After an absolutely horrible week that came on the heels of an absolutely glorious reaction to the Employment Situation Report just 2 weeks ago, it looked as if some common sense finally had come to the market as the clock was ticking down on the year.
After that glorious reaction the DJIA found itself 0.1% higher on the year, only to see itself sink to 3.1% lower just a week later.
But this past Monday after adding another 100 points to that loss, it all turned around mid-day and kept going higher right up to and beyond the FOMC Statement release and beyond.
By the time the FOMC broke an almost 10 year hiatus on raising interest rates and Janet Yellen finished telling us all that the rate rise wasn’t likely to be the only one in the coming year, the market had embraced the news and taken the index to a point that it was almost 0.5% higher on the year.
That’s not much after nearly a year’s work, but it’s better than some of the alternatives.
Strong buying heading into the widely expected FOMC announcement looked as if it was an attempt to capitalize on what was expected to be a strong year end rally as the interest rate overhang was finally coming to its end.
There’s nothing more American than trying to foresee and then take advantage of an opportunity and to then create a “feel good” story, by using the final trading days of the year to bring some glory to a year that the net change had done little justice toward portraying the wild activity seen.
However, the kiss of death probably came as analyst after analyst started talking about a year end rally and some even began to dust off the old “we’re setting up for a rip your face off rally” cry.
With that kind of optimism it probably shouldn’t have been too much of a surprise that as the week came to its end the DJIA was 3.9% lower for the year, with the S&P 500 faring better, being only 2.6% lower.
While society may appreciate the motives behind many non-profits, it’s different when that status is intentional.
With now less than 10 trading days left before 2015 becomes inscribed there’s still plenty of time to move away from the flat line, although many will hope that we don’t move too far, as the year following q flat performing year tends to be very good.
Just like in far too many basketball games, it all comes down to the final seconds when a single missed opportunity can make all of the difference in the outcome.
The upcoming Christmas holiday trade shortened week does have a GDP report release, but not much else, although it didn’t take much to set markets upside down this week.
That GDP data may make all of the difference for the year and it may be the true test of just how firm that recent embrace of the FOMC’s decision may be.
The key to 2016 may very well end up being the same thing that kept 2015 in shackles for most of the year.
The fear of an interest rate increase was the prevailing theme as the market generally recoiled at the very thought of those rates moving higher. Instead, traders should have done what it did on far too few occasions during the year when coming to a realization that a small rate increase would not hamper growth and that an increase was the recognition of an expanding economy.
Those realizations were infrequent and short lived, just as it was this past week.
In essence, all of 2015 has been a large missed opportunity where an irrational fear of a return of 1970s era interest rates held reign.
That’s where the GDP data comes in as it intersects with Janet Yellen’s suggestion that last week’s announcement wasn’t likely to be part of a “one and done” strategy.
A strong GDP, particularly if above consensus and coupled with good news on home sales, durable goods and jobless claims may serve to fuel the fear of more interest rate hikes.
It will take something really tangible to offset the fears of an image of unrestrained interest rate increases. If the FOMC is right, that should mean that corporate earnings will finally begin to reflect actual economic expansion rather than contraction of the number of shares floating around.
While the next earnings season begins in just a month, perhaps some retail sales data coming as Christmas shopping concludes may give us some hope that the consumer is really coming alive. It would be nice to see consumers helping to grow corporate earnings per share the old fashioned way, by increasing revenues.
It would then be especially nice to see traders taking that opportunity to take a stake in a growing economy.
As usual, the week’s potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or “PEE” categories.
In the past 2 weeks I’ve only opened a single new position.
In the week following the Employment Situation Report release I never got a feeling of comfort to move in and buy at what may have appeared to be developing bargain prices.
I had a little bit of regret last week as it didn’t take long for the market to develop a positive tone and move higher, yet even then I had a hard time justifying doing very much and really wanting to preserve cash.
Ultimately that feeling of regret gave way to some relief.
This week doesn’t have me in a very different state of mind and I expect to be reluctant to part with cash, particularly as the week’s option premiums will reflect a holiday shortened week.
In setting up a covered option portfolio I try to use a laddered approach to expiration dates in the hope that being somewhat diversified in those dates there can be some opportunity to not get caught with too many expiring positions at one time either getting stranded or assigned.
Even when not adding new positions as a means of generating weekly income, with some luck the expiring positions can become the sources of income for the week if they are able to be rolled over.
I had some decent fortune with that last week and have a number of positions up for expiration in the coming week that could potentially serve as income sources, although I would prefer that they become sources of replenishment for a low cash reserve.
This week, if spending down any of that reserve, I don’t expect to get very far flung in the positions under consideration.
Unfortunately, there aren’t any upcoming ex-divided positions this week to consider and my initial thought is to think about less risky kind of positions, but while it is a more speculative position, Seagate Technolgy (STX) has been behaving well at its current price.
Looking at 10 buy/writes or put sales of Seagate Technology over a period of 4 years has me wishing I had followed through on consideration of it more frequently. The shares are almost always volatile and they tend to defined trade in a range for a period of time following a volatile move, although the risk is always for another volatile move when otherwise unexpected.
My Seagate Technology positions have been evenly split between buy/writes and put sales, tending to favor the put sale when there is no near term ex-dividend date at hand. That has been the case with 3 put sales in the past 2 months.
Based on Friday’s closing price a put sale at a strike 1.8% below that closing price could still offer a 1.3% ROI for a week.
My most recent short put position was the longest of any of my previous positions and lasted 29 days, including the initial sale of puts and 3 rollovers in an attempt to defer assignment of shares, which I would be willing to take if the ex-dividend date was soon upcoming.
The finance sector performed better than the S&P 500 for the week, but they were even more harshly punished on the final 2 days of the week, even as some of the guessing about interest rates has been taken out of the equation.
I had owned the latter on 17 occasions during a 19 month period in 2012 and 2013, but only 4 times since then. Those 4 times have all been in the past two months and I wouldn’t mind trying to re-create some of the experiences from 2012 and 2013.
On the other hand, I’ve owned Bank of America less frequently, but have already owned shares on 7 occasions in 2015. In my world, the more often you own shares in any given period of time the better it is performing for you, while hardly performing for anyone else just watching the shares go up and down.
In both cases the recent large moves up and down have created appealing opportunities to accumulate option premiums as well as thinking about trying to capture some gains on the shares themselves. For those a bit more cautious, some consideration could be given to foregoing the potential gain on shares by selling in the money calls or out of the money puts.
As long as their volatility remains elevated the risk is reduced as the premiums themselves become elevated as well. Additionally,as there’s little reason to believe that interest rates are heading lower any time soon, the financials may have some wind at their backs.
For investors, there is nothing special about Pfizer (PFE) at the moment, other than its quest to escape US corporate taxes. Unfortunately for Pfizer, there is nothing otherwise special about it at the moment.
Where the opportunity may be is in the amount of time that it could take for it to actually move forward with its plans. Shares are currently trading at about the level they had been when news came out of their plans so there may not be too much downside if there is an eventual roadblock placed in their path.
In the meantime, trading in a defined range may make it a hospitable place to park some cash while also collecting option premiums and perhaps a dividend, as well.
Finally, for some reason I heard the classic Byrds song “Turn, Turn, Turn” many times this week and it made me think that in addition to a time for war and a time for peace, there is also a time for comfort foods and maybe monthly options, as well.
In this case, Dunkin Brands (DNKN) offers both that form of comfort and only offers monthly option contracts.
It is well off from its highs from 3 months ago and has recently traded higher from its low point 2 months ago.
I might be very interested in adding shares if there’s any additional discomfort in its share price this week and might consider even selling March 2016 calls in an effort to ride out any earnings risk in early February as well as to collect its dividend and some potential gain on the shares themselves.
That would be sweet.
Traditional Stocks: Bank of America, Dunkin Brands, Morgan Stanley, Pfizer
Momentum Stocks: Seagate Technology
Double-Dip Dividend: none
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.