Sometimes you just have nowhere to go.
One thing that was fairly certain last week was that there wasn’t too much of a trend and there wasn’t any clear path to follow.
As markets began testing the 18000 level on the DJIA and 2100 on the S&P 500, the chorus was loud and clear.
There is no place to go but up.
The alternating chorus was that there was no place to go but down.
The market instead went sideways, but not very far as all roads seemed to be closed off.
After the previous week, which ended precisely unchanged, this past week managed to move 0.1%,
Granted, the first three days of the week did seem to benefit from Chairman Janet Yellen’s superb demonstration of how hedging your words works to allow people to hear whatever it is that they want to hear.
Following Monday afternoon’s talk, Dr. Yellen essentially said something to the effect of “It’s not good out there, but it’s all good. You know what I mean?”
Years ago I heard a fairly odd individual present a lecture on the pharmacological management of children requiring sedation. He referred to the well known age and weight based rules regarding dosages, but said they were inadequate. Not surprisingly, after listening to him for a brief while, it was only his eponymous rule that could determine the correct amount of sedative agents to administer to a child.
He referred to his rule by example and these were his precise words, that I still remember 30 years later.
“You take the kid’s weight and then you take a day like today. It’s hot, but it’s not hot. You know what I mean?”
Like Janet Yellen, he was from Brooklyn.
The old Brooklyn. Not modern day Brooklyn. In fact, both were from the same Bay Ridge Brooklyn neighborhood.
While I still remember those words 30 years later, they had no influence on me other than to believe that sometimes a monkey can have more credibility than someone with a degree.
The strength of Dr. Yellen’s words, however, starting already growing dim as the latter half of the week approached and traders were left wondering what was going to be the driver for anything between now and the July 2016 FOMC meeting.
Of course, even though most everyone discounts any action at next week’s FOMC meeting, there’s always the chance of a reaction to any change in the wording of the statement as it’s released.
In that event the subsequent press conference may carry even more weight than usual, although you would have to wonder what Yellen could say that would be substantively different from the non-committal tone she struck this week.
With earnings season nearly at its end the catalysts appear to be few between now and that July 2016 FOMC Statement release. Some upcoming and compelling GDP and Employment Situation Report numbers, particularly if there are strong upward revisions, could be all the catalysts necessary, but after this past Friday’s performance, oil prices may be relevant once again.
That’s after a couple of weeks of the stock market not tethering itself too tightly to oil prices. But with interest rates possibly taking a back seat for a short while, there may be a void to fill and oil seems the logical driver.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
I haven’t traded much in the past few weeks, nor for 2016, for that matter, but oil has gotten more of my attention than anything else.
Although Marathon Oil (MRO) has gone significantly higher in the past 10 weeks, following Friday’s decline, I wouldn’t mind owning shares for a third time during that time period.
Following oil’s run higher and seeing it break the $50 level, that level may be under assault and those oil company shares that had moved nicely higher in 2016 may also be under assault.
Friday was an example of the risk that may lie ahead of some oil companies, but the option premiums are reflective of those risks, just as they were when I first added Marathon Oil and Holly Frontier (HFC) in the past 2 months, to keep company with my uncovered lots of shares in those companies.
Even with Marathon Oil’s decline on Friday, those shares are still somewhat higher than I would like if considering re-establishing a position. However, with any further weakness on Monday, despite the near term risk, this is probably my most likely trade for the week.
While I’m anxious to open some new positions, that doesn’t include the need to be reckless. Despite the downside risk to opening a new position in Marathon Oil, the liquidity in the options market is fairly good in the event of a need to rollover the position following a large adverse price move.
With the availability of extended weekly options if there is such an adverse price move, there would be opportunity to extend the time frame of the expiration and collect some premium while waiting for the inevitable volatility to take the price higher and then lower and then higher again.
I have some subscribers for whom Gilead has been a long time favorite and I often wished that I had followed their path. There were certainly no signs preventing me from doing so.
At almost all price points over the past 2 years, a position in Gilead, if either buying shares and selling calls or simply selling puts, would have been a good place to be, if rolling over calls or puts and having some patience.
That is the case even at most of the various high points thanks to the option premiums and the dividends and the ease of rolling over positions owing to the options liquidity offered.
With eyes only on the dividend and a short term holding, I don’t think very much about its drug pipeline or pricing pressures or opportunities that may come following the Presidential election. Having a short term horizon makes all of those sentinel events new opportunities and the latter uncertainty is still very far off.
With Tiffany shares just barely above their 2 year lows, it has been more than 3 years since I’ve owned shares.
Perhaps coincidentally, that last time was at the current price.
Back then, when only monthly options were available, my preference was to consider a purchase of shares during the final week of the monthly option cycle or when an ex-dividend date was upcoming.
This week happens to offer both, but Tiffany now offers extended weekly options.
With a much higher dividend per share than when I last owned it and a yield that is enhanced by its current price, Tiffany is back on my radar screen.
As challenged as retail has been since Macy’s (M) started off a string of disappointing earnings reports and as flat as the world’s economies have been, particularly those important for Tiffany’s sales, I think that this is both a good time and a good opportunity to consider a new position, but as with Gilead, it may require some patience.
If while exercising that patience there is opportunity to continue collecting option premiums, patience is well rewarded. With earnings more than 2 months away, I wouldn’t mind the opportunity to serially roll over calls, but also wouldn’t mind being able to exit the position prior to earnings.
Finally, I haven’t had much reason to think about buying shares of Oracle (ORCL) lately. The last time I owned shares was nearly 3 years ago and at that time I owned them on 3 separate occasions over the course of a few months.
In my ideal world, that would be the case with most stocks when opening a new position, but that hasn’t been the case for me of late. Maybe Marathon Oil will change that this week, but I think that Oracle could now be positioned to do the same.
Oracle reports earnings this week and its current price is somewhat above the mid-way point between its recent high and recent low.
I generally like to consider a purchase when a stock is at or slightly below that mid-way point. However, even with the risk of earnings approaching and without a really compelling premium despite the added risk of upcoming earnings, I’m considering a position.
However, with the chart in mind and seeing the climb that Oracle shares had taken since February, as well as the precipitous declines it has been known to take, I have no interest in establishing a position prior to earnings.
I would, however, very strongly consider opening a position if shares decline by anything approaching the 5% implied move that the options market is predicting. In that event, I would likely sell puts to open a position, but would be mindful of an upcoming ex-dividend date either late in the July 2016 option cycle or early in the August cycle.
Things have been quiet at Oracle for a while as Larry Ellison has stepped back and replaced a form of autocratic rule with muddled lines of leadership. In the past when Oracle disappointed on earnings, Ellison was always quick to point fingers.
Since I don’t currently own shares and have nothing to lose, I welcome a sharp decline in Oracle, only in the hope that it might re-animate Ellison and perhaps re-create a leadership structure that will move forward even if all signs say there is nowhere to go.
Traditional Stocks: none
Momentum Stocks: Marathon Oil
Double-Dip Dividend: Gilead Sciences (6/14 $0.47), Tiffany & Co (6/16 $0.45)
Premiums Enhanced by Earnings: Oracle (6/16 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.