There are so many ways to look at most things.
Take a runaway train, for example.
The very idea of a “runaway train” probably evokes some thoughts of a disaster about to happen.
Following this past week’s 3.1% gain in the S&P 500, adding to the nearly 4.3% gain since the election result that most everyone thought to be improbable, the market may be taking on some characteristics of a runaway train.
But I don’t really think too much about the inevitable crash that ensues when the train does leave the tracks.
As every physics fan knows, the real challenge behind a runaway train is getting all of that momentum under control.
I don’t think about that, either, though.
What I do think about is trying to understand how to look at momentum.
Momentum, of course, is simply the product of the object’s mass and its velocity.
Mass, of course is nothing more than the force exerted by that object divided by its acceleration.
Acceleration, of course is nothing more than the derivative of an object’s velocity.
So, I like to look at momentum as an expression of the product of an object’s force and its velocity, while at the same time dividing by rate of change in that velocity.
In other words, depending upon how you look at things makes all the difference in the world.
You can look at things in their most elemental form or you can make things unnecessarily complicated and not find yourself anywhere closer to anything, other than confusion.
That runaway train could be a metaphor for the stock market we are all going to wake up to on Monday. Its momentum either makes it unstoppable or it has to come up against some awfully strong counter force to get it to stop.
This coming week marks the final FOMC meeting for 2016 and if anyone believes that it will be the force to stop the runaway train, then they haven’t been paying attention to the indifference of investors clamoring to get aboard that train.
That indifference may very well be what helps stocks do what they do so well when consistently hitting new highs.
Momentum takes them even higher.
The real difference though is that while some people do think about jumping off from a runaway train as their best chance for survival, unlike the stock market, you don’t find too many people trying to jump onto that runaway train.
No one fears missing out as the momentum grows and grows and the crash to come gets more and more frightening.
While those of us looking at events unfolding in real time, it’s hard not to refer to what we’ve been seeing over the past month as anything other than the “Trump Rally.”
In the history books, though, when looking at the stock market’s performance during the term of a Presidency, the “Trump Rally” accrues to the credit of the current sitting President.
That is precisely how it will be perceived at some point when the President-Elect is no longer able to remind the world of how he moved the market, unless a living hologram is erected in the National Mall instead of a Trump Presidential Library.
By the same token, the economy can be very much like a runaway train when it comes to the forces necessary to change its momentum. Sometimes, the force that’s necessary may be nothing more than the passage of time. Sometimes a President gets credit or may get the blame for the actions taken by his predecessor that just took time to play out, for good or for bad.
At the moment, for Presidents serving 8 years, Barack Obama is second only to Bill Clinton in terms of the market’s performance, but timing can be everything, as the “tech bubble” was the force to stop the Clinton years’ momentum, much to the dismay of George W. Bush, who inherited the ennui that set in and who many years later set into stage the inflection point in unemployment that started less than a month have his successor took office.
The last 8 years haven’t exactly been a story of momentum, but no sooner does the new President take office and we will be at the beginning of the first earnings season of 2017 when expectations are finally for broadly based improvements in earnings.
Guess who will take the credit?
Timing is everything, but who cares who gets the credit, as long as that train has lots of room and a long, long track ahead?
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
As we head toward a 10% gain since the election, the S&P 500 is now up a respectable 10.5% on the year.
History, of course, will ignore the intervening details, but it may very well turn out to be a year where the first and last 7 weeks really mattered and everything in-between was pretty much unnecessary.
That makes this year similar to most professional basketball games, except that in basketball the first 2 minutes don’t count either; only the final two do.
That Trump Rally, though, does make it more difficult to look for where do put idle funds.
I am actually at my highest cash level in some time and even as I am reasonably optimistic about what the coming quarter has to offer, I do like having cash available as more and more positions are being assigned away from me and replenishing cash reserves.
This week I’m not too excited about the prospects of parting with any of that cash and for the first time in what seems like an eternity, I won’t be thinking about any kind of new position in Marathon Oil (MRO), unless there is a strong reversal in the price of crude oil.
That doesn’t seem likely in the immediate time frame, but as more and more of those oil rigs do come on board, the runaway train will be the lure of increasing prices on supply and we all know what happens when supply outstrips demand.
It still will take more than a Netflix (NFLX), Amazon (AMZN) and Facebook (FB) led economy and stock market to increase demand for all of that extra oil that will come to market to take advantage of pricing.
No one seems to be taking advantage of pricing at Gap (GPS), based on the last couple of years.
It seems that it hasn’t had a single good monthly sales report in ages and has really had nothing good to report as its relevancy just erodes.
But as I look at its chart, Im actually encouraged by its recent 10% decline and it is beginning to appear to me as if it has found a real support level.
That level has me interested in opening a position, especially as shares go ex-dividend in just a few weeks.
The greatest difficulty that I have with this position is deciding whether to categorize it as a “Traditional” or “Momentum” stock.
Ultimately, I think this is just a traditional kind of stock that has just had a run of either really bad luck or really bad management and really bad strategies to go along with really bad merchandise.
That sounds like an endorsement to me.
Now, if you’re really looking for a “Momentum” kind of stock, look no further than Cliffs Natural Resources (CLF).
If you haven’t noticed metal commodities are alive right now.
The trend has been higher, but there can still be some explosive lower moves and as with any momentum, you just never know when that opposition force is about to arrive.
This is a position that I would definitely first enter with the sale of out of the money put options.
In the event of an adverse price movement, and you certainly have to be prepared for one, or two, there is enough liquidity to allow rollover.,
In the event of an adverse move or two or three, there could be reason to then consider using a longer time frame for the rollover in an effort to wait out the reversal and at least get a little bit of premium in exchange for some of your stomach lining.
Finally, you rarely get a real gift from a casino that you haven’t paid for in literal or figurative spades. But this past week’s news about some heavy handed measures to limit ATM withdrawals in Macau sent shares of Las Vegas Sands into a freefall.
Almost like a runaway train.
Las Vegas Sands’ share price has made up a lot of ground lately, so the week’s sharp reaction to the Macau news may be an opportunity for those that believe human beings with a need to gamble will figure out a way to gamble.
While they’re likely well on their way to figuring out how to circumvent attempts to limit their losses, or their gains, depending on your cynicism and perspective, shares are ex-dividend on the following week’s first day of trading.
I always like considering those opportunities where even an early assignment can be appealing. In those cases, the idea is to sell an in the money call and utilize a longer dated option expiration.
With some far more expensive shares of Las Vegas Sands already in my portfolio, I have been grateful for the continued dividend and the option premiums that have put somewhat of a brake on the freefall that its shares do occasionally experience.
Traditional Stocks: Gap, Inc.
Momentum Stocks: Cliffs Natural Resources
Double-Dip Dividend: Las Vegas Sands (12/19 $0.72)
Premiums Enhanced by Earnings: none
Remember, these are just guidelines for the coming week. The above selections may become actionable – most often coupling a share purchase with call option sales or the sale of covered put contracts – in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week, with reduction of trading risk.
It’s hard to say what really came as more of a surprise.
