Aug302013

Weekend Update – September 1, 2013

Weekend Update

Behind every “old wives’ tale” there has to be a kernel of truth. That’s part of the basis for it being handed down from one generation to the next.

While I don’t necessarily believe that the souls of dead children reside in toads or frogs, who knows? The Pets.com sock puppet was real enough for people to believe in it for a while. No one got hurt holding onto that belief.

The old saw “Sell in May and go away,” has its origins in a simpler time. Back when The Catskills were the Hamptons and international crises didn’t occur in regular doses. There wasn’t much reason to leave your money in the stock market and watch its value predictably erode under the hot summer sun back in the old days.

Lately, some of those old wives’ tales have lost their luster, but the Summer of 2013 has been pretty much like the old days. With only a bare minimum of economic news and that part of the world that could impact upon our stock market taking a summer break, it has been an idyllic kind of season. In fact, with the market essentially flat from Memorial Day to Labor Day it was an ideal time to sell covered options.

So you would think that Syria could have at least waited just another week until the official end to the summer season, before releasing chemical weapons on its own citizens and crossing that “red line,” that apparently has meaning other than when sunburn begins and ends.

Or does it?

On Monday, Secretary of State John Kerry made it clear where the United States believed that blame lay. He used a kind of passion and emotion that was completely absent during his own Presidential campaign. Had he found that tone back in 2004 he might be among that small cadre of “President Emeritus” members today. On Friday he did more of the same and sought to remove uncertainty from the equation.

Strangely, while Kerry’s initial words and intent earlier in the week seemed to have been very clear, the market, which so often snaps to judgment and had been in abeyance awaiting his delayed presentation, didn’t know what to do for nearly 15 minutes. In fact, there was a slightly positive reaction at first and then someone realized the potentially market adverse meaning of armed intervention.

Finally, someone came to the realization that any form of warfare may not be a market positive. Although selling only lasted a single day, attempts to rally the markets subsequently all faded into the close as a variant on another old saying – “don’t stay long going into the weekend,” seemed to be at play.

That’s especially true during a long weekend and then even more true if it’s a long weekend filled with uncertainty. As it becomes less clear what our response will be, paradoxically that uncertainty has led to some calm. But at some point you can be assured that there will be a chorus of those questioning President Obama’s judgment and subsequent actions and wondering “what would Steve Jobs have done.”

John Kerry helped to somewhat answer that question on Friday afternoon and the market ultimately settled on interpreting the message as being calming, even though the message implied forceful action. What was clear in watching the tape is that algorithms were not in agreement over the meaning of the word “heinous.”

With the market having largely gone higher for the past 20 months the old saying seeking to protect against uncertainty during market closures has been largely ignored during that time.

But now with uncertainty back in the air and the summer season having come to its expected end, it is back to business as usual.

That means that fundamentals, such as the way in which earnings have ruled the market this past summer take a back seat to “events du jour” and the avalanche of economic reports whose relevance is often measured in nano-seconds and readily supplanted by the next bit of information to have its embargo lifted.

This coming week is one of great uncertainty. I made fewer than the usual number of trades last week and if i was the kind that would be prone to expressing regret over some of them, I would do so. I expect to be even more cautious this week, unless there is meaningful clarity introduced into the equation. While wishing for business as usual, that may not be enough for it to become reality.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and , Momentum categories, with no suitable “PEE” selections this week (see details).

While I currently own more expensive shares of Caterpillar (CAT), I almost always feel as if it’s a good time to add shares. Caterpillar has become everyone’s favorite stock to disparage, reaching its peak with famed short seller Jim Chanos’ presentation at the “Delivering Alpha Conference” a few weeks ago. as long as it continues trading in a $80-$90 range it is a wonderful stock for a covered call writing strategy and it has reliably stayed in that range.

Joy Global (JOY) reported its earnings last week and beat analysts estimates and reaffirmed its 2014 guidance. Nonetheless it was brutalized in the aftermath. Although already owning shares I took the opportunity to sell weekly put options in the belief that the reaction was well overdone.

If the reports of an improving Chinese economy are to be believed, and that may be a real test of faith, then Joy Global stands to do well. Like Caterpillar, it has traded in a reasonably narrow range and is especially attractive in the $48-53 neighborhood.

eBay (EBAY) is simply on sale, closing the week just below the $50 level. With no news to detract from its share price and having traded very well in the $50 -53 range, it’s hard to justify why it fell along with other stocks in the uncertainty that attended the concerns over Syria. It’s certainly hard to draw a straight line from Syria related fears to diminished earnings at eBay.

By the recent measure that I have been using, that is the comparison to the S&P 500 performance since May 21, 2013, the market top that preceded a small post-Ben Bernanke induced correction, eBay has well underperformed the index and may be relatively immune from short term market pressure.

Baxter International (BAX) is one of those stocks that I like to own and am sad to see get assigned away from me. Every job has its negative side and while most of the time I’m happy seeing shares assigned, sometimes when it takes too long for them to return to a reasonable price, I get forlorn. In this case, timing is very serendipitous, because Baxter has fallen in price and goes ex-dividend this week.

Coach (COH) also goes ex-dividend this week and that increases its appeal. At a time when retail has been sending very mixed messages, and at a time when Coach’s position at the luxury end is being questioned as Michael Kors (KORS) is everyone’s new darling, COach is yet another example of a stock that trades very well in a specific range and has been very well suited to covered option portfolios.

In general, I’ve picked the wrong year to be bullish on metals and some of my patience is beginning to wear thin, but I’ve been seeing signs of some stability recently, although once again, the risk of putting too much faith into a Chinese recovery may carry a steep price. BHP Billiton (BHP) is the behemoth that all others bow to and may soon receive the same kind of fear and respect from the potash industry, as it is a prime reason the cartel has lost some of its integrity. BHP Billiton also goes ex-dividend this week and is now about 6% below its recent price spurt higher.

Seagate Technology (STX) isn’t necessarily for the faint of heart. but it is down nearly 20% from its recent high, at a time when there is re-affirmation that the personal computer won’t be disappearing anytime soon. While many of the stocks on my radar screen this week have demonstrated strength within trading ranges, Seagate can’t necessarily lay claim to the same ability and you do have to be mindful of paroxysms of movement which could take shares down to the $32 level.

While Seagate Technology may offer the thrills that some people need and the reward that some people want, Walgreen (WAG) may be a happy compromise. A low beta stock with an option premium that is rewarding enough for most. Although Walgreen has only slightly under-performed the S&P 500 since May 21st, I think it’s a good choice now, given potential immunity from the specific extrinsic issues at hand, particularly if you are under-invested in the healthcare sector.

Another area in which I’m under-invested is in the Finance sector. While it hasn’t under-performed the S&P 500 recently, Bank of New York Mellon (BK) is still about 7% lower in the past 5 weeks and offers a little less of a thrill in ownership than some of my other favorites, JP Morgan Chase (JPM) and Morgan Stanley (MS). Sometimes, it’s alright giving up on the thrills, particularly in return for a competitive option premium and the ability to sleep a bit sounder at night.

Finally, with the excitement about Steve Ballmer finally leaving Microsoft (MSFT) after what seems like an eternity of such calls, the share price has simply returned to a more inviting re-entry levels. In fact, when Ballmer announced his decision to leave the CEO position in 12 months, I did something that I rarely do. I bought back my call options at a loss and then sold shares at the enhanced share price. Occasionally you see a shares appreciation outstrip the appreciation in the in the money premium and opportunities are created to take advantage of the excitement not being reflected in future price expectations.

At the post-Ballmer excitement stage there is still reason to consider share ownership, including the anticipation of another dividend increase and option premiums while awaiting assignment of shares

Traditional Stocks: Bank of New York Mellon, Caterpillar, eBay, Microsoft, Walgreen

Momentum Stocks: Joy Global, Seagate Technology

Double Dip Dividend: Baxter International (ex-div 9/4), BHP Billiton (ex-div 9/4), Coach (ex-div 9/5)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

Aug92013

Weekend Update – August 11, 2013

Weekend Update

I like to end each week taking a look at the upcoming week’s economic calendar just to have an idea of what kind of curveballs may come along. It’s a fairly low value added activity as once you know what is in store for the coming week the best you can do is guess about data releases and then further guess about market reactions.

Just like the professionals.

That’s an even less productive endeavor in August and this summer we don’t even have much in the way of extrinsic factors, such as a European banking crisis to keep us occupied in our guessing. In all, there have been very few catalysts and distractions of late, hearkening back to more simple times when basic rules actually ruled.

In the vacuum that is August you might believe that markets would be inclined to respond to good old fundamentals as histrionics takes a vacation. Traditionally, that would mean that earnings take center stage and that the reverse psychology kind of thinking that attempts to interpret good news as bad and bad news as good also takes a break.

Based upon this most recent earnings season it’s hard to say that the market has fully embraced traditional drivers, however. While analysts are mixed in their overall assessment of earnings and their quality, what is clear is that earnings don’t appear to be reflective of an improving economy, despite official economic data that may be suggesting that is our direction.

That, of course, might lead you to believe that discordant earnings would put price pressure on a market that has seemingly been defying gravity.

Other than a brief and shallow three day drop this week and a very quickly corrected drop in May, the market has been incredibly resistant to broadly interpreting earnings related news negatively, although individual stocks may bear the burden of disappointing earnings, especially after steep runs higher.

But who knows, maybe Friday’s sell off, which itself is counter to the typical Friday pattern of late is a return to rational thought processes.

Despite mounting pessimism in the wake of what was being treated as an unprecedented three days lower, the market was able to find catalysts, albeit of questionable veracity, on Thursday.

First, news of better than expected economic growth in China was just the thing to reverse course on the fourth day. For me, whose 2013 thesis was predicated on better than expected Chinese growth resulting from new political leadership’s need to placate an increasingly restive and entitled society, that kind of news was long overdue, but nowhere near enough to erase some punishing declines in the likes of Cliffs Natural Resources (CLF).

That catalyst lasted for all of an hour.

The real surprising catalyst at 11:56 AM was news that JC Penney (JCP) was on the verge of bringing legendary retail maven Allen Questrom back home at the urging of a newly vocal Bill Ackman. The market, which had gone negative and was sinking lower turned around coincident with that news. Bill Ackman helped to raise share price by being Bill Ackman.

Strange catalyst, but it is August, after all. In a world where sharks can fall out of the sky why couldn’t JC Penney exert its influence, especially as we’re told how volatile markets can be in a light volume environment? Of course that bump only lasted about a day as shares went down because Bill Ackman acted like Bill Ackman.The ensuing dysfunction evident on Friday and price reversal in shares was, perhaps coincidentally mirrored in the overall market, as there really was no other news to account for any movement of stature.

With earnings season nearly done and most high profile companies having reported, there’s very little ahead, just more light volume days. As a covered option investor if I could script a market my preference would actually be for precisely the kind of market we have recently been seeing. The lack of commitment in either direction or the meandering around a narrow range is absolutely ideal, especially utilizing short term contracts. That kind of market present throughout 2011 and for a large part of 2012 has largely been missing this year and sorely missed. Beyond that, a drop on Fridays makes bargains potentially available on Mondays when cash from assigned positions is available.

As usual, the week’s potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum, with no “PEE” selections this week. (see details).

For an extended period I’ve been attempting to select new positions that were soon to go ex-dividend as a means to increase income, offset lower option premiums and reduce risk, while waiting for a market decline that has never arrived.

This week, I’m more focused on the two selections that are going ex-dividend this coming week, but may have gotten away after large price rises on Thursday.

Both Cliffs Natural Resources and Microsoft (MSFT) were beneficiaries of Chinese related news. In Cliffs Natural’s case it was simply the perception that better economic news from China would translate into the need for iron ore. In Microsoft’s case is was the introduction of Microsoft Office 365 in China. Unfortunately, both stocks advanced mightily on the news, but any pullback prior to the ex-dividend dates would encourage me to add shares, even in highly volatile Cliffs, with which I have suffered since the dividend was slashed.

A bit more reliable in terms of dividend payments are Walgreens (WAG), Chevron (CVX) and Phillips 66 (PSX).

Although I do like Walgreens, I’ve only owned it infrequently. However, since beginning to offer weekly options I look more frequently to the possibility of adding shares. Despite being near its high, the prospect of a short term trade in a sector that has been middling over the past week, with a return amplified by a dividend payment, is appealing.

Despite being near the limit of the amount of exposure that I would ordinarily want in the Energy Sector, both Chevron and Phillips 66 offer good option premiums and dividends. The recent weakness in big oil makes me gravitate toward one of its members, Chevron, however, if forced to choose between just one to add to my portfolio, I prefer Phillips 66 due to its greater volatility and enhanced premiums. I currently own Phillips 66 shares but have them covered with September call contracts. In the event that I add shares I would likely elect weekly hedge contracts.

If there is some validity to the idea that the Chinese economy still has some life left in it, Joy Global (JOY), which is currently trading near the bottom of its range offers an opportunity to thrive along with the economy. Although the sector has been relatively battered compared to the overall market, option premiums and dividends have helped to close that gap and I believe that the sector is beginning to resemble a compressed spring. On a day when Deere (DE) received a downgrade and Caterpillar was unable to extend its gain from the previous day, Joy Global moved strongly higher on Friday in an otherwise weak market.

Oracle (ORCL) is one of the few remaining to have yet reported its earnings and there will be lots of anticipation and perhaps frayed nerves in advanced for next month’s report, which occurs the day prior to expiration of the September 2013 contract.

You probably don’t need the arrows in the graph above to know when those past two earnings reports occurred. Based Larry Ellison’s reaction and finger pointing the performance issues were unique to Oracle and one could reasonably expect that internal changes have been made and in place long enough to show their mark.

Fastenal (FAST) is just a great reflection of what is really going on in the economy, as it supplies all of those little things that go into big things. Without passing judgment on which direction the economy is heading, Fastenal has recently seemed to established a lower boundary on its trading range after having reported some disappointing earnings and guidance. Trading within a defined range makes it a very good candidate to consider for a covered option strategy

What’s a week without another concern about legal proceedings or an SEC investigation into the antics over at JP Morgan Chase (JPM)? While John Gotti may have been known as the “Teflon Don,” eventually after enough was thrown at him some things began to stick. I don’t know if the same fate will befall Jamie Dimon, but he has certainly had a well challenged Teflon shell. Certainly one never knows to what degree stock price will be adversely impacted, but I look at the most recent challenge as just an opportunity to purchase shares for short term ownership at a lower price than would have been available without any legal overhangs.

Morgan Stanley (MS), while trading near its multi-year high and said to have greater European exposure than other US banks, continues to move forward, periodically successfully testing its price support.

With any price weakness in JP Morgan or Morgan Stanley to open the week I would be inclined to add both, as I’ve been woefully under-invested in the Finance sector recently.

While retailers, especially teen retailers had a rough week last week, Footlocker (FL) has been a steady performer over the past year. A downgrade by Goldman Sachs (GS) on Friday was all the impetus I needed and actually purchased shares on Friday, jumping the gun a bit.

Using the lens of a covered option seller a narrow range can be far more rewarding than the typical swings seen among so many stocks that lead to evaporation of paper gains and too many instances of buying high and selling low. Some pricing pressure was placed on shares as its new CEO was rumored a potential candidate for the CEO at JC Penney. However, as that soap opera heats up, with the board re-affirming its support of their one time CEO and now interim CEO, I suspect that after still being in limbo over poaching Martha Stewart products, JC Penney will not likely further go where it’s unwelcome.

Finally, Mosaic (MOS) had a good week after having plunged the prior week, caught up in the news that the potash cartel was falling apart. Estimates that potash prices may fall by 25% caused an immediate price drop that offered opportunity as basically the fear generated was based on supposition and convenient disregard for existing contracts and the potential for more rationale explorations of self-interest that would best be found by keeping the cartel intact.

The price drop in Mosaic was reminiscent of that seen by McGraw Hill FInancial (MHFI) when it was announced that it was the target of government legal proceedings for its role in the housing crisis through its bond ratings. The drop was precipitous, but the climb back wonderfully steady.

I subsequently had Mosaic shares assigned in the past two weeks, but continue to hold far more expensively priced shares. I believe that the initial reaction was so over-blown that even with this past week’s move higher there is still more ahead, or at least some price stability, making covered options a good way to generate return and in my case help to whittle down paper losses on the older positions while awaiting some return to normalcy.

Traditional Stocks: Fastenal, Footlocker, JP Morgan, Morgan Stanley, Oracle

Momentum Stocks: Joy Global, Mosaic

Double Dip Dividend: Chevron (ex-div 8/15), Phillips 66 (ex-div 8/14), Walgreen (ex-div 8/16)

Premiums Enhanced by Earnings: none

Remember, these are just guidelines for the coming week. The above selections may be 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 over-riding objective is to create a healthy income stream for the week with reduction of trading risk.

 

 

May312013

Weekend Update – June 2, 2013

Daily Market Update

Who’s wagging who?

Anytime a major market goes down 7% it has to get your attention, but what seemed to set Japan off? Maybe it was just coincidental that earlier in the day across an ocean, the United States markets had just finished a trading session that was marked by a “Key Reversal,” ostensibly in response to some nuanced wording or interpretation of Federal Reserve Chairman Ben Bernanke’s words in testimony to a congressional committee.

The very next day we showed recovery, but since then it’s been an alternating current of ups and downs, with triple digit moves back in fashion. Intra-day reversals, as in their May 22, 2013 “Key Reversal” extreme have been commonplace in the past week after a long absence

Whether there is any historical correlation, direct or inverse between gold and our markets, gold has been experiencing the same kind of alternating gyrations and actually started really wagging a day before simple words got the better of our markets.

In the meantime, Japan clearly was the last to wag, but buried in the chart is the fact that in the after hours the Nikkei has had significant reversals of the day’s trading and it appears that our own markets have then taken their cues from the Nikkei futures.

 

 

 

It may have all started with a daily price fix in London and then it may have been fired up with mere words, but then having gone across the Pacific, it has all come back to our shores with great regularity and indecision.

For me, that is painting an increasing tenuous market and it has shown in individual stocks.

 

As a covered option seller, I do like alternating moves around a mean. I don’t really care what’s causing a stock to wag back and forth. In fact, doing so is an ideal situation, but more so when the moves aren’t too great and the time frames are short. Certainly the most recent activity has been occurring within short time frames, but the moves may presage something more calamitous or perhaps more fortuitous.

It’s hard to know which and it’s hard to be prepared for both.

Toward those ends I continue to have a sizeable cash position and continue to favor the sale of monthly contracts, but it can’t be all passive, otherwise there’s the risk of letting the world pass you by, so I continue to look for new investing opportunities, although I’ve been executing fewer weekly new positions than it generally takes to make me happy.

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

I’ve been a fan of Dow Chemical (DOW) for a long time. It’s performance over the past year is a great example of how little a stock’s price has to change in order to derive great profit through the sale of call options and collecting dividends. It is one of those examples of how small, but regular movements round the mean can be a great friend to an investor. While I prefer assignment of my shares over rolling contracts over to the next time period, in this case, Dow Chemical goes ex-dividend at the very beginning of the July 2013 option cycle, thereby adding to the attraction.

I recently sold puts on Intuit (INTU) minutes before earnings were released, having waffled much the way our markets are doing, up until the last minute before the closing bell. Having had two precipitous falls in the weeks before earnings, there wasn’t much bad news left to digest and I was able to buy back puts the following morning, as shares went higher. June isn’t always a kind month to shares of Intuit, but it isn’t consistently a negative period. I think it has still enough stored bad will credit to offer it some stability this June.

Transocean (RIG) is just another of those stocks that’s part of the soap operas created when Carl Icahn puts a company in his cross-hairs. Having just re-initiated the dividend, Transocean has done an incredible job of maintaining value during the period when it ceased dividends and was still subject to lots of liability related to the Deepwater Horizon incident.

There’s nothing terribly exciting about Weyerhauser (WY). I currently own higher priced shares that have withstood the surprisingly low lumber futures thanks to a recent dividend and option premiums. As there is increasing evidence that the economy is growing there’s not too much reason to fear a continued slide in asset value.

Joy Global (JOY) reported earnings last week and I didn’t go along with last week’s suggestion that it would be a good earnings related trade, having also gone ex-divided. Although earnings weren’t stellar, some of the news from Joy Global was and indicated growth ahead, not just for its own operations, but in mining sectors and the economy. Shares seem to have been holding very well at the $55 level

Riverbed Technology (RVBD) is always on my mind for either a purchase or sale of puts in anticipation of a purchase at a lower price. Unfortunately, I don’t always listen to my mind, sometimes forgetting that Riverbed Technology has been a consistent champion of the covered call strategy over a five year period and was highlighted in one of the first articles I wrote for Seeking Alpha, which includes a delightful picture at the end of the article.

Coach (COH) is another of my perennial holdings, however, it was most recently lost to assignment at a substantially lower price, following good earnings. Despite the higher price, it is in the range that I originally initiated purchases and also goes ex-dividend this week. What gives it additional appeal is that now weekly options are available for sale.

Baxter International (BAX) also goes ex-dividend this week and like so many in the health care sector has performed very nicely this year. It recently responded very well to the adverse news related to one of its drugs in the United Kingdom and otherwise has very little putting it a great risk for adverse news. Being currently under-invested in the healthcare sector I’d like to add something to the portfolio and Baxter seems to have low risk at a time that I’m increasingly risk adverse.

Coca Cola Enterprises (CCE) is a stock that I have never owned, despite having considered doing so ever since its IPO, which was more years ago than I care to divulge. It is down approximately 5% from its recent high and appears to have support about $2 lower than its current price. I think that it can withstand any tumult in the overall market with its option premium and dividend offering some degree of comfort in the event of a downturn.

Although, I currently own shares of Williams Companies (WMB) and am uncertain as to whether I will add shares, as I’m over-invested in the energy sector and may favor Transocean to Williams. However, it too, offers a dividend this week and shares seem to be very comfortable at t its current level, which is about 7% lower than its April 2013 high point.

Finally, the lone earnings related trade of the week is Navistar (NAV), now back from the pink sheet dead. Mindful that its last earnings report saw a 50% rise in share price, you can’t completely dismiss a similar move to the downside in the event of a disappointment in earnings or guidance. However, recent reports from Caterpillar (CAT), Cummins Engine (CMI), Joy Global and others suggests that there won’t be horrible news, although you can never predict how the market will react or what other factors may drag an innocent company along for a ride. In Navistar’s case, the weekly futures imply about a 7% move. In the meantime, the sale of a put at a strike price 10% below the current price could provide a 1% ROI. NAy more than that loss and you should be prepared to add Navistar shares to your portfolio and hopefully you’ll enjoy the ride.

Traditional Stocks: Dow Chemical, Intuit, Transocean, Weyerhauser

Momentum Stocks: Joy Global, Riverbed Technology

Double Dip Dividend: Baxter International (ex-div 6/5), Coach (ex-div 6/5), Coca Cola Enterprises (ex-div 6/5), Williams Companies (ex-div 6/5)

Premiums Enhanced by Earnings: Navistar (6/6 AM)

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.

May262013

Weekend Update – May 26, 2013

Weekend Update

That was the crash, dummy.

“I’ll know it when I see it,” is a common refrain when you’re at a loss for just the right descriptors or just can’t quite define what it is that should be obvious to everyone.

While there are definitions for what constitutes a recession, for example, an individual may have a very good sense of personally being in one before anyone else recognizes or confirms its existence.

Certainly there’s also a distinction between a depression and a recession, but it’s not really necessary to know the details, because you’ll probably know when you’ve transitioned from one to another.

The same is probably true when thinking about the difference between a market crash and a market correction. While people may not agree on a standard definition of what constitutes either, a look at your own portfolio balance can be all the definition that you need.

I’ve been waiting, even hoping for a correction for over two months now. That hoping came to a crescendo as a covered option writer with the expiration of many May 2013 contracts and finding more cash than I would have liked faced with the aspects of either being re-invested at a top or sitting idly.

Then came Federal Reserve Chairman Ben Bernanke’s congressional testimony and the mixed signals people perceived. Was it tapering or not tapering? Was it now or later?

What came as a result was what some called a “Key Reversal Day.” That is a day when the market reaches new highs and then suddenly reverses to go even lower than the previous day’s low. It’s thought that the greater the range of movement and the greater the trading volume the more reliable of an indicator is the reversal,

On both counts the aftermath of the reaction to Bernanke’s words, or as the “Bond King” Bill Gross of PIMCO called “talking out of both sides of his mouth” was significant.

Was that the beginning of the long over-due correction? After all we are now in the 52nd month of the current bull run, which has been the duration of the past two.

With news that the Japanese market lost more than 7% overnight following our own key reversal day was the sense that the correction may take on crash-like qualities, but instead our own markets almost had another key reversal day, but this time in the other direction. After an early 150 point drop and subsequent recovery all that was missing was to have exceeded the previous day’s high point.

Correction? Crash? That was so yesterday. It’s time to move on, dummy

While hopeful that some kind of correction might bring some meaningful opportunities to pick up some bargains, the correction was too shallow and the correction to the correction was too quick.

So this week is more of the same. Nearly 50% cash and no place to go other than to be mindful of a great 1995 article by Herb Greenberg that has some very timeless investing advice in the event of a crash, having drawn upon some Warren Buffett, Bob Stovall and Jeremy Siegel wisdom.

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

Already owning shares of both Deere (DE) and Caterpillar (CAT), as I often do, a frequent companion is their more volatile counter-part, Joy Global (JOY). Always sensitive to news regarding the Chinese economy, Joy Global reports earnings this week, as well, which certainly adds to its risk profile. Most recently the news coming out of China has pointed toward slowing growth, although historically the Chinese data have demonstrated as much ability to contradict themselves longitudinally as the US data. I believe bad news is already incorporated into the current prices of the heavy machinery sector and all three of these companies are trading within a long established price range that provides me some level of comfort, even in a declining market. For that reason, I may also add shares of Deere, particularly if it approaches $85.

Morgan Stanley (MS) has gone along the uphill ride with the rest of the financial sector in recent weeks. It was among the many stocks whose shares I lost to assignment at the end of the May 2013 cycle, but it too, has been a constant portfolio companion. It tends to have greater European exposure than its US competitors, but for the time being it appears as if much of the European drama is abating. Over the past year it’s shares have traded in a wide range but has shown great resilience when the price has been challenged and has offered very attractive premiums to help during the periods of challenge.

Unlike the prior week, this past week wasn’t very good for the retailers. WIth earnings now past, one of the elite, JW Nordstrom (JWN) goes ex-dividend this week. While it still has downside room, even after a 3% earnings related drop along with the rest of the more “high end” oriented retailer sector, it will likely out-perform other lesser retailers in the event of a market pause.

Also in the higher end range, Michael Kors (KORS) has been one of my recent favorites, although I must admit I didn’t see the reason for the excitement on a retail level during a recent early morning trip to the mall. No matter, I’m not in their demographic. What I do know is that their shares move with great ease in either direction, other reversing course during the trading session and it offers an appealing option premium. That premium is a bit more enhanced as it reports earnings this week and I may look to establish a position after having shares also assigned recently.

I approach any purchases in the Technology sector with some concern for being over-invested in such shares. Although Cypress Semiconductor (CY) is now trading 10% higher from where I had shares recently assigned on two previous occasions it continues to offer a reasonably attractive options premium and trades in a stable price range.

Lexmark (LXK) is now well above the strike price that I had shares recently assigned. It’s appeal is enhanced by being ex-dividend this week and the knowledge that it appears to have gotten beyond the initial shock that this “printer maker” was getting out of the “Printer maker” business. Thus far, it appears as if the transition to a more content management and solutions oriented company is proceeding smoothly.

Also going ex-dividend this week is one of the little known, but largest owner of television stations around the nation. Sinclair Broadcasting (SBGI). It may be in position to pick up a rare gem as an ABC station in Washington, DC is rumored to be available for purchase. While it has appreciated significantly in the past two months, it’s shares are down approximately 7% from recent highs.

Not that I would suggest lighting up one of their products while watching a fine situation comedy being broadcast by SInclair, but Lorillard (LO), which assuages some of its health related guilt by offering a rich dividend, does go ex-dividend this week. It too, has been trading higher of late, but is down just a bit from its recent high.

Finally, Salesforce.com (CRM) reported earnings after this past Thursday’s (May 23, 2013) closing bell. The market assessed an 8% penalty for its disappointing numbers, but that should just be a minor bump in their road and not likely a deep pothole. Unfortunately, I didn’t execute the earnings related put sale trade last week as I thought I might, which would have returned 1% even in the face on an 8% drop in share price, but this week brings new opportunity, only on the share purchase and option sale side.

In fact, I was so convinced by the previous paragraph that I sent out that Trading Alert on Friday rather than waiting for Tuesday.



Traditional Stocks: Cypress Semiconductor, Deere, Morgan Stanley, Salesforce.com

Momentum Stocks: none

Double Dip Dividend: JW Nordstrom (ex-div 5/29), Lexmark (ex-div 5/29), Lorillard (ex-div 5/29), Sinclair Broadcasting ex-div 5/29)

Premiums Enhanced by Earnings: Joy Global (5/30 AM), Michael Kors (5/29 AM)

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.

 

Apr282013

Weekend Update – April 28, 2013

Weekend Update

Schadenfreude suits me just fine.

Is it really “schadefreude” when you don’t really know or see the people upon whom misfortune has been heaped?

For those that aren’t familiar with the word, “schadenfreude” is the strangely good feeling that some people derive when others fail or are subject to misfortune.

In Talmudic teaching the highest form of charity is when neither the donor nor the recipient are aware of one another’s identity. Complete ignorance raises the act of charity to a higher level.

Of course, we will never be able to answer the question of whether there is really a sound produced when a tree falls in the forest and there is no one present to lay witness. A single degree of separation can completely call into question that which seems patently obvious. Ignorance of an event can be is as if it doesn’t even exist.

Being a covered option seller, I do take some perverse pleasure and satisfaction when the market goes lower, even though I know that the vast majority of investors, especially the individual investor, fares well only when the markets are moving higher.

When I sell longer term call options, such as the monthly variety, I just love seeing the share price exceed my strike level early during the term of the contract, only to watch those gains dissipate as the term nears its end, especially if the end returns right to the strike price.

Somewhere, I just know that someone is asking themselves why they didn’t take their profits when they had the chance.

That’s pretty bad, right? But I never see that person. I’m not really certain that they even exist, except for the fact that I was once that person. To a large degree I believe that I was deeply ignorant back in those days with regard to the discipline of securing profits. These days I’ve simply added ignorance to the fortunes of those on the other end of trades to the list of things unknowable. Additionally, not knowing who they are is the highest form of ignorance.

As this past week was one that I immensely enjoyed and briefly put away my short term pessimism in order to trade at levels that reflect a more bullish tone, I’m now on the fence as to whether the bullish feeling can be sustained given what the past may be revealing.

After hitting market peaks 2 weeks ago and then alternatively going from the worst week of 2013 to one of the best weeks of 2013, I continue to believe that we are replicating the first 5 months of 2012.

So while I’m very happy with the higher tract that stocks took this past week, I’m especially happy to see assignments take place and have the cash settle in my account, to hold or to invest, as the market reveals itself.

Although I would much rather be fully invested, I really do want to see give backs of many gains at this point. Having a sizeable portion in cash and evolving from the use of weekly contracts to monthly ones, or even the occasional June 2013 cycle, makes it easy to make that wish.

If history is a guide, the last correction we experienced lasted just one month and then was completely recovered 2 months after it ended.

I can live with that, at least while cash is on the sidelines. If it happens, and assuming that it’s within tolerable levels, such as 10%, I’ll be reasonably happy, but not in a schadenfreude kind of way, although that kind of admission would certainly get me much more attention. Everyone notices the misanthropic guy and wishing that stock prices retreat may be the highest form of misanthrope, especially if it disproportionately impacts widows and orphans.

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, as in previous weeks there is a greater emphasis on stocks that offer monthly contracts only, eschewing the usual preference for the relatively higher ROI of weekly options for the guarantee of premiums for a longer period in order to ride out any turbulence. Additionally, as with the previous week, we are at the height of earnings season and thus far there have been some surprises, perhaps offering more opportunity to sell well out of the money puts prior to earnings.

I really can’t recall the last time I owned shares of ExxonMobil (XOM). Although it is one of the shares that I consistently follow, it rarely has piqued my short term interest. That may be changing a bit as I look at its upcoming and increased dividend. At a time that I’m expecting to be on the precipice of a market decline that is technically driven, rather than fundamentally, I would be more inclined to limit new investments to more defensive stocks that are likely to outperform a falling market during a period of economic stability or growth.

Although Apple (AAPL) was a potential earnings related trade last week, I ultimately waited for earnings and instead purchased shares the next day. Those were assigned, but if shares open the week near the $410 level, I am interested in establishing a new position and using an out of the money monthly contract in order to have an opportunity to also secure the newly increased dividend. I believe that Apple will out-perform the market in the near term and will offer trading opportunities in addition to appealing option premiums.

With last week’s selection Cisco (CSCO) among those assigned, Oracle (ORCL) also one of last week’s potential picks went unrequited. It also under-performed Cisco as some of the networking companies were depressed following Broadcom’s (BRCM) earnings. I’ll be looking to Oracle as a potential purchase this week as well, as the technology sector may be showing some signs of catching up to the overall market with Microsoft (MSFT) and Intel (INTC) showing strength.

As news related to the Chinese economy seems to wag our own stock market, the heavy machinery titans have been slammed back and forth as what is called “news” is so often re-interpreted or presented in different lights that create an alternation between good economic news and bad economic news on a near daily basis. Very often the sector moves in unison even when the exposure to China is limited. While Joy Global (JOY) has significant exposure, PACCAR (PCAR)certainly has less so. Both have recovered a bit this past week as have Caterpillar (CAT) and Deere (DE). ALl, however, continue to trail the S&P 500 in 2013.

Petrobras (PBR) suspended its regular dividend payment in 2012. I’m somewhat embarrassed to still be holding shares priced in the $19-20 range, purchased just before a slew of bad news. Having held onto shares even as they sank as much as almost 25%, it has been clawing its way back. Among the positive signs are the recent announcement of two special dividends. With the hope for some stability in its share price after bad news regarding pricing and production issues have now been digested, it may be time to restart accumulating shares.

Last week playing earnings related trades was a very timely strategy. I don’t know if the pleasant surprises will continue, but I think there may again be some very reasonable risk-reward propositions available, as long as you don’t mind the possibility of owning shares after it’s all said and done.

Among those reporting is Facebook (FB), which despite having received an IPO allocation and currently owning shares at various price points, has become one of my favorite stocks. The existence of extended weekly options opens up many more opportunities to generate option premiums and mitigate the potential impact of sudden adverse moves in share price. At Friday’s closing price, a weekly put sale at a strike price 12.5% below the close could return a 0.7% ROI. For those more adventurous, a strike price only 9% lower could yield a 1.4% return.

Pfizer (PFE) reports earnings this week and fits into the profile that appeals to me the most when considering an earnings related trade. This past week it sustained a large price drop, which is usually the signal that clears me to sell puts on shares. However, in this case, I more likely to consider an outright purchase on shares, not only for some capital appreciation and option premium income, but also in order to capture the May 8, 2013 dividend payment.

Humana (HUM) has been on a true rollercoaster ride. As often happens with health care stocks the various interpretations of how changing legislation or pricing structure may impact share price sends the shares in irrational and alternating directions. With earnings approaching and shares down almost 10% from its 2 week ago high, it represents a potentially acceptable risk-reward offer. If it falls less than another7% the ROI is approximately 1%. That, however, is for the time remaining on a monthly contract, which makes it a little less appealing to me, but still under consideration.

Finally, I’m not certain how much longer the world needs an independent Open Table (OPEN) but it has the kind of pricing volatility at the time of earnings release to make it worth considering a purchase of shares and the sale of deep in the money calls or simply a sale of deep out of the money puts.

Traditional Stocks: ExxonMobil, Oracle, Paccar, Pfizer

Momentum Stocks: Apple, Joy Global

Double Dip Dividend: Petrobras (ex-div 4/30)

Premiums Enhanced by Earnings: Facebook (5/1 PM), Humana (5/1 AM), Open Table (5/2 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.