Weekend Update – August 2, 2015

Like many people I know who have seen the coming attractions for “Vacation,” I’m anxious to see the film having laughed out loud on the two occasions that I saw the coming attractions.

That’s one of the benefits of diminishing short term memory and ever lower standards for what I find entertaining.

My wife and I usually rotate over who gets to select the next movie we see, although it usually works out to a 3 to 1 ratio in her favor. We tend to like different genres. But on this one, we’re both in agreement.

I’m under no illusions that the upcoming “vacation” being taken by the Federal Reserve and its members will have anywhere near the hijinks that the scripted “Vacation” will likely have.

For a short while the usually very visible and very eager to share their opinion members of that august institution will not garner too much attention and the stock market will be left to its own devices to try and interpret the meaning of incoming economic data in a vacuum.

The greatest likelihood is that the Federal Reserve Governors and the members of the FOMC will also be busily evaluating the economic data that will continue to accrue during the remainder of the summer, even as they have a much abridged speaking schedule in August.

I count only 3 scheduled appearances for August, which means less opportunity to go off script or less opportunity to speak one’s own mind, regardless of how that mind may lack influence where it really matters.

That then translates into less opportunity to move markets through casual comments, observations or expressions of personal opinion, even when that opinion may carry little to no weight.

While FOMC members may be taking a vacation from their public appearances for a short while, they’ll be able to give some thought to the most recent economic data which isn’t painting a picture of an economy that is expanding to the point of worry or perhaps not even to the point of justifying action.

The GDP data reported this week came in below estimates and further there was no indication of wage growth. For an FOMC that continually stresses that it will be “data driven” one has to wonder where the justification would arise to consider an interest rate increase even as early as September.

This coming week’s Employment Situation Report could alter the landscape as could the upcoming earnings reports from retailers that will begin in about 2 weeks.

With less attention being paid to when an interest rate hike may or may not occur, perhaps more attention will be paid to the details that would trigger such an increase and interpret those details on their surface, such that good news is greeted as good news and bad news as bad. That would mean a greater consideration of fundamental criteria rather than interpretation of the first or second order changes that those fundamentals might trigger.

Meanwhile, the market continues to be very deceiving.

While the S&P 500 is only about 1.5% below its all time high and the DJIA is about 3.5% below its high, it’s hard to overlook the fact that 40% of the latter’s component companies are in bear market correction.

That seems to be such an incongruous condition and the failure to break out beyond resistance levels after successfully testing support could be pointing to a developing dynamic of higher lows, but lower highs. That’s something that technicians believe may be a precursor to a breakout, but of indeterminate direction.

A lot of good that is.

The fact remains that the market has been extremely unpredictable from week to week, exhibiting something resembling a 5 steps forward and almost 5 steps backward kind of pattern throughout 2015.

With this past week being one that moved higher and bringing markets closer to its resistance level, the coming week could be an interesting one if China remains under control and fundamentals coming from earnings and economic data paint a picture of good news.

Given my low volume of trading over the past few weeks I feel that I’ve been on an extended, but unplanned vacation. Unfortunately, there are no funny tales to recount and the weeks past feel like weeks lost.

Although I’ve never really understood those who complained about having “too much quality family time” and welcomed heading back to work, I think I now have a greater appreciation for their misery.

As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.

Last week I purchased shares of Texas Instruments (NASDAQ:TXN) with dividend capture in mind. However, on the day before the ex-dividend date shares surged beyond my strike price and I decided to roll those options over in a hope that I could either retain the dividend and get some additional premium, or, in the event of early assignment, simply retain the additional premium.

This week, despite semi-conductors still being embattled, I’m interested in adding shares of Intel (NASDAQ:INTC), also going ex-dividend during the week.

While patiently awaiting the opportunity to sell new calls on a much more expensive existing position, I’m very aware that Intel is one of those DJIA components in correction mode. However, I don’t believe Intel will be additionally price challenged unless caught in a downward spiraling market. While I’d love to see some rebound in price for my existing shares, I’d be more than satisfied with a quick turnaround of a new lot of shares and capture of dividend and option premium.

MetLife (NYSE:MET) is also ex-dividend this week. It, too, may be in the process of developing higher lows and lower highs, which may serve as an alert.

With interest rates under pressure in the latter half of the week, MetLife followed suit lower, with both peaking mid-week. Any consideration of adding shares of MetLife for a short term holding should probably be done in the context of the expectation for interest rates climbing. If you believe that interest rates are still headed lower, the prospect of dividend capture and option premium may not offset the risk associated with the share price being pulled toward its support level.

MetLife shares are currently a little higher priced than I would like, but with a couple of days of trading prior to the ex-dividend date, I would be more enticed to consider a dividend capture trade and the use of an extended weekly option if there is price weakness early in the week.

I haven’t owned shares of Capital One Financial (NYSE:COF) in a number of years, although it’s always on my watch list. I almost included it in last week’s selection list following it’s impressive earnings related plunge of about 13%, but decided to wait to see if it could show any attempt to stem the tide.

In a sector that has generally had positive earnings this past quarter the news that Capital One was setting aside 60% more for credit losses came as a stunner, as its profitability ratio also fell.

Some price stability came creeping back last week, however, although still leaving shares well off their highs from less than 2 weeks ago. Even after some price recovery, Capital One Financial joins along with those DJIA stocks that are in correction mode and may offer some opportunity after being oversold.

Despite still owning a much too expensive lot of shares of Abercrombie and Fitch (NYSE:ANF), I’m always attracted to its shares, even when I know that they are likely not to be good for me.

There’s something perverse about that facet of human nature that finds attraction with what most know is bound to be a train wreck, but it can be so hard to resist the obvious warning signals.

While having that expensive lot of shares the recent weakness in Abercrombie and Fitch shares that have taken it below the tight range within which it had been trading makes me want to consider adding shares for the fourth time in 2015.

The option premiums are generally attractive, befitting its penchant for large moves and there is nearly 4 weeks to go until it reports earnings, so there may be some time to manage a position in the event of an adverse price movement.

I might consider the sale of puts with Abercrombie, rather than a buy/write. The one caveat about doing so and it also pertains to being short calls, is that if the ensuing share price is sharply deviating from the strike price when looking to execute a rollover, the liquidity may be problematic and the bid-ask spreads may be overly large and detrimental to someone who feels pressure to make a trade.

Finally, for those that have real intestinal fortitude, both Green Mountain Keurig (NASDAQ:GMCR) and Herbalife (NYSE:HLF) have been in the cross hairs of well known activists and both report earnings this week.

The Green Mountain Keurig saga is a long one and began some years ago when questions arose regarding its accounting practices and issues of inventory. Thrown later into the equation were questions regarding the sale of stock by its founder who had also served as CEO and Chairman until he was fired.

What Green Mountain has shown is that second acts are possible, as it has, very possibly through a lifeline offered by Coca Cola (NYSE:KO), emerged from a seeming spiral into oblivion.

Somewhat ominously, at its recent earnings report and conference, Coca Cola made no mention of its investment in Green Mountain, which has seen its share price fall by more than 50% in the past 9 months. It has been down that path before, having fallen by about 65% just 4 years ago in 2 month period.

Are there third and fourth acts?

The options market is implying a price move of about 10.7%. Meanwhile, one can potentially obtain a 1% ROI for the week if selling a put contract at a strike as much as 14% below this past Friday’s close.

In light of how this current earnings season has punished those disappointing with their earnings, even that fairly large cushion between the implied move and the strike that could deliver a 1% ROI still leads to some discomfort. However, I would very much consider the sale of puts after the earnings report if shares do plunge.

Herbalife has had its own ongoing and long saga, as well, that may be coming toward some sort of a resolution as the FTC probe is nearly 18 months old and follows allegations of illegality made nearly 3 years ago.

Following a fall to below $30 just 6 months ago, a series of court victories by Herbalife have helped to see it realize its own second act, as shares have jumped by 65% since that time.

The options market is implying a share price move of about 16%.

Considering that any day could bring great peril to Herbalife shareholders in the event of an adverse FTC decision, that implied move isn’t unduly exaggerated, as more than business results are in play at any given moment.

However, if that intestinal fortitude does exist, especially if also venturing a trade on Green Mountain, a 1% ROI may possibly be obtained by selling puts at a strike nearly 29% below Friday’s closing price.

Now that’s a cushion, but it may be a necessary one.

If the news is doubly bad, combining disappointing earnings and the coincidental release of an FTC ruling the same week that Bill Ackman would immensely enjoy, I might recommend a vacation, if you can still afford one.

Traditional Stocks: Capital One Finance

Momentum Stocks: Abercrombie and Fitch

Double-Dip Dividend: Intel (8/5), MetLife (8/5)

Premiums Enhanced by Earnings: Green Mountain Keurig (8/5 PM), Herbalife (8/5 PM)

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.

Weekend Update – March 3, 2013

Sequester This.

Despite being a reasonably smart guy, I’ve never understood how to play the game of “craps.” It’s too fast, there are too many possible decisions and when you get right down to it, it’s name is probably based on something that aptly describes something you’d rather not touch or taste. A name like that should serve as fair warning to stay away. Sometimes a glance at the people playing the game sends the same message.

Not that a word like “sequester” is any better. The very sound of “sequestration” makes me want to cringe as I think about what my poor dachshund had to endure. It’s probably almost as bad as what the individual investor has to endure on a maddeningly frequent basis as markets whipsaw for no apparent reason, yet there’s never a shortage of reasons to explain the unexplainable. At least the dog never required an explanation and eventually went on his way, fully healed from the experience. I can’t say the same thing about my portfolio.

The events that spurred the past week’s early sell-off was by all accounts equal parts Italy, Federal Reserve and Sequestration. Later in the week, as the market was knocking at the gates of 2007’s record levels it was Italy, the Federal Reserve and the lack of interest in the Sequestration that were responsible for the turn of events.

What’s not to understand?

Just a few months earlier the new year’s gains were said to be due to averting the Fiscal Cliff. You may or may not recall the gyrations the market took as competing elected officials decided to vent and spew as they raised and then dashed hopes of a meaningful resolution and simply played craps with other people’s portfolios. Since we’ve all learned that ethical guidelines regarding investment portfolios of elected officials are rather lax, you had to wonder just how the “house” odds were stacked in their game of craps.

This time around as the Sequestration deadline loomed the market just kept chugging along higher. It’s hard to understand that as it seems that there can only be a downside, regardless of whether a resolution is reached or not, unless it becomes clear that there really is no danger posed by this thing they’ve called “The Sequester.”

It seems odd that many are taking great pains to paint frightening and untenable outcomes if the sequestration becomes reality. Yet no one seems to care. Not the man on the street, who based on his knowledge of geography can’t possibly have any idea of what the sequestration is, nor the markets.

To me, the ultimate game of craps was being played this week, as no one really knows what either outcome to this most recent crisis will bring the economy or the markets. Yet that didn’t stop concerned parties from dueling press conferences and then abandoning Washington, DC prior to the deadline and prior to an agreement. Most of all, it didn’t end money pouring into stocks and pushing them higher and higher.

Couple that uncertainty with the certainty that myriads of people beginning to foam at the corners of their mouths felt as we got tantalizingly closer to the heights of 2007. That’s precisely how storms are created.

Just as there were dueling certainties, we also had dueling countdown clocks this past week. Nothing good ever comes of those clocks, whether for the sequestration deadline or Dow points until 14164.

Option to Profit subscribers know that I’ve been unusually dour the past week or two out of concern for a repeat of 2012’s market month long 9% drop. The course that we’re following currently seems eerily familiar.

With that personal concern it’s somewhat more difficult to select stock picks for the coming week, particularly while also looking for opportunities to raise cash positions in preparation for bargains ahead.

However, as Jim Cramer has long said, “there’s always a bull market somewhere.”

I don’t know if that’s true, but there’s always a strategic approach to fit every circumstance.

In this case, while I strongly favor weekly options, where they are available, concerns regarding a quick and sharp downturn lead me to look more closely at monthly or even longer option opportunities in an attempt to still put money to work but to not be left empty handed after expiration of a weekly contract, while then holding a greatly devalued position. The longer term contracts, although perhaps offering lower time adjusted ROIs, do offer some opportunity to assure premium flow for more than a single week and do allow for greater time to ride out any storms.

The week’s selections are categorized as either Traditional, Momentum, Double Dip Dividend or “PEE” and include a look at premiums derived from selling weekly, remaining March 2013 options or April 2013 options (see details).

Deere (DE) was on my list last week, as well. But like most items on the list last week, it remained unpurchased as my cautionary outlook was already at work. In the past month Deere has already had a fairly big drop compared to the S&P 500. I don’t see very much sequester related risk with a position right now, but Deere does have a habit of getting dragged along with others reacting to bad industrial news.COF

Citibank (C) was also on the list last week, but was replaced by Morgan Stanley (MS) as one of the few trades of the week. Although I’m expecting some market challenges ahead, I don’t believe that the decline will be lead by financials, which have already been week of late. If the sequestration occurs and some of the forecasted job cuts become reality, in the short term, I would expect the credit side of Capital One’s (COF) business to benefit. I’ve had Capital One on my wish list in the past, but haven’t bought shares for quite a while, as its monthly only options premiums were always off putting. Now that there are weekly options available, it seems strange that I’d be looking more toward the security provided by the longer term contracts.

With all of the dysfunction at JC Penney (JCP) and Sears’ (SHLD) ambivalence about its position in retail, Kohls (KSS) is just a solid performer. Its been in the news lately, including the rumor category. My shares were recently assigned, but as earnings are out of the way and price is returning to the comfort range, Kohls, too, is another of the boring, but reliable stocks that can be especially welcome when all else is languishing.

Although I own Williams Companies (WMB) with some frequency, I’m not certain that I can refer to it as one of my “favorites.” It’s performance while holding it is usually middling, but sometimes it’s alright to be just average. Williams does go ex-dividend this week and is also in my comfort zone with its current price.

YUM Brands (YUM) is one of those stocks that seem to have a revolving door in my portfolio. It is probably as responsive to analysts interpretation of events as any stock that I’ve seen and it typically finds its way back to where it started before the poorly conceived interpretations were unleashed on the investing public. I had wanted to pick up shares last week to replace those assigned the week prior, but simply valued cash more.

Praxair (PX) is just a boring company whose big gas tanks are ubiquitous. Sometimes boring companies are just the right tonic, when the stresses of a falling market are prevailing, at least in my mind. Making a dividend payment this week makes it less boring and perhaps it still has enough helium on hand to resist falling.

Pandora (P) reports earnings this week and it is fully capable of moving 25% on that event. At the moment, the options market is factoring in approximately a 16% move. AT it’s current price, I would strongly consider taking chances of receiving a 1+% ROI in return for seeing a 25% or less price drop.

On a positive note, we can draw a parallel from an astute observation from more than a century ago. Since “everything that can be invented has been invented,” there was clearly no future need for the Patent Office. So too, with the passing of the Sequestration, there can be no other unforeseen man made fiscal crises possible, so it should all be milk and honey going forward. Don’t let the higher volatility fool you into believing otherwise.

Traditional Stocks: Deere, Capital One, Kohls

Momentum Stocks: Citibank, YUM Brands

Double Dip Dividend: Williams Company (ex-div 3/6)

Premiums Enhanced by Earnings: Pandora (3/7 PM)

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.

Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.