Jan92014

Daily Market Update – Close

Daily Market Update

 

  

(see all trades this option cycle)

 

Daily Market Update – January 9, 2014 (Close)

Much has been said of the ability for January to predict the entire year’s stock market.

In fact, taking it even further, there are those who believe that the first 5 trading days actually have great predictive capacity for determining the outlook for the entire year.

Today marks the 6th trading day of 2014, so it must be time to make some conclusions.

An interesting article takes a statisticians’s view of the topic and is somewhat better than the more superficial mentions of how January may impact the remainder of the year. Unfortunately, this short and undated article appears to be about 10 years old and hasn’t considered the past tumultuous trading period, but still offers some meaningful insights. I’ve tried contacting the author to see if he has an update and will share the information, if he does respond.

However, I can tell you that his conclusions, when looking at those past years in hindsight, have been well founded.

In a nutshell, he believes that January is an effective predictor for the rest of the year, especially if January is a month that moves higher. What may be more useful, however, is what occurs when January moves lower.

In that case the correlation falls apart. The market could move lower or higher, as opposed to a greater likelihood of only moving higher. The belief expressed in that article was that during such a period moving in and out of stocks was an appropriate strategy.

For me, that’s like music to my ears, especially if the first 5 days.of 2014, which have been similar to the first 5 days of 2011, would result in a repeat of 2011.

That was an odd year, only in that the market ended the year unchanged.

It was a year punctuated by ups and downs in an alternating rhythm. As a result, it was also a year that saw a significant spike in volatility and, therefore, option premiums.

To be fair, the opinion expressed by the author specifically avoided the idea that the first 5 days of the month have any real meaning. He looked at the entire month of January, but taken together with the comments being tossed around about those first 5 days, it at least warrants some attention.

Thus far, the first 5 days haven’t set the world on fire, although the 6th day’s pre-market is pointing mildly higher and although not likely, tomorrow’s Employment Situation Report could create a large move in either direction.

Still, the very thought that a stock picker’s market may be on the horizon, one in which stocks are actually distinguished from one another on the basis of price performance, is a great and overdue situation.

If that is truly on the horizon that would mean less opening of new positions and more rollovers of existing positions, as the increased volatility would offer premiums more worthwhile, even when strike prices are more of a distance from current prices.

That’s not really the situation right now and hasn’t been so for much of 2013.

What’s also very appealing is that when markets do have such alternating currents it tends to be easier to find new positions worthy of purchase. Instead of a market where everything just moves higher imagine a world where there are tides and you can coincide moving in and out of positions with the flow of those tides.

That’s not really a dream, it’s more of a hope for the return of what used to be what we thought were regular markets.

For now my hope is that this negative tone takes a break.

While the market did recover on this 6th day, the retailers, other than Macys, are having a really hard time and that can never be very good. Even Macys owed its good fortune to the way the market reacted to news of widespread layoffs.

That’s certainly not nice or good.

 

 

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 8, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan92014

Daily Market Update

Daily Market Update

 

  

(see all trades this option cycle)

 

Daily Market Update – January 9, 2014 (9:30 AM)

Much has been said of the ability for January to predict the entire year’s stock market.

In fact, taking it even further, there are those who believe that the first 5 trading days actually have great predictive capacity for determining the outlook for the entire year.

Today marks the 6th trading day of 2014, so it must be time to make some conclusions.

An interesting article takes a statisticians’s view of the topic and is somewhat better than the more superficial mentions of how January may impact the remainder of the year. Unfortunately, this short and undated article appears to be about 10 years old and hasn’t considered the past tumultuous trading period, but still offers some meaningful insights. I’ve tried contacting the author to see if he has an update and will share the information, if he does respond.

However, I can tell you that his conclusions, when looking at those past years in hindsight, have been well founded.

In a nutshell, he believes that January is an effective predictor for the rest of the year, especially if January is a month that moves higher. What may be more useful, however, is what occurs when January moves lower.

In that case the correlation falls apart. The market could move lower or higher, as opposed to a greater likelihood of only moving higher. The belief expressed in that article was that during such a period moving in and out of stocks was an appropriate strategy.

For me, that’s like music to my ears, especially if the first 5 days.of 2014, which have been similar to the first 5 days of 2011, would result in a repeat of 2011.

That was an odd year, only in that the market ended the year unchanged.

It was a year punctuated by ups and downs in an alternating rhythm. As a result, it was also a year that saw a significant spike in volatility and, therefore, option premiums.

To be fair, the opinion expressed by the author specifically avoided the idea that the first 5 days of the month have any real meaning. He looked at the entire month of January, but taken together with the comments being tossed around about those first 5 days, it at least warrants some attention.

Thus far, the first 5 days haven’t set the world on fire, although the 6th day’s pre-market is pointing mildly higher and although not likely, tomorrow’s Employment Situation Report could create a large move in either direction.

Still, the very thought that a stock picker’s market may be on the horizon, one in which stocks are actually distinguished from one another on the basis of price performance, is a great and overdue situation.

If that is truly on the horizon that would mean less opening of new positions and more rollovers of existing positions, as the increased volatility would offer premiums more worthwhile, even when strike prices are more of a distance from current prices.

That’s not really the situation right now and hasn’t been so for much of 2013.

What’s also very appealing is that when markets do have such alternating currents it tends to be easier to find new positions worthy of purchase. Instead of a market where everything just moves higher imagine a world where there are tides and you can coincide moving in and out of positions with the flow of those tides.

That’s not really a dream, it’s more of a hope for the return of what used to be what we thought were regular markets.

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 8, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan82014

Daily Market Update – Close

Daily Market Update

 

  

(see all trades this option cycle)

 

Daily Market Update – January 8, 2014 (Close)

This morning’s ADP jobs data ahead of Friday’s Employment Situation Report was a good one. It was the best report in over a year.

Today was also the 5th anniversary of my retirement.”

The correlation between the ADP and Employment Report two isn’t as good as ADP would have had you believe when it started releasing the data a number of years ago, however, it does carry weight, especially at times when the Employment Situation Report, released two days later was deemed important.

If today had been two months ago the response to the ADP statistics would have been negative, as it would have fired worries about the official government report and how that could have given the Federal Reserve reason to begin the taper of their Quantitative Easing.

With the end of the world not having occurred as the FOMC announced the initiation of the taper last month, much of the fear is gone.

Now there’s nothing to get traders worried in the employment numbers.. Mostly because there’s some reasonable assurance that regardless of the official numbers there will be no policy change coming in its near term aftermath.

Not only is the Chairmanship in transition, but it’s too early to increase the taper before there’s been an opportunity to assess its initial implementation. So it’s likely that Friday will be a non-event.

That would be just fine with me, as many positions are set to expire on that date.

What will be an event, at least for individual stocks, is the start of yet another earnings season tomorrow.

If the Federal Reserve has been right about the economy it would be reasonable to start expecting better earnings and that would be expected to lead to some multiple expansion of the market. That means higher prices, as long as you believe in the relationship between price and earnings.

Of course, that assumes that the market hasn’t already been anticipating the expanded multiples associated with an improving economy.

Going forward, I’m inclined to discount the market discount.

I discount the market’s ability to forecast the future much as the market completely discounted today’s FOMC minutes. And in this case, when I say “discounted,” what I mean is “ignored.”

I think that if earnings are actually improving, and the simple act of so many having bought back shares alone, will increase earnings per share, then shares will move higher on the news.

The market had been pointing toward a mildly higher opening but that devolved pretty quickly after the opening bell. It’s really not clear that the drop actually signifies anything, especially in the day after a triple point gain. There are so many swirling and competing theories that try to explain investor behavior in January, especially with regard to tax related behavior, that anything is possible.

I especially think that there’s lots of reason to cash in on big winners now, thereby giving 16 months until the tax bill and ensuring that the paper profits become realized. That’s a damper to markets.

Had 2013 been a typical year or a losing year the dynamic would be entirely different right now with tax related selling in high gear to close out the year and greater buying to start the year.

I’m still of the belief that buying will pick up even though I continue to want to exercise some caution. While at a low level on cash reserves and wanting to see it get replenished at week’s end, I’m anxious to again put that money back to use.

That’s recycling at its best, even better than recycling myself out of “retirement.”

 

 

 

 

 

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 8, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan82014

Daily Market Update

Daily Market Update

 

  

(see all trades this option cycle)

 

Daily Market Update – January 8, 2014 (10:00 AM)

This morning’s ADP jobs data ahead of Friday’s Employment Situation Report was a good one. It was the best report in over a year.

Today is also the 5th anniversary of my retirement.”

The correlation between the ADP and Employment Report two isn’t as good as ADP would have had you believe when it started releasing the data a number of years ago, however, it does carry weight, especially at times when the Employment Situation Report, released two days later was deemed important.

If today had been two months ago the response to the ADP statistics would have been negative, as it would have fired worries about the official government report and how that could have given the Federal Reserve reason to begin the taper of their Quantitative Easing.

With the end of the world not having occurred as the FOMC announced the initiation of the taper last month, much of the fear is gone.

Now there’s nothing to get traders worried in the employment numbers.. Mostly because there’s some reasonable assurance that regardless of the official numbers there will be no policy change coming in its near term aftermath.

Not only is the Chairmanship in transition, but it’s too early to increase the taper before there’s been an opportunity to assess its initial implementation. So it’s likely that Friday will be a non-event.

That would be just fine with me, as many positions are set to expire on that date.

What will be an event, at least for individual stocks, is the start of yet another earnings season tomorrow.

If the Federal Reserve has been right about the economy it would be reasonable to start expecting better earnings and that would be expected to lead to some multiple expansion of the market. That means higher prices, as long as you believe in the relationship between price and earnings.

Of course, that assumes that the market hasn’t already been anticipating the expanded multiples associated with an improving economy.

Going forward, I’m inclined to discount the market discount.

I think that if earnings are actually improving, and the simple act of so many having bought back shares alone, will increase earnings per share, then shares will move higher on the news.

The market had been pointing toward a mildly higher opening but that devolved pretty quickly after the opening bell. It’s really not clear that the drop actually signifies anything, especially in the day after a triple point gain. There are so many swirling and competing theories that try to explain investor behavior in January, especially with regard to tax related behavior, that anything is possible.

I especially think that there’s lots of reason to cash in on big winners now, thereby giving 16 months until the tax bill and ensuring that the paper profits become realized. That’s a damper to markets.

Had 2013 been a typical year or a losing year the dynamic would be entirely different right now with tax related selling in high gear to close out the year and greater buying to start the year.

I’m still of the belief that buying will pick up even though I continue to want to exercise some caution. While at a low level on cash reserves and wanting to see it get replenished at week’s end, I’m anxious to again put that money back to use.

That’s recycling at its best, even better than recycling myself out of “retirement.”

 

 

 

 

 

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 7, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan72014

Daily Market Update – Close

Daily Market Update Comment

 

  

(see all trades this option cycle)

 

Daily Market Update – January 7, 2014 (Close)

Yesterday was an interesting day in the market.

Trading volume was unusually light for the first Monday of the New Year and the early rally disappeared fairly quickly.

What was interesting was how much the thesis that the cold weather was going to impact on walk-in sales at retailers, including grocery stores, Starbucks and others, carried wright throughout the day.

With no other news, in this case, only opinion, that family of stocks felt their own deep freeze yesterday.

Whether the thesis is true or not, and it certainly does make sense, the impact won’t be reported until the next earnings season, which begins in April. The greatest likelihood is that very few are going to remember that thesis when April earnings rolls around and if true, those stocks are likely to suffer again.

Now, if only I would be able to remember that when the time comes.

In the meantime there’s plenty more to think about.

Yesterday evening Janet Yellen was confirmed as the next Chairman of the Federal Reserve.

This Friday is the first release of an Employment Situation Report for 2014 and for which Yellen can play a role in leading the newly configured and hawkish voting membership. Yellen herself doesn’t assume the Chairmanship until February 1, 2014.No doubt that a strong report would bring pressure to increase the size of the taper from its current $10 billion each month. Even though the hawks won’t represent a voting block of sufficient proportion to effect policy, the wording of the FOMC minutes are parsed each month and the market often reacts to sentiment as much as it does to reality.

So we’ll see what Friday brings. With so many positions set to expire on Friday I’m hoping for a non-event or a modest rise higher as it would be nice to get some more cash in hand for greater flexibility going forward.

While waiting there’s still not much reason to go counter to January history.

I’m currently at the lowest cash level in many months and still willing to go down a bit further, perhaps to 20%. That would mean considering an additional two or so new purchases for the week if the opportunities present themselves. But even if not adding many new positions there is still enough upside potential in covered and uncovered positions to take advantage of any modest rally, so I wouldn’t be adverse to that possibility.

It otherwise promises to be a non-event driven week and the low volume may very well continue as even traders get cold when arctic winds blow. The prospects of low volume sometimes introduces opportunism and artificially large moves as big traders in essence are able to manipulate the market, often using the option market as their vehicle.

Those sort of things always seem to correct themselves for the rest of us who may get caught in the vortex as it’s all happening and then just as suddenly see the reversals occurring after the big boys have made their money.

While waiting for a sign to spend more money staying warm sounds like a good strategy right now.

While yesterday was interesting today was even more so, since nothing really happened and the market simply sustained a tripe digit gain all through the session.

While I liked the action the only galling part of the day was seeing the reversal in shares of Verizon, that goes ex-dividend tomorrow, as it went its own way apart from the rest of its tiny sector and made it very unlikely that the dividend will be collected tomorrow. As usual, the galling part was because there was no news to account for the very strong movement in the shares. In all likelihood it was simply strong buying pressure in order to capture the dividend on a day that the market was already climbing higher.

Ultimately, it makes no sense for people to bid up shares in order to capture a dividend that will simply be taken from the share price and taxed, to boot, but everyone likes the idea of getting dividends. even when it simply is a case of moving assets from one bucket to another.

Maybe that’s why I haven’t bought Verizon in years.

So if someone would kindly remind me when April earnings season is about to begin to stay away from today’s cold weather victims, please ralso emind me to also stay away from Verizon.

I’ll probably remember on my own, but it never hurts to have a gentle reminder.

 

 

 

 

 

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 7, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan72014

Daily Market Update

Daily Market Update Comment

 

  

(see all trades this option cycle)

 

Daily Market Update – January 7, 2014 (10 AM)

Yesterday was an interesting day in the market.

Trading volume was unusually light for the first Monday of the New Year and the early rally disappeared fairly quickly.

What was interesting was how much the thesis that the cold weather was going to impact on walk-in sales at retailers, including grocery stores, Starbucks and others, carried wright throughout the day.

With no other news, in this case, only opinion, that family of stocks felt their own deep freeze yesterday.

Whether the thesis is true or not, and it certainly does make sense, the impact won’t be reported until the next earnings season, which begins in April. The greatest likelihood is that very few are going to remember that thesis when April earnings rolls around and if true, those stocks are likely to suffer again.

Now, if only I would be able to remember that when the time comes.

In the meantime there’s plenty more to think about.

Yesterday evening Janet Yellen was confirmed as the next Chairman of the Federal Reserve.

This Friday is the first release of an Employment Situation Report for 2014 and for which Yellen can play a role in leading the newly configured and hawkish voting membership. Yellen herself doesn’t assume the Chairmanship until February 1, 2014.No doubt that a strong report would bring pressure to increase the size of the taper from its current $10 billion each month. Even though the hawks won’t represent a voting block of sufficient proportion to effect policy, the wording of the FOMC minutes are parsed each month and the market often reacts to sentiment as much as it does to reality.

So we’ll see what Friday brings. With so many positions set to expire on Friday I’m hoping for a non-event or a modest rise higher as it would be nice to get some more cash in hand for greater flexibility going forward.

While waiting there’s still not much reason to go counter to January history.

I’m currently at the lowest cash level in many months and still willing to go down a bit further, perhaps to 20%. That would mean considering an additional two or so new purchases for the week if the opportunities present themselves. But even if not adding many new positions there is still enough upside potential in covered and uncovered positions to take advantage of any modest rally, so I wouldn’t be adverse to that possibility.

It otherwise promises to be a non-event driven week and the low volume may very well continue as even traders get cold when arctic winds blow. The prospects of low volume sometimes introduces opportunism and artificially large moves as big traders in essence are able to manipulate the market, often using the option market as their vehicle.

Those sort of things always seem to correct themselves for the rest of us who may get caught in the vortex as it’s all happening and then just as suddenly see the reversals occurring after the big boys have made their money.

While waiting for a sign to spend more money staying warm sounds like a good strategyright now.

 

 

 

 

 

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 6, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan62014

Daily Market Update

Daily Market Update Comment

 

  

(see all trades this option cycle)

 

Daily Market Update – January 6, 2014 (Close)

Last night I went to bed hearing that the Nikkei had fallen 2% and was ready to awaken to the same kind of news regarding the S&P 500 futures.

So much for a January Rally.

Normally I turn on the TV and check Bloomberg for the overnight recap before doing anything else, but this morning, in anticipation of some rocky roads ahead, it was time to make the coffee first. I thought there might be a need for some comfort.

But that didn’t turn out to be the case. The US markets were preparing themselves for a sedate open in a week that will likely see the confirmation of Janet Yellen as the next Federal Reserve Chairman and end with the release of the Employment Situation Report.

While it remains hard to really embrace a bullish attitude I’d be inclined to be bullish if January simply slowly and methodically climbs higher, rather than some years past in which it had spectacular returns that just weren’t borne out throughout the year or that didn’t live up to the January promise of things to come.

Both 2012 and 2013 saw 5% gains in January, ending the years up about 13% and 30%, respectively.

Either of those would be good years when all said and done, but by and large 2012 was flat for the remainder of the year, just as was 2011.

While I continue to look at 2013 as an aberration, I’m not entirely certain that 2014 will be any different. Certainly there will be those prepared to say in hindsight that if earnings do improve and there is a faltering market, or one that isn’t very responsive to those brightened earnings, it was simply a case of the market having discounted an improving economy.

I’ve long given up on the idea that the market and those who spend their lives immersed in it are so smart as to be able to look so convincingly into the future and predicate their actions today on events 6 months from today.

While I do understand the concept of “buy on the rumor and sell on the news,” that is a real time strategy, not one based on some finite portion of my life expectancy.

But the economy, by all measures, is improving. They key is that it isn’t getting red hot, as previous recoveries have seen such periods when all guns were firing, leading to spiking interest rates, which in turn lead to bonds being preferred over stocks.

Stocks are the only game in town and that doesn’t really show any sign of changing right now.

A slowly improving economy is like the somewhat perverted scientific experiment of placing a frog into a very slowly warming pot of water that eventually gets to a boil, except that the outcome is good.

A slowly climbing market, especially one that takes the time to smell the roses, is also one that is more likely to lead to a good outcome.

The past couple of months have actually been like that as the market has taken some time to rest, consolidate and move forward. While I and so many others talk about how healthy a 5 or 10% correction would be, perhaps the most healthy way of going forward is simply to pace oneself.

With many positions set to expire this and next week and not having replenished the cash reserve very much this week, pacing myself is likely the key to this week.

I’d like to see that slow climb continue and lead to lots of assignments, but with prices not having climbed so high as to make the decision regarding adding new positions so difficult.

Ultimately in a flat market or one that slowly climbs higher or lo slowly drops lower, there would be far less need to add new positions and far more opportunity to make rollover trades. Whatever brings in the income or whatever creates a downside cushion is fine, as long as the process goes on and on.

Although I expected each of the last two weeks to be slow trading weeks, they turned out very differently. But this week I’m again expecting a slow trading week and would be surprised if it turned out otherwise.

I’d be content to just let the market show the way and follow its lead this week.

 

 

 

 

 

   

 Access prior Daily Market Updates by clicking here

 OTP Sector Distribution* as of January 6, 2014

 * Assumes equal number of shares in positions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Posting of trades is not a recommendation to execute trades

 

Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

Friday? See Week in Review for summary statistics and performance

Sunday? See Weekend Update for potential stock choices for coming week

Any day? See Performance for open and closed positions

Subscribers may see  ROI statistics  on all new, existing and closed positions on a daily updated basis

 

 

 

 

 

 

 

 

 

 

 

See all Trade Alerts for this monthly option cycle

  
 
   

Jan12014

Daily Market Update

Daily Market Update

  

(see all trades this option cycle)

 

Daily Market Update – January 2, 2014 (Close)

2014 is going to be held to a high standard.

For lots of investors 2013 was one of the best years that they’ll ever see, although there have certainly been better ones.

What there really hasn’t been is such a strong and concerted move that has sent markets up about 150% in less than 5 years.

Can 2014 live up to that standard?

The period from 1995 to 1999, in terms of market performance, may be similar to the current time. Really good years were followed by really good years.

And then the bubble burst.

The comparison may end, though, without including the bursting part, because there really is not dot com craziness pervading the current market. Everything is moving higher and while the market doesn’t seem completely rationale, its mostly because it hasn’t taken a break and not because of frenzied bidding.

For people that trade Momentum stocks, such as Tesla, the idea is to trade and trade until the trade is no longer there. They don’t question the rationality of the price move, they just accept that it’s happening and want to be part of it. They also recognize that at some point the trade will disappear and will usually do so with little warning and in a big way.

At least most recognize that to be the case. The others shouldn’t be investing.

The market may have simply been acting like a Momentum stock for the past 14 months. How much longer it keeps going is anyone’s guess, but it’s hard to not be part of the action, especially if the uniqueness of the product is not what is sending prices higher.

I spent so much of 2013 waiting for a correction I don’t know what it feels like anymore to be an unrepentant bull., bull I am more bullish about 2014 than 2013, simply because of history, despite the fact that this run is getting really long in the tooth.

Interestingly, not that much has been made this year about the historical strength the market sees in January. In the past the years in which everyone seemed to be talking about the guarantee of profits in January the theory just fell apart.

The lack of talk is always a good sign, although the market is getting 2014 off to a lackluster start.

For the covered option buyer the least preferable of all markets is the one that we just finished. While I am more bullish for 2014 than 2013 part of that bullishness is wrapped up in the hope that the market will show more indecision this year and spend more time bobbing up and down.

Those movements create volatility and create many more opportunities to generate income from holdings, while requiring less reliance on discovering new buying opportunities.

With initial weakness to start the morning I plan on watching a bit before considering any more purchases for the week, despite now being more open to adding new positions on Thursdays and Fridays.

As the morning seemed to do nothing but confirm weakness there did appear to be some new opportunities, but caution isn’t a bad idea whenever there is a large move. It’s bad to ever get into a mindset that you’re either going to miss a rally or miss a bargain.

I don’t believe that the selling this morning is reflective of anything other than a little exhaustion and taking profits while deferring tax liability until 2015, so I do expect things to get back on track fairly soon. Anyone of that mindset, looking at a declining market is going to want to lock their profits in before any risk of a slide lower.

While the market never did recover, neither did the selling really grow and the volume was very light, so no real insights were in the making today.

Hopefully tomorrow, with expiration at hand, we’ll have a little bit of a snapback to either get some assignments or at least some rollovers.With plenty of positions already set to expire the next two weeks I may be looking for rollovers using expanded options or even the February monthly contract.

With money in hand and perhaps some relative bargains beginning to appear I’m anxious to get back to work, hoping to make fewer trades, collect more dividends and rollover more positions in 2014.

Oh yeah, and peace on earth, too.

 

 

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Monday through Thursday? See “Daily Market Update” with first edition published by 12 Noon and Closing Update published by 4:30 PM

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Dec312013

Strategic Tax Losses

Daily Market Update Comment

NOTE:  Any strategic tax loss trades must be executed by 4 PM (EST) on Tuesday, December 31, 2013.

This year I will not be making any such trades for the OTP portfolio. However, individuals may want to check their capital gains for the year and see if any strategic sales may offset the tax liability for 2013. The “Strategic Tax Loss” spreadsheet can be used to see what the benefit of a tax related sale is in terms of share price increase necessary to be equivalent to the tax credit specific to your tax bracket.

Dec122013

A Bullish Case Going Forward

Daily Market Update

(A version of this article appeared on TheStreet.com)

The bullish case? I can’t possibly make one, having been expecting a market correction similar to that seen in April 2012 since April of this year. Besides. I’m an inveterate covered option writer and by nature see the pitfalls of every single trade that I make or suggest.

After all, why would you need protection in the form of options if your stock thesis was sound?

After nearly 30 years of marriage my wife recently told me that only about 40% of what I say turns out to actually be correct. If it was only that good when it came to selecting stocks and getting the timing just right. I’d be in the pantheon of the world’s greatest investors instead of world’s greatest husbands.

Conveniently ignoring my track record of premature pessimism, the coming week holds lots of risk for portfolios.

At a time, albeit only for a day or two, that good news was actually interpreted by the market as being good news, it was a little disconcerting that the idea of a budget deal wasn’t greeted with great enthusiasm. In fact, even the architects of the deal seemed to minimize the achievement. Considering that the current Congress would even have a difficult time agreeing on what day to celebrate New Years if it fell on a Monday, one would be excused for thinking a budget deal, well ahead of a deadline was actually monumental.

Suggesting that the market had simply discounted the deal is also convenient, but clearly without basis. Certainly watching Speaker Boehner and Majority Leader Cantor take the opportunity to rail against the Affordable Care Act, when they addressed the nation, fighting yesterday’s war instead of rallying the markets by celebrating a rare accomplishment, wasn’t helpful.

At this point, however, that’s all yesterday’s news and other than painting a picture of a squeamish market, doesn’t offer any forward looking guidance.

Where the immediate risk enters is from the coming week’s release of the FOMC minutes and perhaps more importantly Chairman Ben Bernanke’s press conference that follows.

Having sold many options with an expiration date just two days after the FOMC release, I’m forced to recall two other occasions this year when I was smugly anticipating assignment of many positions and counting the cash, when the market turned on a dime and not in the right way, either.

Just a few days ago there were very few believing that there was any possibility that the dreaded “taper” to Quantitative Easing could begin or be announced in December. That may be why last week’s good Employment Situation Report was greeted as good news, despite the fact it was good news. Without the fear of the taper beginning much sooner rather than later, the market rallied. But remember, that in the previous days the market sputtered as a synthetic version of tapering, the rising yield on 10 Year Treasury Notes showed us what is in store when the real thing hits.

While the outcome of what awaits next week isn’t pre-ordained, I like to know when obstacles are ahead and what lessons can be learned from the past.

I normally spend Wednesday’s scouting out potential new positions for next week’s purchases in anticipation of weekly option assignments and cash flowing into my account. The question is whether it’s time to preserve the cash or simply look for the bullish case that always exists somewhere, although can disappear in an instant.

Since I never look to hit homeruns, the names that I gravitate to for short term plays are only to achieve small returns and are the names so often dismissed by those with traditional mindsets.

No one thumps their chest pounding about a proposed 1% ROI for the week on their recommeed trades.

COH ChartHowever, eBay (EBAY), Coach (COH) and Caterpillar (CAT) gravitate to the top even when the foundation around them may be weakening. Not because they necessarily have good fundamental stories, after all, they have all had their recent share of derision, but because they have been reliable in their mediocrity and have simply traded in a range for an extended period of time.

 That range is precisely what makes them valuable to an option seller. While exercising a traditional buy and hold approach to these would have been an exercise in futility of the past year, a punctuated form of ownership, essentially a serial buy and hold technique, characterized by repeated purchases, writing of calls and assignments could be an exercise in delight, as seen in these returns in eBay, Caterpillar and Coach. The predictability of that range is more reliable than being able to time a rally or decline. The consistency of trading, particularly over the past nine months or so is the sort of thing that dreams are made of, if you have nothing else to dream about.

They may be boring and they may be out of favor among, but sometimes the bullish case is made out of adding together lots of baby cows.

As I look toward the challenge of the coming week and the message sent by today’s market, I take my seemingly eternal pessimism, but am not inclined to shrink back into my shell. Rather, the time seems exceddingly right for small victories shared with old friends

COH data by YCharts

Nov22013

Weekend Update – November 3, 2013

Daily Market Update

Some things are just unappreciated until they’re gone.

If you can remember those heady days of 2007, it seemed as if every day we were hitting new market highs and everyone was talking about it when not busy flipping houses.

Some will make the case that is the perfect example of a bubble about to burst, similar to when a bar of gold bullion appears on the cover of TIME magazine, just in time to mark the end of a bull run.

On the other hand, when everyone is suddenly talking about perhaps currently being in a bubble it may be a good time to plan for even more of a good thing.

That’s emblematic of the confusion swirling in our current markets. Earnings are up. Better than expected by most counts, yet revenues are down. The stock market can do only one thing and so it goes higher.

In case you haven’t been paying attention, 2013 has been a year of hitting record after record. Yet the buzz is absent, although house flipping is back. Not that I go to many social events but not many are talking about how wild the market has been. That’s markedly different from 2007.

Listening to those who purport to know about human behavior and markets, that means that we are not yet in a stock market bubble and as such, the market will only go higher, yet that’s at odds with the rampant bubble speculation that is being promoted in some media.

I’m a little more cynical. I see the paucity of excitement as being reflective of investors who have come to believe that consistently higher markets are an entitlement and have subsequently lost their true value. No one seems to appreciate a new record setting close, anymore. The belief in the right to a growing portfolio is no different from the right to use a calculator on an exam. Along with that right comes the loss of ability and appreciation of that ability.

Without spellchecker, the editors at Seeking Alpha would have a hard time distinguishing me from a third grader, but spelling really isn’t something I need to due. It’s just done for me.

While many were unprepared in 2007 because they were caught up in a bubble, 2013 may be different. In 2007 the feeling was that it could only get better and better, so why exercise caution? But in 2013 the feeling may be that there is nothing unusual going on, so what is there to be cautious about?

AS markets do head higher those heights are increasingly met with ennui instead of wonder and awe. It’s barely been more than five years since we last felt the wrath of an over-extended market but I’m certain that the new daily records will be missed once they’re gone.

As a normally cautious person when it comes to investing, but not terribly willing to sacrifice returns for caution my outlook changes with frequency as new funds find their way into my account after the previous week’s assignment of options I had sold.

This past week I didn’t have as many assignments as I had expected owing to some late price drops on Friday, so I’m not as likely to go on a spending spree this coming week, as I don’t want to dig deeply into my cash reserve. This week I’m inclined to think more in terms of dividend paying stocks and relatively few higher beta names, although opportunity is situational and Monday morning’s opening bell may bring surprise action. I appreciate surprise and for the record, I appreciate every single bit of share appreciation and income that comes my way as a gift from this market.

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

I currently own shares of MetLife (MET) and have done so several times this year. MetLife reported earnings this past week. They reported a nearly $2 billion turnaround in profits, but missed estimates, despite strength in every metric. They re-affirmed that a lower interest rate environment, as might be expected with a continuation of Quantitative Easing, could impact its assets’ performance in the coming year. That was the same news that created a buying opportunity in the previous quarter, so it should not have come as too much of a surprise. What did, however come as a surprise was the announcement that MetLife would no longer be offering earnings per share guidance. According to its CEO “we will instead expand our discussion of key financial metrics and business drivers, creating a more informed view of MetLife’s future prospects.” The price drop and it’s ex-dividend date this week make it a likely candidate for using my limited funds this week.

I’ve long believed that Robert ben Mosche, CEO of AIG (AIG) was something of a saint. Coming out of comfortable retirement in Croatia to attempt an AIG rescue, he continued on his quest even while battling cancer and still found the time to re-pay AIG’s very sizeable debt to US taxpayers. Who needs that sort of thing when you can live like royalty off the Mediterranean coast?

AIG was punished after reporting earnings this past week. It’s hard to say whether the in line earnings, but slightly lower revenue was to blame for the nearly 7% drop or whether joining forces with MetLife was to blame. Not that they literally joined forces, it’s just that ben Mosche announced that AIG will no longer comment on its “aspirational goals,” which was a way of saying that they too were no longer going to provide guidance. I haven’t owned shares in 2 months and that was at a lower price point than even after the large Friday drop, but I think the opportunity has re-arrived.

Wells Fargo (WFC) goes ex-dividend this week and as much as I’ve silently prayed for its share price to drop back to levels that I last owned them, it just hasn’t worked out that way. To a large degree Wells Fargo has stayed above the various banking controversies and has deflected much of the blame and scrutiny accorded others. At some point it becomes clear that prices aren’t likely to drop significantly in the near term, so it may be time to capitulate and get back on the wagon. However, what does give me some solace is that shares have trailed the S&P 500 during the three time frames that I have been recently using, each representing a near term top of the market; May 21, August 2 and September 19, 2013.

In the world of big pharma, Merck (MRK) has shared in little of the price strength seen by some others. In fact, of late, the best Merck has been able to do to prompt its shares higher have all come on the less constructive side of the ledger. Only the announcement of workforce reductions and other cost cutting steps have been viewed positively.

But at some point a value proposition is created which isn’t necessarily tied to pipelines or other factors pertinent to long term price health. In this case, a quick 7% price drop is enough to warrant consideration of a company paying an attractive dividend and offering appealing enough option premiums to sustain interest in shares even if they stagnate while awaiting the next price catalysts. Besides, if you’re selling covered calls, there’s nothing better than share price stagnation.

What is a week without drawing comparisons between Michael Kors (KORS) and Coach (COH)? Coach has become everyone’s favorite company to disparage, although on any given day it may exchange places with Caterpillar. Kors, is of course, the challenger that has displaced Coach in the hearts of investors and shoppers. Having sold Coach puts in advance of earnings and then purchasing shares even after those expired, those were assigned this past week. However, at this price level Coach is still an appealing covered option purchase and well suited for a short term strategy, even if there is validity to the thesis that it is ceding ground to Kors.

Kors, on the other hand, is doing everything right, including entering the S&P 500. It’s hard not to acknowledge its price ascent, even after a large secondary offering. While I know nothing of fashion and have no basis by which to compare Coach and Kors, I do know that as Kors reports earnings this week the option market is implying approximately 7.5% price move in either direction. However, anything less than a 10% decline in price can still deliver a 1% ROI

Williams Companies (WMB) is one of those companies that seems to fly under the radar. Although I’ve owned shares many times there has never been a reason compelling me to do so on the basis of its business fundamentals. Instead, ownership has always been prompted by an upcoming dividend or a sudden price reversal. In this case I just had shares assigned prior to earnings, which initially saw a big spike in price and then an equally large drop, bringing it right back to the level that I have found to be a comfortable entry point.

Riverbed Technology (RVBD) reported earnings last week and I did not purchase additional shares or sell puts, as I thought I might. Too bad, because the company acquitted itself well and shares moved higher. I think that shares are just starting and while RIverbed Technology has probably been my most lucrative trading partner over the years, purely on the basis of option premiums, this time around I am unlikely to write call options on all new shares, as I think $18 is the next stop before year end, particularly if the overall market doesn’t correct.

What can anyone add to the volumes that have been said about Apple (AAPL) and Intel (INTC)? Looking for insights is not a very productive endeavor, as the only new information is likely to currently exist only as insider information. Both are on recent upswings and both have healthy dividends that get my attention because of their ex-dividend dates this week. Intel offers nothing terribly exciting other than its dividend, but has been adding to its price in a stealth fashion of late, possibly resulting in the assignment of some of my current shares that represent one of the longest of my holdings, going back to September 2012. While I have always liked Intel it hasn’t always been a good covered call stock because when shares did drop, such as after earnings, the subsequent price climbs took far too long to continually be able to collect option premiums. However, without any foreseeable near term catalysts for a significant price drop it offers some opportunities for a quick premium, dividend and perhaps share appreciation, as well.

Finally, in its short history of paying dividends Apple’s shares have predominantly moved higher after going ex-dividend, although there was one notable exception. Given the factors that may be supporting Apple’s current price levels, including pressure from activist investors and Apple’s own buybacks, I’m not overly concerned about the single historical precedence and think that the triumvirate of option premium, dividend and share appreciation makes it a good addition to even a conservative portfolio.

Traditional Stocks: AIG, Merck, Williams Companies

Momentum Stocks: Coach, Riverbed Technology

Double Dip Dividend: Apple (ex-div 11/6), Intel (ex-div 11/5), MetLife (ex-div 11/6), Wells Fargo (ex-div 11/6)

Premiums Enhanced by Earnings: Michael Kors (11/5 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.

Sep102013

How Much Do I Need to Make Some Money?

Daily Market Update

How Much is Enough?How much is enough?

I still vividly remember the Tolstoy short story “How Land Does a Man Need?“

That story tells of “Pahom” who surprisingly needed much less land than he thought.

Eschewing greed has always been a tenet of the Option to Profit strategy, but I don’t think that it derived from any Tolstoy influence on me during childhood. I was probably influenced by Soupy Sales and The Marx Bothers much more than Tolstoy.

When I was younger, I looked at everything through the lens of the “The 1964 Zenith 25 Inch Color TV” metric. I don’t think that the word “metric” was really a word then, but like “algorithm,” it sounds like you have credibility when you sprinkle casual conversation with those words, especially if you master the art of subliminal suggestion..

G-spot.

In essence, for me the question was always distilled down to “how many Zenith Color TV’s, using 1964 prices, could be purchased with the amount of money in question?”

For standardization purposes, a single such TV was about $500 back then.

I remember when my father was offered a job paying $25,000 a year.

Totally unaware of such mundane things as taxes and other asset drainers, I just looked at that sum as meaning we could buy a new color TV each and every week.

Now, nearly 25 years later, Zenith is gone, your SUV glove compartment is probably bigger than 25 inches and $25,000 isn’t really that much.

So how much do you need?

I started using the covered call strategy and actively trading in and out of positions while I was still getting a regular paycheck. At the time, the income stream was a nice adjunct and I was only devoting about 25% of my portfolio to the strategy.

Now, I don’t work and I’ve devoted 100% of my stock portfolio to the strategy.

Did I mention that my wife, coincidentally, became known as “Sugar Momma” once I devoted myself to plunking my butt on the La-Z-Boy and trading full time?

I’ve always maintained that you can generate 2-4% per month of income from your assets. That shouldn’t be confused with “profit.” My goal is to use my assets to create income, while limiting downside risk in a down market and accepting the fact that my capital gains may be lessened during a bull run.

I’m OK with that.

Even if the market is going down and your portfolio may show paper losses, you can still generate that 2-4% that can become a source of income or “the source of income”

Since I tend to be a conservative guy, let’s make some assumptions.

Firstly, the upper range of the 2-4% return is during periods of market volatility and utilizing near the money option sales. You want higher than 4%, that can be done, too, but you have to also dismiss “fear” as you would need to devote more of your assets to “momentum” stocks or more speculative plays, like Green Mountain Coffee Roasters, Amazon, Netflix and MolyCorp, to name a few. Maybe even those “evil” leveraged ETF’s and ETN’s, such as ProShares UltraSilver and UltraShort Silver, Barclays Volatility ETN and others.

Secondly, the upper range also assumes that most, if not all of your holdings will be hedged, thus creating income streams.

So, now lets assume that it’s not very volatile out there and only 50% of your holdings are hedged and you’re not a momentum risk taking kind of guy.

I’ll call that 1%.

So how big of a portfolio do you need to make a monthly 1% income stream meaningful to you? What is your personal “Pahom” telling you that you need?

Well, let’s not forget to throw the monthly $200 subscription fee in there (once I increase it to that amount).

That means to reach a break even, your portfolio would have to be at least $20,000.

The bad news is that if that’s all you have, you may be in the 1% for income stream, but you’re probably not in the 1% by “Occupy Wall Street” standards.

Beyond that, even if you wanted to put the strategy into effect and accept a 0% income flow, after your subscription costs, $25,000 really isn’t enough to be diversified and have some pricing efficiency, even with your Uncle Vinnie acting as your discount broker.

So, you can easily do the math at different asset levels and different income stream rates.

From my perspective, after expenses, at that 1%, I’d need a $75,000  portfolio to get one new Zenith 25 inch color TV every month.

You may have your own metric.

Obviously, the next question is how much would it take to make a meaningful difference in your life?

I’m also assuming that your investments are discretionary. That is, you’re not playing with money that you may need in a moment of desperation. Those moments always seem to come when you’re stocks are at their low points. There’s nothing worse than taking losses, unless it’s taking losses when you’re arm is being twisted to do so.

Been there. But you’ll have to read “Option to Profit” for the story.

G-spot.

 

 

RETURN HOME

 

Aug132013

Carl Icahn Spells the End of an Era at Apple

Daily Market Update

This afternoon came news via a simple 140 space statement that Carl Icahn currently had “a large position” in Apple (AAPL).

By all accounts his discussion with CEO Tim Cook were cordial. Icahn himself, in another 140 space blast referred to it as “nice,” and he anticipated speaking to Cook again shortly.

I currently own Apple shares that somewhat surprisingly weren’t assigned away from me last week in an effort to grab the dividend. Considering that shares were trading at about $465 prior to the ex-dividend and the strike price sold was $450, my expectation had been that assignment was a certainty. Especially since option premiums were no longer showing any time premium with such a deep in the money option.

But as many know when it comes to Apple stock, rational thought isn’t always a hallmark of ownership.

I still think back to a comment made to an earlier Seeking Alpha article I had written in May 2012, when Apple was trading at about $575

“I guess it’s hard to not have a certain bias towards a company that has turned $30,000 of your dollars into $600,000 and may if things go right turn it into a $1,000,000.”

I always wondered whether that individual had taken interim profits or whether subsequent to May 2012 had secured some profits as Apple dropped some 200 points. The fact that its author was a CPA wasn’t lost upon me.

At the time, I thought that an investing strategy of hoping to turn $30,000 into $1,000,000 was irrational, just as turning $600,000 into $1,00,00 was irrational.

What was abundantly clear, as I took a cynical view of Apple shares in repeated articles when analysts were calling for a $1,000 stock price was that emotion was at work among many investors. Part of the emotion was the fervent belief that Apple could only keep innovating and would always be an aspirational product with great margins.

However, one refrain that repeatedly was played was that Apple shares were destined to go much higher, based on an absurdly low price to earnings ratio.

The contention was that one the market starting placing a value on Apple shares more consistent with other technology stocks, Apple would soar far above its current level.

Of course, the seemingly rational analysis dismissed the fact that the market may in fact, have been rational in giving Apple a P/E in the 12 range, just like any well regarded retailer.

A retailer? Apple is a retailer and not a technology company? Granted, it is no longer “Apple Computer,” but why should Apple be considered anything but a technology company?

That’s where Carl Icahn comes in.

Despite his recent foray into Dell Computer (DELL), his history as an activist shareholder has not included many companies in the technology arena.

Icahn refers to Apple as being “undervalued” but he isn’t looking at a low P/E to buttress his opinion. He is looking at a continuing large cash position that he envisions as a means of expanding the already large share buyback, that to many has already been the source of Apple strength going from its near term lows to $450.

This is not a case of finding fault with leadership, this is not a case of someone seeking to prevent shareholders from being robbed blind in an insider buyout deal. Apple is very different from Dell in so many ways.

This is all about leveraging cash, without regard to product pipeline and without regard to product margins. This isn’t about cutting expenses or changing direction. It is as pure as you can get – it is about cash.

Icahn cares nothing about this company other than for the cash it holds. Cash which is unleveraged isn’t worth very much to him or anyone else. It certainly adds nothing to a company’s P/E.

Icahn cares nothing about this company other than for the cash it holds. Cash which is unleveraged isn’t worth very much to him or anyone else. It certainly adds nothing to a company’s P/E. It’s time to face the fact that the stock market has been entirely rational in assigning Apple the P/E it has for these past years. It was not going to ever be considered a technology company again. It is a retailer with a narrow range of products which are bought at the whims of a fickle consumer.

While not terribly different from David Einhorn’s earlier attempt to wiggle cash out of the Apple coffers, Icahn is relentless and scrappy. What starts as perhaps a nice discussion can quickly go elsewhere.

While there is a quick pop in Apple shares in the aftermath of the announcement and while I anticipate shares to move even higher, this is the end for the Apple that you knew and loved. It wasn’t the death of Steve Jobs, but rather the indirect impact of his absence that spells the end, as Apple becomes like so many other companies simply nothing more than a vessel for someone that will have as limited interest as a pedestrian day trader.

While I’ve believed that Apple was an eminently good trading stock once in went down below the $450 level in February 2013, I think that in the very near term its suitability as a trade is even further enhanced, despite the large move higher this afternoon.

In fact, in the case of Apple, I would even consider the rare decision to purchase shares without immediate and concomitant sale of call options.

As long as Carl Icahn is on your side, you may as well consider him in the same vein as those who warn that you should “never fight the Fed,”  even if you believe Apple is too large for even Carl Icahn to take on. That’s because this is now also a new era of cooperative behavior (against Bill Ackman, at least), where the big boys are capable of joining forces these days and will do so like vultures when there’s cash to be had.

The only caveat is that it’s not likely that you’ll enjoy dreams of turning $30,000 into a $1,000,00 and so I would be all for taking profits wherever they present themselves.

 

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.

Feb262013

Diversification 101 Redux

Daily Market Update

I received an email this morning from a subscriber. He is well known to me in that he communicates with frequency and is very constructive in comments and observations. He also has good insights and asks very good questions.

So when I received and then read his email early in the morning following a 200 point decline in the market the day before, most of which came in the final hour, I was already concerned about market direction, recent losses in the OTP portfolio and losses in my own portfolio.

To put a little perspective on the specific period of time, I had just written an article earlier in the week expressing concern that we were heading for a market drop similar to that seen in 2012. I reiterated that concern and the potential need to increase cash positions the next week in one of the Daily Market Updates.”

He was asking about his paper losses of the last two weeks. Those losses were well in excess of what I and the portfolio encountered, (not considering the 50 or so positions that have already been profitably closed in 2013.)

As it would turn out, after he graciously shared some information with me, approximately 30% of his portfolio was concentrated in 5 positions. Four of those were in “metals” and another in “energy.” What they had in common, much more importantly is that all had suffered large losses in recent weeks, even beyond what the market itself had suffered.

With that information it was easy to diagnose the problem. Diversification had been breached.

The very first blog I ever wrote was entitled “Diversification 101” back in 2007. It wasn’t really about a classic discussion of diversification, as I never seem to get involved in those, but it was an extension of the concept of portfolio diversification. Ultimately, it’s all about the management of risk and reducing risk exposure.

By its nature, the act of selling options is already an expression of desiring to manage risk, but it’s not sufficient.

Let’s get basic.

There are essentially 10 or 11 sectors, depending on who is doing the counting. I rarely invest in the Utility sector, but pretty much everything else is fair game.

In a diversified portfolio you would have each sector in which you invest represent an equivalent percentage in your portfolio. For example, if your portfolio currently invests in 7 sectors, each should approximately represent 14% of your total portfolio.In a week, you may be in 6 sectors, eight or still at 7 and the representative proportions change accordingly.

Obviously, the bigger the portfolio the easier it is to be diversified, but large portfolios can also get confusing and unwieldly. It can be easy to lose track of precisely what families of companies you own when you have 20 or more stock positions.

Diversification on the basis of “sector” is a good place to start, but there’s lots more that needs to be done. Within each sector, the component stocks should be reasonably well distributed, recognizing of course that prices do change and the allocations will likewise be altered. Three stocks in a sector? Each should represent approximately one-third for that sector.

Beyond that, there may be rules for individual stocks as well, that comprise the sector. For example, a stock that is particularly volatile may be more appropriately owned at less than what may be the proportionate level.

For example, if you own stocks in a particular sector that is comprised of 5 stocks, within that sector each stock would be expected to comprise 20% of that sector. However, a more risky stock, as is usually designated as “MOMENTUM” in OTP trading alerts may warrant only a 10% position, or even less, depending on one’s individual taste for risk.

That reduced position is further diluted in a portfolio that consists of mutiple sectors.

When it comes to assembling a portfolio that is likely to change with great frequency particular attention has to be placed on monitoring diversification. To start, very often stocks that are assigned are parts of out-performing sectors. They, and their sector mates may be inappropriate to immediately add back to the portfolio because of their inflated prices. As a result, new purchases may then be in other sectors, inflating their relative proportions in your portfolio.

Additionally, very often when shares have fallen in price there is reason to consider adding additional shares as a means to erode paper losses by selling in the money calls on the new lot of shares. But by making those stock purchases you are adding to that particular sector and must do so with an eye both on the sector’s contribution to your overall portfolio as well as the individual stock’s contribution to the sector. Sometimes you feel as if you should turn a blind eye to the need for diversification because the downbeaten or under-performing shares may seem to be such bargains.

For example, I am currently unwilling to add shares of INTC or PBR because they are at their limits for their relative roles in my portfolio based upon their absolute values. If I buy more of either, despite what appear to be very appealing prices, I willl simply own too much of their shares.

In the case of CLF I’m not likely to add shares based on how great of a role I want a speculative stock, such as it is, to play in my portfolio. My CLF shares may not be of the same value as those of INTC or PBR, but I own enough “MOMENTUM” shares across all sectors. Now, especially during an unforgiving market, is not the time to stock up on volatile stocks.

One shortcoming of the methodology that I use to report ROI for Option to Profit subscribers is that there is an underlying assumption that each position is equally weighted in the OTP portfolio. In my real life trading, that isn’t the case as I try to stay within the distribution guidelines based on sector and individual stocks. In general, I spend less on initial purchases of speculative positions than I do for more “TRADITIONAL” positions.

What’s important is to resist the enticement of the premium. The risky positions will offer a greater ROI, but you can work backward to determine how many shares of such a position to purchase. For example, if you purchased 400 shares of MetLife, a “TRADITIONAL” stock and received a net premium of $0.35, how many shares of Cliffs Natural Resources would you have to buy to generate the same net $140 in option premiums?

To answer my own question, using today’s data as an example, a $13,880 purchase of MET would net, after assignment the same as a $5,200 purchase of CLF.

Remember, it’s not about “Greed,” but rather about protecting your portfolio and having it work for you and creating additional income streams.

Although Option to Profit can report sector distribution to track diversification efforts, doing so is fairly unhelpful. It is inadequate for the individual, whose portfolio may be weighted very differently.

As a general rule, each person should define for themselves, for example, what proportion of their portolio do they want invested in “MOMENTUM” stocks? Those are the kind with greater premiums, but come with greater volatility and, therefore risk.

After that, investors should keep an eye on their diversification by sector. It needn’t be precise, but you should have an overall idea, based on value of underlying shares, what kind of exposure you have to each sector. In a typical market, you’ll see under-performance in sectors on a rotating basis, which is made palatable by out-performance in other sectors. In time, the under-performers typically become out-performers, although individual stocks may lag.

The importance of having an idea of your general exposure is related to taking action on Trading Alerts.

If an alert is made for a stock in a particular sector in which you are already fully represented, or perhaps even overweight, then you would likely not want to consider taking the risk of over-exposure. Additionally, if the individual stock has a risk profile that is great, such as a “MOMENTUM” stock, you would want to consider whether within the particular sector you already have sufficient risk exposure.

Ultimately, there will be times that you wished you had been overweight in a particular stock or sector. Although I’m not a gratuitously betting person, I am willing to bet that more often than not, you’ll end up being glad you had your assets spread out and diffused the risk.

Diversification is one of those things that really works over the long term. If you want to stay in the game don’t test the odds.