Some days we really have no clue as to what made the market move as it did, but nothing bothers us more than not knowing the reasons for everything.
We tend to like neat little answers and no untied bundles.
It starts early in life when we begin to ask the dreaded “Why?” question.
We want answers at an early stage in life even when we have no capacity to understand those answers. We also often make the mistake of querying the wrong people to answer those questions, simply on the basis of their ready availability and familiarity.
Those on the receiving end of questions usually feel some obligation to provide an answer even if poorly equipped to do so.
While the market has now gone into a 9 consecutive day decline, it seems only natural to wonder why that’s been happening and of course, some people, have to offer their expert explanation.
It is of course understandable that the question is posed, as earnings haven’t been terrible and neither have economic data. Yet, a 9 day decline hasn’t happened since 1980 and has taken the market into a stealth 5% decline.
Sometimes “not too hot and not too cold” is just the perfect place to be, although from a stock market investor’s perspective, there is always the future that has to be addressed and then discounted.
In fact, with the release of the Employment Situation Report this past Friday, there may be enough time to cast off “fear of the known” as investors can acclimate to the stronger probability that the FOMC will finally move to increase interest rates next month.
So why was the past week as it was and please don’t tell me “it is as it is,” which is an answer that even a three year old asking the obligatory “why” question would never find acceptable.
In the absence of any real reason and even in the absence of any ability to twist news into the opposite of what it really is, sometimes you just have to make up an answer.
As parents, many of us have done that with our children and have learned that if you answer with an air of confidence and authority, you’ve done your job, even if you have no clue as to the real answer to the question posed.
From the day that news came forth that additional emails may have been found related to the server scandal so inartfully responded to by one of the Presidential candidates, the market decline has been largely attributed to the fear that the other Presidential candidate’s electability was enhanced.
Of course, the reaction of the market when that news was initially released was likely not coincidental, so it gave a new reason to explain the unexplainable going forward and that excuse for the market’s weakness this past week was used in great abundance.
The investor class, if that association is correct, is fearful of the unknown that might accompany the election of an untested billionaire, who may not be as wealthy as he regularly portrays himself to be.
Or perhaps, given all of the wildness accompanying this entire campaign, the electorate is worried about whether either of the Vice Presidential candidates is equipped to take the top job when indictments may come through during the Inaugural Ball.
But that still leaves us this coming week, when the market will wake up on Wednesday morning, likely having perfect knowledge of the election results, assuming no repeat of 2000.
If the assertions this past week are accurate and the billionaire has to turn his interests back to his business ventures, the expectation that the market would bounce nicely higher would be reasonable.
On the other hand, there’s always that unknown and if instead of focusing on business, the focus is on creating a Presidential Cabinet, we may pine for the days of a simple 5% decline.
The potential for an instant, even if short lived, evaporation of wealth, could throw a little wrench into the FOMC’s well laid plans. We, and they, have waited for a year for the second of what was expected to be a series of small interest rate increases through 2016.
Even the FOMC may have to find itself dealing with the unknown, but be assured, we will be the last to know, as we come to the realization that sometimes it really is as it is.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend,
This is a week that could easily go in any direction.
With the market down 5% from its September high, it wouldn’t take very much to get to correction levels, but by the same token a bounce from last week could easily be in store if election fears aren’t materialized.
While there are those who believe that the pharmaceutical industry may have greater concerns in the event of a Clinton victory, I think that has already been largely discounted.
You could be excused for not believing that if you glanced at Pfizer’s (PFE) weekly call option premium in a week that it also happens to be ex-dividend.
With the uncertainty at hand over the election, if I do dip into already low cash reserves, I’m more inclined to want to chase a dividend and am not entirely receptive to taking on undue risk.
At its current strike price, Pfizer offers some of that safety, especially with the additional cushion of its option premium and the generous dividend.
As with many stocks that I follow, sometimes it’s just a question of awaiting a drop in price to decide to once again wade in and own shares. I believe that Pfizer is at that price and it is a company that I wouldn’t mind owning for a longer term in the event of a short term adverse price movement. For those with a longer term outlook, Pfizer may be a great addition to a LEAPS covered portfolio.
While it isn’t paying a dividend this week, or even during this current monthly option cycle, Sinclair Broadcasting (SBGI) is another stock whose share price is really appealing to me.
I’ve only owned it on 7 occasions over the past 3 years and have sometimes owned it for as long as 8 months, but never at a price this low.
Sinclair Broadcasting just reported earnings and responded well, despite a slight miss on the bottom line.
It has, over the past years traded so predictably within a range, that at this price I would be very open to adding shares, but with its ex-dividend date coming in the early part of the December 2016 option cycle, would most likely sell a December option and would also consider the use of an out of the money option, rather than a near or in the money strike price.
While any capital intensive business, such as terrestrial broadcasting may suffer from an increasing interest rate environment, Sinclair Broadcasting keeps growing its reach and its revenues reflect that growth, having increased nearly 27% in the past year.
What’s a week without another consideration of Marathon Oil (MRO)?
Again, just like last week, I won’t be following this suggestion, because I’m already at my limit of 3 open positions, wither log shares or short puts.
Last week would have been another good week to initiate an earnings related short put position as shares bounced very nicely higher when earnings were released, but then succumbed to energy price pressures to end the week virtually unchanged.
With no reason to suspect that the sector’s volatility has come to an end and no reason to suspect that the individual name will break below its support, I think that this will be another good week to consider a position.
This time, however, with the ex-dividend date being the following Monday, there may be reason to consider going long shares and selling a 2 week dated call option in the attempt to capture the dividend.
Alternatively, a weekly put option could be sold and if in jeopardy of being assigned, simply taking assignment rather than rolling the puts over.
I did that recently with another lot of Marathon Oil shares and sold calls into its earning strength, with the hope of capturing its dividend and as much option premium as I could possibly get, for as long as I can get it if shares can continue to be confined in the $13 – $16 price range.
Finally, last week it was Coach’s (COH) time to report earnings and this week it will be Michael Kors (KORS) under scrutiny.
Coach’s reception was a good one and its shares spiked as it reported earnings early in the week, but it eventually succumbed to market pressures and end the week down 1%.
In the meantime, the days when Kors was seemingly thriving at the expense of Coach have long been over and the two are more likely to see their stock prices in lockstep these days.
That’s what makes Kors so appealing this week as the option market is implying a large price move, but there may still be opportunity despite the uncertainty being expressed.
The implied move is 10.5% and while that defines a price range of about $44 – $54, you could still derive a 1% weekly ROI by selling a put option 14.2% below Friday’s closing price.
I’m not overly anxious about spending any money this week, but this trade is an appealing one. My expectation is that Kors will have a reasonably well received earnings report and that it will come with enough time between it and election results to potentially shake off any adverse macro-market movement.