There probably aren’t too many people willing to admit they remember The Osmond’s song “(Just Like A) Yo-Yo.”
The really cool people would look at you with some disdain, as the only thing that could have possibly made the yo-yo tolerable to mention in any conversation was if it was somehow in connection to the song of that title by “The Kinks.”
With her dovish words just the prior week, Janet Yellen set off another round of market ups and downs that have taken us nowhere, other than to wonder who or what we should believe and then how to behave in response.
That’s been the case all through 2016, as another week of ups and downs have left the S&P 500 just 0.2% higher year to date. Of course, that’s within a 17 month context in which the S&P 500 has had no net movement, but has certainly had lots of ups and lots of downs.
Reminds me of something.
For those that do recall happier times with a yo-yo in hand, you may recall “the sleeper.”
“The Sleeper” was deceiving.
There was lots of energy involved in the phenomenon, but not so obviously apparent, unlike the clear ups and downs of the standard yo-yo move.
Both, though, ended up going nowhere.
“The Sleeper,” though, was quick to respond to a catalyst and return back to the regular pattern of ups and downs or whatever other tricks a yo-yo master could summon.
For now, the market catalyst continues to be oil, as it again demonstrated this week with some large moves in both directions, continuing to trade in magnitude without any obvious regard to fundamentals.
Like “The Sleeper,” markets have snapped in response to oil and even with some recent hints that oil’s hold may be lessening, stocks haven’t been able to break free.
For anyone who ever had a yo-yo string snap, breaking free isn’t necessarily a good thing, especially if stocks decide to finally break free as oil finally decides to break higher.
While oil still is in control, increasingly, however, we may be seeing the very words of Janet Yellen and the other members of the Federal Reserve act as catalysts. There may be some increasingly divergent views regarding diagnosis and plan of action and less reticence to express those views.
That reminds me of what happened to so many great bands as the individual members sought their own creative paths.
I doubt that Janet Yellen ever purported to be cool. It’s equally unlikely that any of her recent predecessors believed themselves to be so, even as many consider them akin to Rock Gods. As Janet Yellen continues to sport the early 60s “mop-top,” reminiscent of the Fab Four, the belief may have some merit.
For those who do believe that the Federal Reserve Chairman are Rock Gods, they were rewarded this week when their own “Fab Four,” Ben Bernanke, Alan Greenspan, Janet Yellen and Paul Volcker assembled for a round table discussion of the economy.
No great pronouncements came from that historic meeting, as it was unlikely that any of her predecessors would weigh in too much in a manner that could have been considered as a challenge to Yellen’s path.
Still, the market may have used some of Yellen’s comments from that Thursday evening to propel itself strongly higher at Friday’s open, also helped out by oil once again reversing course.
But just as Yellen laid out some confidence, albeit in a non-threatening way, about the FOMC being able to initiate additional interest rate increases in 2016, came word the following morning that the Atlanta Federal Reserve was lowering its GDP forecast.
Understandably, markets may have some difficulty taking such diverging pieces of information and making sense of things.
Where that leaves us is maybe looking toward what has historically mattered.
Earnings.
This week begins another earnings season. After 4 successive quarters of disappointment we’re all primed for some good corporate earnings news.
Top line growth would be especially nice, even if comparative EPS data may not reflect quite as much artificial growth from stock buybacks during the past quarter.
Still, while we wait for Federal Reserve officials to get on a similar page, any signs from corporate earnings that the consumer is again getting involved could be the catalyst that we’ve been long awaiting.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I haven’t opened any new positions in the past 2 weeks as even with continuing price declines I haven’t found a sense of comfort or confidence to part with even a small bit of cash reserves.
With earnings season starting this week, I generally like to see the tone being set by the financial sector, even though their strong showing doesn’t necessarily reflect on the direction of the rest of the market. A poor showing, however, often does.
That financial sector has been battered of late as interest rates remain inconceivably low.
I’m hopeful that expectations are so low that when the big names do report over the next 2 weeks there may be some upside surprise.
However, I’m not willing to place any money on that hope.
Instead, this week I’m more intrigued by some retail names that retreated last week after a period of strength.
Among those are Best Buy (BBY), Coach (COH) and Abercrombie and Fitch (ANF).
If you believe that the consumer is coming back and you’re more inclined to be comforted by Janet Yellen than by the Atlanta Federal Reserve, then retail may be the first place to look.
With those recent losses, I may be more welcome to the notion of considering any of those positions through the sale of put contracts, rather than buy/writes.
While all have good dividends, none are in the immediate future, so that’s one less factor in the equation. With the exception of Coach, which reports earnings at the end of April, the others have an additional month before their own days of reckoning.
Coach, a one time favorite of mine, had long been a consistent performer. That’s not to say that it wasn’t unpredictable when earnings were at hand, but it could reliably be expected to revert to its mean after a large run higher or plunge lower.
That hasn’t been the case for the past few years, although more recently as Coach has been re-emerging from the shadow cast by Michael Kors (KORS) and others, it has started behaving more like the Coach of years past.
You can’t discount the impact of new leadership and strategic direction and Coach has become a far more proactive company and far less likely to take the consumer for granted.
I have a nearly 2 year old position in Coach that has been awaiting that reversion to the mean and have only owned shares on two other occasions in the past 2 years.
With a weekly put premium offering a 1% ROI even if shares fall by 1.2%, based on Friday’s closing prices, and the liquidity offered by the market for Coach puts, I find some soft leathery comfort in considering the sale of those puts and the ability to roll them over in the event of an adverse price movement in the near term.
If faced with that possibility, I would be mindful of the upcoming earnings on April 26, 2016 and if faced with again having to roll the puts over in an effort to avoid assignment of shares, I would look at bypassing the April 29, 2016 options and perhaps considering the following or even a later week and possibly with a lower strike price, as well.
In so many ways Best Buy is the same as Coach.
It too was being written off as irrelevant in the giant shadow of Amazon (AMZN), yet it’s amazing what new leadership and direction can do.
I own a nearly one year old position in Best Buy, and like Coach, have opened and closed 2 new positions since then.
The risk – reward proposition of selling puts in Best Buy isn’t as attractive as it may be for Coach, however, without the immediate challenge of an earnings announcement, there may be some opportunity for serial rollover in the event of an adverse price movement.
The one caveat is that there isn’t very much price support until 28.50, even as shares are down about 12% during the course of the past 4 weeks.
Finally, there was probably a time when if you had ever admitted to either listening to The Osmonds or ever playing with a yo-yo, you would have been banned from any Abercrombie and Fitch store for life.
Being too cool to make some people with discretionary spending power feel disenfranchised from entering your stores was probably not the best of strategic initiatives, but under new leadership a kinder and less smug Abercrombie and Fitch has arrived.
Here too, I have an 18 month old open position, but have had the good opportunity of opening and closing 6 positions since then to help ease the pain just a tiny bit.
With an almost 10% drop in the past week. the risk – reward proposition allows for a 1.2% ROI with the sale of a weekly put option, even if shares fall by 2.1% on the week.
As with the other potential choices for the week, there is some reasonable liquidity in the option market in the event that there is a need for a rollover of the short put position in an effort to escape assignment.
Whether rolling over calls or puts on a serial basis on stocks with high volatility, the net result can be very satisfying, even when the potential angst of unexpected and sudden price movements are factored into the equation.
Sometimes those ups and downs can be your best friend.
Traditional Stocks: none
Momentum Stocks: Abercrombie and Fitch, Best Buy, Coach
Double-Dip Dividend: None
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.
