These are sensitive times.
For the longest time the FOMC and investors were the closest of allies.
The FOMC gave investors what they craved.
With cheap money increasingly made available investors could do what they want to do the most.
In return, if you believe in trickle down economics, the great wealth created by investors would then get re-invested into the economy, helping to fund the creation of jobs, which in turn would fuel increasing demand for consumer products.
That would result in a virtuous cycle that would grow the economy, with the FOMC carefully controlling growth to keep the 40 years’ worth of inflation fears soothed.
Surely that was a win – win scenario, in theory, at least.
Then came the rumors.
Those rumors were started, fueled and spread by the very FOMC that created good times for most everyone that had a discretionary dollar to invest.
The fear that those rumors of an interest rate increase coming soon, perhaps a series of them in 2016, would become reality, periodically sowed selling waves into the blackened hearts of investors.
With even the doves among the FOMC members beginning to utter tones spoken by hawks, investors knew that their glory days were numbered and began expressing some slow acceptance of an interest rate increase.
It’s not as if they really had any choice, although it was also clear that any evidence of consumers slowing down or not living up to their expectations would send the FOMC into a bit of a retreat, which in turn would send investors into a subdued celebratory mode.
What had become clear, however, over the past few months is that the acceptance is begrudging at best, as it is more accepted in theory rather than in reality.
Investors have shown an uneasy acceptance of an interest rate hike, as long as it comes later and not sooner.
That was abundantly clear this past week as the disappointing Employment Situation Report data was initially interpreted by investors as meaning that the probability of an interest rate increase announcement coming at this month’s FOMC meeting was less likely.
Markets moved nicely higher on the notion that there was going to be another few months of cheap money to fuel the party.
But then came word from among the top leaders of the FOMC and Federal Reserve that conditions were still being met for an interest rate increase in September and investors did what they usually do when fear or loathing is part of the equation.
The FOMC and investors simply continued playing the game that they’ve been playing for much of 2016, having established an uneasy truce, while awaiting for the other side to blink.
At some point, this truce will either fall apart or the sides will embrace one another.
For all of their obfuscation and for all of the confusing economic data, there is still little sign that retailers are ready to tell us that stores are crowded and inventories are being depleted.
The FOMC seems to have erred once when raising interest rates almost a year ago. The market’s decline in the period afterward wasn’t with foresight of the lack of economic growth to come.
It was due to disappointment that the party was slowing down.
The subsequent recovery has all come as thoughts of extending the party have taken hold.
Now, though, I think we are ready to move forward, even if taking a short term step backward upon the reality of another interest rate increase, in anticipation of the FOMC not making the same mistake twice.
But, I wouldn’t mind waiting until December. It might not be a bad idea for the FOMC to be behind the curve this time, to allow the current uneasy truce to give way to renewed investor confidence based upon an expanding economy and a return to investing based upon fundamental factors.
Nothing spells peace better than two independent and healthy entities going about their own businesses side by side.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
Volatility is painfully low and there are only 4 trading days in the current week, so weekly option premiums are going to be even less appealing.
On top of that, with earnings season essentially having come to its end, all that remains is an FOMC watch and then the reaction to its action or inaction.
For me, that just leaves more uncertainty, but without the reward.
Because of that, my predominant focus is on securing more dividends, if possible.
I currently own all three of those and see opportunity in all three, not just for the upcoming dividends, but also for their option premiums and some chance for capital appreciation, as well.
Generally, when I do consider positions going ex-dividend, I try to exploit any possibility of a pricing inefficiency that would have some of the decrease in the share price coming as a result of the dividend, being borne by the option buyer.
As a result, I usually try to sell in the money call options generally being happy with either early assignment or receiving the dividend.
This week, however, I’m more inclined to consider the sale of slightly out of the money calls or may consider longer term expirations.
I purchased GameStop following its fairly muted decline, by its historical standards, following recent earnings, specifically with the dividend in mind.
Shares have been trading fairly well on the heels of its bad news and have shown some stability. While GameStop has had “another shoe to drop” in the past, I think that the near term opportunity is to exploit both its price decline and generous dividend.
There’s no question that its business model has challenges, but those challenges have been constant and evolving over the years, while GameStop has adapted, evolved and persisted.
I don’t look at GameStop as a long term holding, but it is a stock that may also be amenable to serial rollover, which has been my primary activity in 2016, as my overall trading activity has taken a dive even from 2015, which itself was a low trading volume year.
Coach and General Motors appeal to me at the moment for different reasons.
I like Coach following having given back some recent gains, which returns it to a support level that appears to have some holding ability. With few people now questioning its long term strategy or ability to compete, Coach continues to build its base and make itself more accessible to more consumers.
Unlike GameStop, I would consider any new positions in Coach as a potential longer term holding and would also consider it a serial rollover vehicle that also happens to have an appealing dividend.
I like General Motors at the moment, not because of its recent price decline, but rather for its recent price stability.
It doesn’t have the same kind of price supports that Coach has, however, it too, may be considered as a longer term holding with a very attractive dividend and option premiums, as long as the share price remains in its current neighborhood.
With volatility continuing so low and the longer term trend continuing higher, it’s difficult to buck the trend, so a longer term perspective with positions such as Coach and General Motors may be appropriate under current market conditions.
Finally, with so many now believing that the financial sector may finally awaken as interest rate increases seem likely, I think that I may finally be ready to secure my first position in PayPal (PYPL).
There is no dividend, but what really appeals to me since its spin off from eBay (EBAY) is the well defined trading range and liquidity of its options.
The availability of extended weekly options makes it also a candidate for serial rollovers as it continues to offer an attractive premium, despite having traded in a fairly narrow range.
Ultimately, the ideal application of a covered option strategy, in my opinion, is when that combination of price stability and attractive option premium exists alongside liquidity.
If that kind of co-existence is possible, surely investors and the FOMC can figure out a way to move forward as 2017 approaches.
Traditional Stocks: none
Momentum Stocks: PayPal
Double-Dip Dividend: Coach (9/8 $0.34), GameStop (9/7 $0.37), General Motors (9/7 $0.38)
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.