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.