We are pretty much done with the most systemically important earnings reports for this most current earnings season.
To say that it has been a confusing mix of results and projections would be an understatement.
By the end of the week, we had our fourth consecutive week of almost no net change. Yet the market remained within easy striking distance of its all time closing highs.
Why it’s at those all time closing highs is another question, but for the past 2 months the climb higher, while confounding, hasn’t disappointed too many people even as it’s given no reason to really be hopeful for more to come.
However, technicians might say that the lack of large moves at these levels is a healthy thing as markets may be creating a sustainable support level.
That is an expression of hope.
Others may say that the clear lack of clarity gives no signal for committed movement in any direction.
That is an expression of avoidance, so as to preclude disappointment with whatever happens next. If you have no great hopes, you can’t really have great disappointment.
I buy into both of those outlooks, but have had an extraordinarily difficult time in believing that there is anything at immediate hand to use whatever support level is being created as a springboard to even more new highs.
My hope is also tempered by the knowledge that there have been very few instances in which a market has been able to exceed its previous closing highs by more than 2% and while this has been one of those rare times, that “support” level identified by technicians could just as easily be a barrier.
The disappointments of the past 2 weeks that reflect consumer participation in the economy make it hard for me to understand where the justification for a near term interest rate increase will come from.
Ordinarily, I wouldn’t care, except that with the recently strong Employment Situation Report it seemed as if traders were happier with the idea that it was finally time to raise those rates.
What at one time would have been disappointment over the raising of rates has more recently become an expression of hope that higher rates would be a reflection of a growing economy and presumably improved earnings and eventually leading to expanded price multiples.
To hear the stream of Federal Reserve Presidents willing to share their opinions, and there is no shortage of those, you would think that there was plenty of reason to suspect that a rate hike was at hand. The release of the FOMC minutes this week did nothing to dispel that notion either and markets reacted quickly and positively to the suggestions of that increase.
But, then there’s that nagging confusion.
The previous week saw some of the major national retailers start the stream of earnings from that important sector and the initial reaction to uninspiring news and disappointing guidance was hope for better things to come.
How else could you explain the surging prices of those retailers amidst a sea of news that had little of redeeming value?
So often it’s said that “hope is not a strategy,” but as long as axioms are in vogue, traders were “putting their money” where their hopes were and sent those retailers sharply higher.
That wasn’t the case this week.
Well, some of it was the case. Earnings and guidance from retailers was still fairly anemic and guidance was still as disappointing. This time around, however, no one seemed eager to double down and make “lemonade out of lemons.”
It’s hard to fault a sense of caution when disappointment has been at hand, however, I do see the possibility of yet another force at play when we begin to ready ourselves for the next round of earnings.
That starts in October and while there was increased belief that the FOMC would find reason to announce their need for an interest rate increase at the time of their September meeting, I think it will not come at that time.
Instead, the widespread disappointment in retail earnings and the lack of even a shred of optimism leaves us in a position to react to an “under-promise, but over-deliver” scenario that could be the perfect storm of increasing consumer led revenues, profits and stock price.
At least I hope that’s the case.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
This is yet another week that I have difficulty in identifying anything that captures my interest and more importantly, anything that can capture my money.
For me, 2016 has thus far been a very good year, but most of that has been on paper. It hasn’t been a year of generating consistent option premium revenue, even as dividend revenue has continued playing more of an important role in my thinking.
It has been a year of very little trading and very few newly closed positions that could either be used to build up cash positions or used to fund the opening of other new positions. Not only has my trading been very limited, but it has also been limited to a very narrow range of stocks.
I don’t mind the former, because it requires much less of a thought process when you simply do the same thing over and over and become a serial purchaser of the same stock or serial seller of the same calls or puts.
Ironically, all of the positions that I’m considering this week are reporting earnings and despite the uncertainty that’s always associated with earnings, these may offer a reasonable level of reward for the risk, with a very specific caveat.
In addition to all reporting their quarterly earnings this week, Best Buy (BBY), GameStop (GME) and Hewlett Packard (HPQ) all have other things in common.
For one, they have all been written off as becoming increasingly irrelevant and unable to compete in a changing marketplace.
That may still turn out to be the case for any or all of those names, but they have all gone on to see another day.
Best Buy has been in the news lately as it celebrates its 50th anniversary. The “Black Friday” like prices promised may bring customers into its stores, but it’s probably a question for a future quarter as to whether there is a net positive impact from steep price cutting, especially when comparisons are made.
Even as it’s chief rival Amazon (AMZN) grows and grows, Best Buy continues to have relevance and is no longer purely a brick and mortar showcase for its rival.
I currently have a 16 month old share lot and despite its anemic 7% ROI to date, that still puts it 2% ahead of the S&P 500 for the comparable period.
Yes, especially if I were more precise and also factored in the S&P 500 dividends for that time period.
But I still have hope, because that 7% return comes as the shares are still about 11% below their purchase price.
Hewlett Packard, has certainly been a disappointment the past few years to just about everyone. I still own shares following the spin-off of its more energetic self, Hewlett Packard Enterprises (HPE).
While Meg Whitman jumped ship and left the commodity based business behind in favor of the spin-off, I saw my shares of the latter assigned as one of those very few 2016 closed positions. But, as anemic as Hewlett Packard has been, the accumulation of premiums and dividends has made mediocrity the new black.
While the technology sector has performed admirably during this earnings period I would be reluctant to bet that the same would necessarily extend to Hewlett Packard, particularly if the market has a stutter step or two this week.
GameStop may be the poster child for a company that has been written off on so many levels and so many times.
Whether it’s the business model that’s called into question, the changing face of gaming or the entry of muscled competitors, GameStop has persisted, much to the disappointment of that short selling community.
Always a favorite of the short selling community, except when it surges on unexpectedly strong earnings, it has neither gone to “zero” nor willingly given up its fight for relevance.
What these three weekly choices also have in common is that all three will be going ex-dividend in the next 2 to 3 weeks.
I generally like to consider earnings related trades in terms of the sale of puts, but am wary of doing so when there isn’t very much time to recover from a larger than expected price decline with an impending ex-dividend date to also consider.
Normally, I would consider rolling over the short puts in the event of that kind of an adverse price movement, but I generally would prefer to have outright ownership of shares with an ex-dividend date rapidly approaching.
The final thing that all three have in common, at least from my perspective, is that I’m not interested in establishing any kind of position other than after earnings and then, only in the event of a reasonably sized decline.
That’s because the options market is not implying the kind of moves that those stocks have made in recent years when earnings have been released.
That is the essence of the caveat.
For me, that means that there is insufficient reward relative to the risk if trying to enter into a position before earnings are announced.
While the opportunity to generate some revenue from the sale of puts may vanish if waiting until after earnings and the earnings surprise to the upside, the reward could be magnified in the event of a large downside move as volatility driven premiums typically increase and entry price may be considerably lower.
In such an instance, I would probably prefer to buy shares and sell calls. In doing so, I’d be mindful of the upcoming ex-dividend dates and would likely look at the opportunity to sell longer term dated options and rather than utilizing in the money or near the money strike levels, would consider going for some capital gains on the underlying shares that may just need a little time for a price rebound.
Or at least I will hope if in that position to be disappointed.
Traditional Stocks: none
Momentum Stocks: none
Double-Dip Dividend: none
Premiums Enhanced by Earnings: Best Buy (8/23 AM), Hewlett Packard (8/23 PM), GameStop (8/24 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.