On an intellectual level, I can easily understand why it makes sense to not be fully invested at most moments in time. There are times when just the right opportunity seems to come along, but it stops only for those that have the means to treat that opportunity as it deserves.
I also understand why it is dangerous to extend yourself with the use of margin or leverage, and why it's beneficial to resist the need to pass up that opportunity.
What I don't understand is why those opportunities always seem to arise at times when the well has gone dry, and margin is the only drink of water to be found.
Actually, I do understand. I just wish things would be different.
I rely on the continuing assignment of shares and the re-investment of cash on a weekly basis. My preference is for anywhere from 20-40% of my portfolio to be turned over on a weekly basis.
But this past week was simply terrible on many levels. Whether you want to blame things on a deterioration of the metals complex, hidden messages in the FOMC meeting or the upcoming Sequester, the market was far worse than the numbers indicated, as the down volume to up volume was unlike what we have seen for quite a while.
On Wednesday, the performances of Boeing (BA), Hewlett Packard (HPQ) and Verizon (VZ), all members of the Dow Jones Industrials Index, helped to mask the downside, as the DJIA and S&P 500 diverged for the day. Thursday was more of the same, except Wal-Mart (WMT) joined the very exclusive party. So far, this week is eerily similar to the period immediately following the beginning of 2012 climb and immediately preceding a significant month-long decline of nearly 10%, beginning May 2012.
That period was also preceded by the indices sometimes moving in opposite directions or differing magnitudes, and those were especially accentuated during the month-long decline.
So what I'm trying to say is that with all of the apparent bargains left in the carnage of this trading shortened week, I don't have anywhere near the money that I would typically have to plow in head first. I wish I did, but I don't. I also wish I had that cash so that I wouldn't necessarily be in a position to have it all invested in equities.
Although that margin account is overtly beckoning me to approach, that's something that I've developed enough strength to resist. But at the same time, I'm anxious to increase my cash position, but not necessarily for immediate re-investment.
As usual, the week's potential stock selections are classified as being in Traditional, Momentum, Double Dip Dividend or "PEE" categories (see details).
Cisco (CSCO) was one of those stocks that I wanted to purchase last week, but like most in a wholly unsatisfying week, it wasn't meant to be. With earnings out of the way and some mild losses sustained during the past week, it's just better priced than before.
Although there have been periods of time that I've owned shares of both Caterpillar (CAT) and Deere (DE), up until about $10 ago on each stock, there has rarely been a time over the past 5 years that I haven't owned at least one of them. This past week saw some retreat in their prices, and they are getting closer to where I might once again be comfortable establishing ownership.
Lockheed Martin (LMT) is one of those stocks that I really wished had offered weekly option premiums. Back in the days when there was no such vehicle, this was one of my favorite stocks. This week it goes ex-dividend, and that always gets me to give a closer look, especially after some recent price drops. Dividends, premiums and a price discount may be a good combination.
Dow Chemical (DOW) has been in my doghouse of late. That's not any expression of its quality as a company, nor of its leadership. After all, back when the market last saw 14,000, Dow Chemical was among those companies whose shares, dividends and option premiums helped me to survive those frightening days. But after 2009 had gotten well-entrenched and started heading back toward 14000, the rest of the market just left Dow behind. Then came weekly options, and Dow Chemical didn't join that party. More recently, as volatility has been low, its premiums have really lagged. But now, at its low point in the past two months for no real reason and badly lagging the broad market, it once again looks inviting.
Lorillard (LO) was on my radar screen about a month ago, but as so often happens when it came time to make a decision, there appeared to be a better opportunity. This week, Lorillard goes ex-dividend. Unfortunately, it no longer offers a weekly option, but this is one of those companies that if not assigned this month will likely be assigned soon, as tobacco companies have this knack for survival, much more so than their customers.
MetLife (MET) was on last week's radar screen, but it was a week that very little went according to script. Maybe this week will be better, but like the tobacco companies that are sometimes the bane of insurance companies, even when paying out death benefits, somehow these companies survive well beyond the ability of their customers.
UnitedHealth Group (UNH) simply continues the healthcare-related theme. Already owning shares of Aetna (AET), I firmly believe that whatever form national healthcare will take, the insurance companies will thrive. Much as they have done since Medicaid and Medicare appeared on the national landscape, and they moaned about how their business models would be destroyed. After 50 years of moaning, you would think that we would all stop playing this silly game.
The Gap (GPS) reports earnings this week, along with Home Depot (HD). As opposed to most companies that I consider as potential earnings related trades, there isn't a need to protect against a 10-20% drop. At least I don't think there is that kind of need. But whereas the concern of holding shares of some of those very volatile companies is real, that's not the case with these two. Even with unexpected price movements, eventually, ownership will be rewarded. The fact that Home Depot gained 2% following Friday's upgrade by Oppenheimer to "outperform" always leads me to expect a reversal upon earnings release.
On the other hand, when it comes to MolyCorp (MCP) there's definitely that kind of need to protect against a 20% price decline. Always volatile, MolyCorp got caught in last week's metals meltdown, probably unnecessarily, since it really is a different entity. Yet with an SEC overhang still in its future and some investor unfriendly moves of late, MolyCorp doesn't have much in the way of good will on its side.
Nike (NKE) goes ex-dividend this week, and its option premiums have become somewhat more appealing since the stock split.
Salesforce.com (CRM) is another of those companies that I'm really not certain what it is that they do or provide. I know enough to be aware that there is drama regarding the relationship between its CEO, Mark Benioff, and Oracle's mercurial CEO, Larry Ellison, to get people's attention and become the basis of speculation. I just love those sort of side stories; they're so much more bankable that technical analysis. In this case, a xx% drop in share price after earnings could still deliver a 1% ROI.
Finally, two banking pariahs are potential purchases this week. I've owned both Citigroup (C) and Bank of America (BAC) in the past month, and have lost both to assignment a few times. As quickly as their prices became to expensive to repurchase, they have now become reasonably priced again.
Although Friday's trading restored some of the temporarily beaten down stocks a bit, a number still appear to be good short-term prospects. I emphasize "short term" because I am mindful of a repeat of the pattern of May 2012, and I am looking for opportunities to move more funds to cash.
I don't know if Friday's recovery is a continuation of that 2012 pattern, but if it is, that leads to concern over the next leg of that pattern.
For that reason, I may be looking at opportunities to increase cash levels as a defensive move. In the event that there are further signals pointing to a strong downside move, I would rather be out of the market and miss a continued upside move than go along for the ride downward and have to work especially hard to get back up.
I've done that before, and I don't feel like having to do it again.
Traditional Stocks: Caterpillar, Cisco, Deere, Dow Chemical, MetLife, United Healthcare
Momentum Stocks: Citibank
Double Dip Dividend: Bank of America (ex-div 2/27), Lockheed Martin (ex-div 2/27), Lorillard (ex-div 2/27), Nike (ex-div 2/28)
Premiums Enhanced by Earnings: Home Depot (2/26 AM), MolyCorp (2/28 PM), Salesforce.com (2/28 PM), The Gap (2/28 PM)
Remember, these are just guidelines for the coming week. Some of the above selections may be sent to Option to Profit subscribers as actionable Trading Alerts, most often coupling a share purchase with call option sales or the sale of covered put contracts. Alerts are sent in adjustment to and consideration of market movements, in an attempt to create a healthy income stream for the week with reduction of trading risk.
Some of the stocks mentioned in this article may be viewed for their past performance utilizing the Option to Profit strategy.