Following the past week, it should be pretty easy to know what to do when the experts chime in and compete for your attention.
You run as far and as fast as your feet can possibly take you.
It will be fascinating to walk into a physician’s waiting room about 6 months from now and pick up some seven and eight month old copies of the news magazines sprinkled around the various end tables.
I’ve always enjoyed reading those aged articles just to get a snicker over how wrong the futurists and the experts consistently demonstrate themselves to be.
Most of the time, I don’t even have an appointment or any need. I just go to do the reading and then leave when someone finally asks “Sir, have you been helped?”
From the 99% probability of a Clinton victory in the Presidential election, as put forward by the Princeton Election Consortium, or the less sanguine 60-70% probability put forward by competitor fivethirtyeight, no one of any credibility got it right.
My guess is that if these elections predictions were written by stock analysts, the probability of a Clinton victory would have been reduced to 30% the day after the election, just as price targets and ratings are so often changed after stock moving news has already done its work.
By the same token, no one of any merit guessed that the market would rally after a Trump victory.
Following the sharp declines that were very highly correlated with news of a potential second shoe to drop with the Clinton emails and then the highly correlated surge when it was revealed that there was no second shoe, everyone became an expert waiting to chime in.
I know I was, but I don’t usually need any reason nor correlation.
Clinton was headed for an easy victory and the market would at least not follow a Trump victory path into correction.
Just when everything seemed to obvious, Clinton didn’t win and the market didn’t succumb.
Unless of course new closing highs are your definition of having succumbed.
For those playing around in the futures pit or in foreign exchanges and then prone to panic or with tight trading rules, the market did succumb long enough to prove someone’s point.
The reality is everyone got everything wrong.
Not only did Trump come out victorious, but the market was in full celebratory mode, even as interest rates rocketed higher and the only indicator that has had any value in 2016, the price of West Texas Intermediate crude oil, fizzled.
With the election out of the way, the only other story that may remain for the stock market is whether the FOMC will finally raise interest rates in 2016.
For the most part, the free markets did the FOMC’s work for it as the 10 Year Treasury Note ended the week at 2.11%, having had an extraordinary 11% climb on a single day.
While it was all good this past week, unless of course you were a Clinton supporter, especially one leaving or short the market, I’m going to have a tough time predicting what comes next, even as retailers did their best to pit a positive spin on what awaits going into the holiday season and 2017.
That’s because of the really wide dichotomy seen this week as the S&P 500 managed its 3.8% gain, while the DJIA was 5.33% higher.
Either of those were enough to make most people happy and could just as easily be a stepping off point for even more highs or could represent a slippery slope.
Common sense may have told you that the split, if it was going to materialize, should have started as soon as sentiment began to change on Wednesday, as the DJIA made a nearly 1100 point reversal from the low point in the futures to its closing level.
It waited a full day, however, but once it did the relative performance, by sector, was fascinating, as it drew a clear distinction between the America that was perceived as existing under Clinton and the America that is now being perceived to exist under Trump.
Those perceptions are not much different from predictions of what will come to be and as we all know, predictions have a funny way of turning out.
I’m not going to run far and fast this coming week, but I am going to be wary, even as I’m thankful for so many people having been so wrong about where the markets were going to head.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
After such increases as seen last week, it’s a little difficult to want to part with cash, unless you are of the belief that once a market high is broken, it’s only a short matter of time until the ascension continues.
I’m of the mind that some of the advances seen last week, particularly in those sectors that helped to create the dichotomy, are going to be short lived.
Once we all come to the realization that even had Hillary Clinton won the Presidential election, every President still has to put on their pant suit one leg at a time.
Casting the rhetoric aside, the harshest of the campaign and its promises are not as likely to become reality overnight, as rhetoric meats reality.
I’m not one to sell specific equities short, but if there ever felt like a right time to do so it could be in the coming week and weeks.
I’ll leave that decision to others that are far more bold than I am, however.
I think that last Friday’s trading, may otherwise be where we may find ourselves for the rest of the market, as we await some kind of a decision from the FOMC and then our own reaction to what now seems so certain.
Among the positions that I may be interested in this week is Best Buy (BBY).
It reports earnings this week and even as it closed 4% lower this past Friday, it is only 5% lower than its 52 week high. It’s downgrade a week before earnings may be a case of an analyst not waiting until the horse has left the gate and I do believe that there is some serious downside risk, if using charts as your measure.
That’s because of the significant gap higher just a few months ago that took shares about 22% higher after earnings were announced. That was far higher than the option market had been predicting.
This time, the option market is predicting an almost 10% price move, but Best Buy, over the past few years has shown that it could easily surprise those price predictions.
I’m not willing to get in front of earnings, but in the event that Best Buy disappoints on earnings and guidance and does take a marked move lower, I would be interested in either selling puts or considering a covered call position, once the upcoming ex-dividend date is announced.
In the event that I do sell puts, I would still be mindful of that ex-dividend date and would consider taking assignment, if in a position to do so, rather than attempting to keep the short put position open by rolling it over to a future date.
The dividend is worth capturing and would be even more so, in the event of a significant price decline.
You probably could have predicted with some degree of certainty that this would be another week of considering Marathon Oil (MRO).
This will, however, be another week that I won’t be following my own suggestion, because I already own my limit of 3 individual lots of shares or short puts.
Had I not done the unusual last week, I would be able to follow my own recommendation.
Last week, I decided to rollover a $14.50 short put position to keep it alive and to continue generating revenue, rather than allowing it to expire.
I did so because of the continuing risk-reward proposition, even as Marathon Oil’s price will decline by $0.05 on Monday, as it goes ex-dividend.
What prompted the decision was the realization that shares could fall an additional 3% before being faced with assignment, in exchange for an additional 1.3% ROI for the week.
For me, that has been the recurring proposition for much of 2016 and while Marathon Oil is sitting near the upper end of where I might want to establish any kind of a position, I would again embrace the chance to sell puts on the shares in the event of a decline, even if only 2-3%.
One thing that has been predictable this year has been Marathon Oil’s resilience within its trading range and the ease in which the position can be managed even in the event of a large adverse price movement.
While the shares have gone virtually nowhere in the past year, it has had enough movement in absolute terms to have made it a spectacular covered option choice and until a breakout to the upside, I suspect it will continue to be a reliable performer.
Finally, given the risky nature of the other selections this week, I actually struggled with whether to consider Microsoft (MSFT) this week.
As it sits within about 3% of its all time high, the shares are ex-dividend this week and the option premiums are fairly generous, perhaps expecting some benefit accruing from a Trump Presidency.
Some of that speculation revolves around proposed tax changes that could benefit Microsoft. Whether it’s a decrease in the corporate tax rate or a tax amnesty on profits held overseas, there may be some significant benefit to Microsoft in the event of changes to the tax code.
Where Microsoft differed from some others thought to be at future advantage, such as the pharmaceutical industry, it went lower, rather than helping to create that DJIA – S&P 500 dichotomy.
It’s somnolence last week is potentially appealing, even at its already high levels, as I will have a difficult time in the coming week trusting anything that I might believe or hear.
Traditional Stocks: none
Momentum Stocks: Marathon Oil
Double-Dip Dividend: Microsoft (11/15 $0.39)
Premiums Enhanced by Earnings: Best Buy (11/17 AM)
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.
Some days we really have no clue as to what made the market move as it did, but nothing bothers us more than not knowing the reasons for everything.
