Weekend Update – May 19, 2013

Shades of 1999.

I’m not certain that I understand the chorus of those claiming that our current market reminds them of 1999.

Mind you, I’m as cautious, maybe much more so than the next guy and have been awaiting some kind of a correction for more than 2 months now, but I just don’t see the resemblance.

Much has also been made of the fact that the S&P 500 is now some 12% above its 200 Day Moving Average, which in the past has been an untenable position, other than back when sock puppets were ruling the markets. Back then that metric was breached for years.

Back in 1999 and the years preceding it, the catalyst was known as the “dot com boom” or “dot com bubble” or the “dot com bust,” depending on what point you entered. The catalyst was clear, perhaps best exemplified by the ubiquitous sock puppet and the short lived PSINet Stadium, back then home to the world Champion Baltimore Ravens. The Ravens survived, perhaps even thrived since then, while PSINet was a casualty of the excesses of the era. When it was all said and done you could stuff PSINet’s assets into a sock.

During the height of that era the catalyst was thought to be in endless supply. But in the current market, what is the catalyst? Most would agree that if anything could be identified it would likely be the Federal Reserve’s policy of Quantitative Easing.

But as last week’s rumor of its upcoming end and then an article suggesting that the Federal Reserve already has an exit plan, the catalyst is clearly not thought to be unending. Unless the economy is much worse than we all believe it to be the fuel will be depleted sooner rather than later.

Now if you’re really trying to find a year comparable to this one, look no further than 1995, when the market ended the year 34% higher and never even had anything more than a 2% correction.

If llke me, and you’re selling covered options; let’s hope not.

For me, this Friday marked the end of the May 2013 option cycle. As I had been cautious since the end of February and transitioned into more monthly option contract sales, I am faced with a large number of assignments. Considering that the market has essentially been following a straight line higher having so many assignments isn’t the best of all worlds.

While I now find myself with lots of available cash the prevailing feeling that I have is that there is a need to protect those assets more than before in anticipation of some kind of correction, or at least an opportunity to discover some temporary bargains.

This week I have more than the usual number of potential new positions, however, I’m unlikely to commit wholeheartedly to their purchase, as I would like to maintain about a 40% cash position by the end of next week. I’m also more likely to continue looking at monthly option sales rather than the weekly contracts.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or the “PEE” category (see details). Additionally, although the height of earnings season has passed there may still be some more opportunity to sell well out of the money puts prior to earnings on some reasonably high profile names..

There’s no doubt that the tone for the week was changed by the down to earth utterances of David Tepper, founder of the Appaloosa Hedge Fund. He has a long term enviable record and when he speaks, which isn’t often, people do take notice. Apparently markets do, as well.

However, among the things that he mentioned was that he had lightened up on his position in Apple (AAPL). It didn’t take long for others to chime in and Apple shares fell substantially even when the market was going higher. Although I was waiting for Apple to get back into the $410-420 range, the rebound in share price following news of reduced positions by high profile investors is a good sign and I believe warrants consideration toward the purchase of new shares.

I recently purchased shares of Sunoco Logistics (SXL) in order to capture its generous and reliable dividend. My shares were assigned this past Friday, but I’m willing to repurchase, even at a higher price and even with a monthly option contract to tie me down. In the oil services business it is a lesser known entity and trades with low volume, however, it will share in sector strength, just in a much more low profile manner.

Pfizer (PFE) is another stock that was recently purchased in order to capture it’s dividend and premium and was also assigned this past week. However, it is among the “defensive” stocks that I think would fare relatively well regardless of near term market direction. Like many others that do offer weekly options, my inclination is to consider the selling monthly contracts for the time being.

While healthcare has certainly already had its time in the sun in 2013 and Bristol Myers Squibb (BMY) has had its share of that glory, after some recent tumult in its price and most recently its next day reversal of a strong move the previous day, I find the option premium appealing. However, as opposed to Pfizer, which I’m more inclined to consider a monthly option, Bristol Myers has too much downside potential for me to want to commit for longer periods.

Although I already own shares of Petrobras (PBR) and am not a big fan of adding additional shares after such a strong climb higher off of its rapidly achieved lows, Petrobras recently and quietly had quite an achievement. WHile everyone was talking about Apple’s $17 Billion bond offering that had about $50 Billion in bids, Petrobras just closed an $11 Billion offering with more than $40 Billion in bids.

Caterpillar (CAT), which I also currently own, is a perennial member of my portfolio. To a very large degree it has been recently held hostage to rumors of contraction and slowing in the Chinese economy. It has, however, shown great resiliency at the current price level and has been an excellent vehicle upon which to sell call options.

As shown in the table above, I’ve owned shares of Caterpillar on 11 separate occasions in less than a year. While the price has barely moved in that period, the net result of the in and out trades, as a result of share assignments has been a gain in excess of 35%.

The more ambiguity and equivocation there is in understanding the direction of the Chinese economy the better it has been to own Caterpillar as it just bounces around in a fairly well defined price range, making it an ideal situation for covered call strategies.

Continuing the theme of shares that I currently own, but am considering adding more shares, is British Petroleum (BP). With much of its Deepwater Horizon liabilities either behind it or well defined, shares appear to have a floor. However, in the past year, that has already been the case, as my experience with British Petroleum ownership has paralleled that of Caterpillar in both the number of separate times owning shares and in return – only better.

Of course, better than either Caterpillar or British Petroleum has been Chesapeake Energy (CHK). I’ve owned it 18 times in a year. It too has had much of its liability removed as Aubrey McClendon has left the scene and it is already well known that Chesapeake will be selling assets under a degree of duress. With its turnaround on Thursday and dip below $20, I am ready to add even more shares.

I’ve probably not owned Conoco Phillips (COP) as much as I would have imagined over the past year probably As a result of owning British Petroleum and Chesapeake Energy so often. Shares do go ex-dividend this week which always adds to the appeal, particularly when I’m in a defensive mode.

Salesforce.com (CRM) was a recommendation last week. I did make that purchase and subsequently had shares assigned. This week it reports earnings and as many of the earnings related trades that I prefer, it offers what I believe to be a good option premium even in the event of a large downward move. In this case a 1% return for the week may be achieved if share price doesn’t exceed 8%

Sears Holdings (SHLD) always seems like a ghost town when I enter one of its stores, although perhaps a moment of introspection would indicate that I drive shoppers away. I’m aware of other story lines revolving around Sears and its real estate holdings, but tend not to think in terms of what has been playing out a s a very, very long term potential. Instead, I like Sears as a hopefully quick earnings trade.

In a week that saw beautiful price action from Macys (M), Kohls (KSS) and others, perhaps even Sears can pull out good numbers and even provide some positive guidance. However, what appeals to me is a put sale approximately 8% below Friday’s close that could offer a 4% ROI for the month or shorter.

Another retailer, The Gap (GPS), has certainly been an example of the ability to arise from the ashes and how a brand can be revitalized. Along with it, so too can its share price. The Gap reports earnings this week and has already had an impressive price run. As opposed to most other earnings related trades, I’m not looking for a significant downward move and the market isn’t expecting such a move either. Based on some of the strong retail earnings announced this past week I think The Gap may be an outright purchase, but I would be more likely to look at a weekly option sale and hope for quick assignment of shares.

TIVO (TIVO) is one of those technologies that I’ve never adopted. Maybe that’s because I never leave the house and the television is always on and I rarely see a need to change the station. But here, too, I believe TIVO offers a good short term opportunity even if shares go down as much as 20% following Monday’s earnings release. In the event that shares go appreciably higher, it is the ideal kind of earnings trade, in that coming during the first day of a monthly option contract, it could likely be quickly closed out and the money then used for another investment vehicle.

Om the other hand, Dunkin Brands (DNKN) is definitely one of those technologies that I’ve adopted, especially when having lived in New England. Fast forward 20 years and they are now everywhere in the Mid-Atlantic and spreading across the country as their new offerings also spread waists around the country. Going ex-dividend this coming week and offering a nice monthly option premium, I may bite at more than a jelly donut. However, it is trading at the upper end of its recent price range, like all too many other stocks.

Finally, Carnival (CCL) hasn’t exactly been the recipient of much good news lately. Although it’s up from its recent woes and lows. It does report earnings at the end of the June 2013 option cycle, but it also goes ex-dividend in the first week of the cycle, in addition to a offering a reasonable option premium

Traditional Stocks: Bristol Myers, Caterpillar, Pfizer, Sunoco Logistics

Momentum Stocks: Apple, Chesapeake Energy, Petrobras

Double Dip Dividend: Carnival Line (ex-div 5/22), Conoco Phillips (ex-div 5/22), Dunkin Brands (ex-div 5/23)

Premiums Enhanced by Earnings: Salesforce.com (5/23 PM), Sears Holdings (5/23 AM), The Gap (5/23 PM), TIVO (5/20 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.

 

 
 

Weekend Update – May 12, 2013

There’s certainly no way to deny the fact that this has been an impressive first 4 months of the year. The recently touted statistic was that after 4 months and one week the market had gone up 13%.

To put that into the perspective the statistic wanted you to have, the statistical factoid added that for all of 2012 the market was up only 7.2%. That certainly tells you not only how impressive this gain has been but how 2013 will undoubtedly leave 2012 in the dust.

What is left unmentioned is that in 2012, in a period of only 3 months and 1 week the market was up 12.9%.

What happened? Could that happen again? Those are questions asked by someone who turned cautious when the market was up less than 8% in 2013 and wasn’t adequately cautious in 2012.

SInce 1970, the S&P 500 has finished the year with gains of greater than 14% on a total of 16 occasions, so there could easily be more to come. That can easily be a justifiable perspective to hold unless you also look at the margins by which 14% was exceeded. In that event, the perspective becomes less compelling. It’s still possible to end the year substantially higher than 14%, just not as likely as such a great start might suggest.

But remember, statistics don’t mislead people. People mislead people.

There was little to no substantive news this past week as the market just continued on auto-pilot. If you owned shares of any of the stocks that had super-sized moves after earnings, such as Tesla (TSLA) or Green Mountain Coffee Roasters (GMCR), that was news enough. But for the rest of us it was quiet.

What was interesting, however, was the behavior of the market during the final hour of Thursday’s trading.

That period marked a turnaround sending the market quite a bit lower, at least based on recent standards when only higher seems to be the order of the day. Initially, the drop was ascribed to a strengthening of the dollar and further drop in gold. Those, however, had been going on for a while, having started earlier in the trading session.

What came to light and whose timing was curiously coincident with the market change in direction was a rumor of a rumor that someone from within JP Morgan (JPM) was suggesting that the Federal Reserve was ready to begin tapering its Treasury purchases, those signaling the beginning of an end to Quantitative Easing.

For the growing throng that believe that QE has been responsible for the market’s climb higher, life after QE couldn’t possibly be rosy.

First comes an errant AP Tweet, then an unconfirmed rumor of a rumor. Those incidents would seem to indicate vulnerability or at least an Achilles heel that could stand in the way of this year becoming the 17th in the list.

Easily said, but otherwise, there’s really not much else on the radar screen that appears poised to interfere with the market’s manifest destiny. Unless of course, Saturday’s Wall Street Journal report that the Federal Reserve has indeed mapped out a strategy for winding down QE, transforms rumor into potential reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or “PEE” categories (see details). Additionally, as the week unwinds, I may place relatively greater emphasis on dividend paying stocks and give greater consideration to monthly contracts, in order to lock into option premiums for a longer period in the event that 2012 is the order of the day.

This week’s selections seem to have more healthcare stocks than usual. I know that healthcare may have already run its course as it was a market leader through the first 4 months of 2012, but some individual names haven’t been to the party or have recently fallen on hard times.

Amgen (AMGN) didn’t react terribly well following its recent earnings report, having fallen 6%. That’s not to say that it hadn’t enjoyed a nice gain in 2013. However, it does offer an attractive short term option premium, despite also being ex-dividend this week. That’s a combination that I like, especially when I still remain somewhat defensive in considering opening new positions.

Eli Lilly (LLY) is also trading ex-dividend this coming week. It has under-performed the S&P 500 this year, but still, a 10% gain YTD isn’t a bad four months of work. It has fallen about 7% since reporting its most recent quarter’s earnings.

Merck (MRK) isn’t joining the ex-dividend parade this week, but will do so during the June 2013 option cycle for those a little more long term oriented than I typically tend to be. However, during a period of having repositioned myself defensively, the longer term options have utility and can provide a better price cushion in the event of adverse market moves.

I’ve owned shares of Conoco Phillips (COP) only once since the spin-off of its refinery arm, Phillips 66 (PSX). It used to be a very regular part of my portfolio prior to that occasion. The parent certainly hasn’t fared as well as the child in the 15 months since Phillips 66 has traded as a public company. The 80% difference in return is glaring. But like so many stocks, I think Phillips 66 isn’t priced for a new purchase, while Conoco Phillips represents some opportunity. Additionally, though not yet announced, there should be a dividend forthcoming in the next week or two.

I don’t recall why I didn’t purchase shares of Marathon Oil (MRO) last week after a discussion of its merits, but it probably had to do with the limited buying I was doing across the board. It reported earnings last week, perhaps that was a risk factor that didn’t have commensurate reward in the option premiums offered. But this week, with that risk removed, it goes ex-dividend and the consideration begins anew.

Although I already own shares of JP Morgan, I would consider adding to that position. Regardless of what your opinion is on the issue of separating the roles of Chairman and CEO, there’s not too much disagreement that Jamie Dimon will forever be remembered as one of the supporting pillars during and in the immediate aftermath of our financial meltdown. The recent spate of diversions has kept JP Morgan from keeping pace with the S&P 500 during 2013, but I believe it is capable of cutting that gap.

Autodesk (ADSK) reports earnings this week and is down about 4% from its recent high. I often like to consider earnings trades on shares that are already down somewhat, however, shares are up quite a bit in the past 3 weeks. While the options market was implying about a 6% move upon earnings, anything less than a 7% move downward could offer a 1.1% option premium for the week’s exposure to risk.

Salesforce.com (CRM) is another of those rare companies that haven’t kept up with market lately. That’s been especially true since its recent stock split. Although it does offer a an attractive weekly premium, the challenge may lie the possibility that shares are not assigned as the May 2013 option cycle ends, because earnings are reported during the first week of the June 2013 cycle. Barring a large downward move prior to earnings, there would certainly be ample time to re-position with another weekly or even monthly option contract prior to earning’s release.

To round off my over-exposure to the technology sector, I may consider either adding more shares of Cisco (CSCO) or selling puts in advance of this week’s earning’s report. I’ve added shares in each of three successive weeks and don’t believe that Cisco’s earnings will reflect some of the woes expressed by Oracle (ORCL). My only personal concern is related to the issue of diversification, but for the moment, technology may be the sector in which to throw caution to the wind.

US Steel (X) has been one of those stocks that I’m not terribly happy about, although that really only pertains to the current lot that I hold. Along with pretty much everything in the metals complex, US Steel hasn’t fared very well the past few months. However, I think that I am ready for a resurgence in the sector and am hoping that the sector agrees with me, or at least continues to show some strength as it has this past week.

Finally, despite having owned Facebook (FB) since the IPO and currently owning two individual lots, priced at $29 and $27.17, it remains one of my favorite new stocks. Not because I can count on it going to $30, but because I can count on it staying in a reasonable pricing neighborhood and becoming a recurrent stream of option income.

Traditional Stocks: Cisco, Conoco Phillips, Merck, Salesforce.com

Momentum Stocks: Facebook, US Steel

Double Dip Dividend: Amgen (ex-div 5/14), Eli Lilly (ex-div 5/14), Marathon Oil (ex-div 5/14)

Premiums Enhanced by Earnings: Autodesk (5/16 PM)

Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.