own right.

With even flat days today and tomorrow we should be left in good position to face the coming week, with a nice combination of available cash and covered positions. Of course, it’s never a really good idea to assume that will end up being the case, as the market does have that ability to surprise and take the wind out of you, but it really hasn’t done so very often of late.

So far this has been a quiet trading week after a couple of busy ones. While that may change over the coming two days and while I don’t usually add new positions near the end of the week, I still would consider doing so, particularly to get a head start of populating the list of positions that expire next week, which is a little on the light side at the moment.

But that too could change if the next two days stay on course and results in some assignments and rollovers, in which case there’s nothing wrong with looking forward to the end of the monthly option cycle for expiration dates, as long as the premiums aren’t dragged down by the low volatility.

While volatility has been down after a brief moment that it looked as if it would be heading to better premium enhancing levels, the current market, one that is gradually moving higher, is my second favorite kind of market and usually results in narrowing the variation in positions held, as the same positions are frequently re-purchased just about as soon as they are assigned.

There’s not too much shame in that and I can live with myself if that’s the case.

 

 

 

 

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.