For anyone who is capable of remembering the sentiment that pervaded markets less than 3 weeks ago, the continuing shattering of stock market records day after day has to come as a surprise.
For those that had the conviction of their opinions, and there were some very prominent people expecting a sell-off in the event of a Trump victory, you have to wonder whether it was worse to miss out on the rally or worse to have been so wrong while in the public eye.
As that watchful eye looked at the DJIA, S&P 500, NASDAQ 100 and Russell 2000, all ended the week closing at their all time highs.
Do you remember what happened when the FBI announced that they were looking into some emails discovered on a laptop owned by one of Hillary Clinton’s top aides? Do you then remember what happened when the all clear was then given just days ahead of the election?
The conventional wisdom was that the uncertainty associated with the unpredictability of a Trump Administration was the antithesis to what the stock market needed to move higher.
That conventional wisdom was certainly reflected in the stock market’s exaggerated movements.
Do you remember the worldwide overnight plunges when it appeared as if Donald Trump would emerge victorious?
And then a funny thing happened.
After a quick 500 point gain in the DJIA when all of those earlier convictions were thrown out the window, the market has just had a slow and steady climb higher.
Nothing spectacular over the past 10 trading days, but it reminds me a little of the 1991-1996 period for no other reason than the move was steady, but only spectacular in its totality.
Obviously, 10 days isn’t the sort of thing that trends are made of, but there is ample reason to believe that as we do hit more and more new highs we are at the beginning of a pronounced move even higher.
Unfortunately, there’s also ample experience to suggest that new highs beget second thoughts that lead to profit taking.
Sometimes those second thoughts are pronounced and sometimes those second thoughts lead to third and fourth thoughts and continued assaults on those new highs until the original scenario of even higher new highs finally becomes reality.
As we await next week’s GDP and Employment Situation Report, it will take a really significant surprise to move the FOMC off from the path they were ordained to take a full year ago, but could then never find quite the right footing.
But once they do find the right footing in just a few weeks, and it now seems that the market has fully accepted the inevitable’s arrival, we may have a period of a market driven by old fashioned fundamentals.
With earnings season just about over and without the dourness that had accompanied reports over the past few years, there’s an optimism that may be well warranted.
Higher employment, higher wages, continuing low oil prices and now growing corporate profits and you have the right mix for 2017
Add to that a newly found optimism with what a Trump administration may hold for the financial health of American businesses and for better or worse, fundamentals may be for the better.
Of course, that’s the conventional wisdom.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I’ve been looking for an entry back into the Blackstone Group (BX) for quite some time. One of the impediments to doing so has been the unease regarding the highly volatile dividend, whose yield kept getting more and more distanced from sanity.
That yield is still high, but no longer insane.
WHat may be a substantive issue is what the impact of a rising rate environment may have on firms such as Blackstone, that have greatly benefited from the leverage possible with exceedingly low rates.
While an increasing interest rate environment is less conducive to profitable deals, I believe that the year long wait for an interest rate increase has already burdened Blackstone shares in the anticipation.
The certainty of an increase, even if followed by further increases with similar levels of certainty, may be far more conducive to investor confidence than the past year has been.
In the meantime, Blackstone shares offer the trifecta of the possibility of continued capital appreciation, an attractive option premium and a very generous dividend.
Cisco (CSCO) recently reported earnings and topped earnings expectations, but it didn’t join the optimistic guidance party and subsequently fell about 5%.
That decline brought Cisco shares in line with the performance of the S&P 500 for 2016 and may leave it as one of a handful of quality companies not participating in the post-election rally.
AQS a result it may present as another triple threat, as does Blackstone Group.
I think that there is opportunity for capital gains on shares, as well as a reasonable call option premium. WHile its dividend isn’t as enticing as that of Blackstone Group, it’s attractive enough to consider.
In this case, I’m most likely to think in terms of a buy/write with an expiration date shortly after the ex-dividend date, which is expected sometime in early January.
Finally, I thought this was going to be the week that I finally stopped thinking about establishing another position in Marathon Oil (MRO).
It had been my go to position, either as a buy/write or increasingly as a short put sale for the past 7 months. I had been hoping to open a new position this past week after closing 2 other positions the week prior, but it started to break out of the range that had worked so well for me.
That is until the close of trading last week when shares fell by about 3%.
That still left Marathon Oil shares at a level higher than I would want to enter into a new position, but may put me at a crossroads between deciding that the trade is over or that it can still continue, albeit at higher levels.
For now, I would prefer to see another decline similar to the 3% that ended the week before committing new funds, but might still consider doing so in the latter part of the week if share price hovers around $16.
In the event of a sharp decline, my inclination would be to enter into a position with the sale of put options.
Whether engaging in a buy/write or selling calls, due to the volatility enhanced premiums, there may even be reason to consider rolling over the short options even in face of assignment of calls or expiration of puts.
For me, Marathon Oil has been a position worth trying to keep open and engaging in serial rollovers for as long as possible. Doing so is sometimes as simple as doing a calculation looking at the ROI that may be received even in the face of a particular level of decline in the share price.
I often like seeing situations that I can still receive a 1% ROI for a weekly position in the face of a 3% decline in shares, in the case of short calls, for example.
Just like it feels great to be right when the conventional wisdom is wrong, it also feels great to be able to turn a profit when your stock actually goes down in value, without having to find yourself mingling with those who sell stocks short.
Not that there’s anything wrong with them or the conventional wisdom.
Traditional Stocks: Blackstone Group, Cisco
Momentum Stocks: Marathon Oil
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.
