- The stock market responds with optimism to dovish monetary sentiment.
- The basis of the stock market's climb may be susceptible to predatory selling.
- Upcoming earnings season may further exploit market fragility.
This week started on such a positive note with the reassuring words of a dove, yet ended so harshly.
This time of the year it's supposed to be the other way around with the lamb having the final word as months of a less threatening nature await ahead.
Instead, after Friday's close, whatever optimism may have been generated by setting even more record highs earlier in the week, had given way to caution and perhaps preparation for some ill winds.
Back when I was in college it wasn't meant as a compliment if you were referred to as being a "dove." and the proverbial lamb was always being led to slaughter. In fact, if you were called a "dove," that was only in polite circles. Otherwise, the words used were far more descriptive and derisive.
By the same token, the doves out there may not have had the kindest of words for the hawks, but in nature, it's usually the hawk that triumphs. In fact, recalling the recent mauling of a peace dove that had been just released by Pope Francis and some children, it didn't really even require a hawk. A seagull and a lowly crow were enough for the task.
This week, though, it was the dove that ruled the day and set the tone for the week. Well, at least most of it, until its fragile nature beset itself.
A fragile market can be equally susceptible even to less formidable foes, as Friday's sell-off had little basis and came on the day of the Employment Situation Report, which for the past 20 months or so has been strongly correlated to a higher moving market on the day of release and for the week as a whole. While the week as a whole did show an advance, the former correlation stood for only a short time before strong selling set in.
Whatever doubts there may have been regarding where Janet Yellen stood on that continuum from dove to hawk following her initial press conference, she made it clear that on issues of the Federal Reserve's actions to help lower the unemployment rate, she was an unabashed dove and while there may be more dissenting voting members than before sitting on the Federal Reserve, she still controls the hawks, but probably keeps at least one eye wary at all times.
The stock market loved that re-affirmation of policy the way we love the beauty of a dove, even though like short sellers, we may privately relish its obliteration by a swooping predator hawk.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend and Momentum categories, with no "PEE" selections this week (see details).
While this was an especially brutal week for stocks on the NASDAQ and particularly for many of those stocks that had borne a disproportionate amount of everyone's attention as they moved ever higher, many others were included in whatever wrath took hold.
With earnings season beginning this coming week, there may be some return to fundamentals, however, disappointments, particularly if weather hasn't been fully factored in or discounted may further exploit market fragility.
MasterCard (NYSE:MA) was one such casualty of the stampede. There was little to account for its 2.5% drop on Friday, bringing it to its 5 month low. The previous week, faced with some potentially adverse decisions regarding swipe fees it reacted well, yet this week it did otherwise without any new challenges being sent its way. While it goes ex-dividend on Monday, its puny dividend isn't something that's likely to be missed by those entering into new positions as shares find themselves at a 5 month low. Believing that last week's selling was overdone I would consider a slightly longer option contract and the use of an out of the money strike as a means to allow some time for price repair while collecting an option premium while waiting.
While not falling quite as much as MasterCard on Friday, shares of Starbucks (NASDAQ:SBUX) also succumbed to selling pressure. While the past week was filled with news regarding other players entering into the breakfast marketplace, including offering free cups of coffee, there was really an absence of Starbucks specific news. While breakfast taco waffles may garner some attention, Starbucks has become as much a way of life as it has a product provider. Its current price is one where it has shown considerable strength and it too may warrant the use of slightly longer term option contracts and an out of the money strike.
Apollo Education (NASDAQ:APOL) was a stock that I highlighted last week as a possible earnings trade. As usual, I prefer those through the sale of well out of the money put contracts prior to earnings, especially if share price is trending downward prior to earnings. In Apollo's case shares had instead shown strength prior to the earnings release, so I stayed away from selling puts at that time. After earnings shares did sustain a drop and I then sold some out of the money puts in the hope that the drop wouldn't continue beyond another few strike levels. While there was almost a need to roll them over on Friday as the market was crumbling, Apollo shares showed resilience, even as the market did not.
While I still don't have much confidence in the product it offers nor the manner in which it generates its revenues, that's largely irrelevant, as it continues to offer some reasonable returns even if shares continue to experience some decline. Once again, however, I would most likely consider the sale of puts rather than an outright purchase of shares and concomitant sale of calls.
There's probably very little that can be added to make a discussion of Herbalife (NYSE:HLF) newsworthy, but when there is, it will really be worth paying attention. While Herbalife has been a good target of put sellers following the severe price drop in the wake of regulatory and legal investigations that are being escalated, it has recovered very nicely with the realization that any real news is likely to be in the distance. It too, is a position that I would likely consider entry through the sale of out of the money puts.
This week's dividend stocks for consideration are two that I haven't owned for a while, as I've been waiting for them to return to more reasonable price levels. Sometimes the realization comes that waiting only prevents being an active participant. Aetna (NYSE:AET) and Abbott Labs (NYSE:ABT) have long been absent from my portfolio despite continually thinking about adding them back.
With a large number of existing positions already going ex-dividend this week, I'm not as anxious to add any additional ones. However, of those two, Abbott Labs is more appealing for having a higher dividend rate and for having already come off some recent price peaks. In need of additional health care sector stocks, Abbott also carries that personal appeal at this point in time. However, it reports earnings the following week so my preference, if purchasing shares, would be a quick holding and given its current option premium would even be willingly accepting of an early assignment.
Aetna has simply left me behind in the dust as I've been waiting for it to return to what I believed was a fair price, but apparently the market has long disagreed. While it may be some time until we all realize whether new healthcare mandates are a positive or negative for the insurers, the one thing that most everyone can agree is that the long term is always positive when your fee structure is highly responsive to actuarial data. Add to that an increasing interest rate environment and the future may be bright for insurers.
Among the shares that I had assigned this past week were Comcast (NASDAQ:CMCSA) and Coach (NYSE:COH). Following the week ending sell-off I was grateful to have as many assignments as there were, especially to replenish cash reserves in the event of buying opportunities ahead. However, among those assigned, these two are ones that I'm eager to re-incorporate into my portfolio.
Comcast, despite my personal feelings about the product and service, has just been a spectacular growth story and has had great guidance under the control of the Roberts family. My celebration of "Comcast Liberation Day" a few years ago didn't mean that I would boycott share ownership or overlook its attributes as an investment. Its recent 10% price drop in the past two months from its highs has offered an opportunity to find some more realistic entry points. While I've been following shares for quite some time, it only recently began offering weekly and expanded weekly options. For me, that was the signal, combined with the reduced share price to start initiating positions. I envision a similar opportunity with Comcast shares on a serial basis as I have experienced with Coach.
Coach remains a stock that I feel like I could happily buy most week in and out as long as it's trading in a $48-$54 range and have done so repeatedly when it has done so. Despite a near absence of positive news in almost two years and the company having been written off as a loser in the competitive wars, especially with Michael Kors (NYSE:KORS), for those who can recognize that multiple small stock gains can be very meaningful, it has been a consistent performer. With earnings approaching at the end of the month, I would be less inclined to use longer term option contracts at this time, as Coach has had a recent history of sharp and unpredictable moves following earnings.
While Coach has been unable to do anything right in the eyes of many, until recently, Under Armour (NYSE:UA) could do no wrong. While it's still not clear whether the design of their latest skating wear for US Olympians was in any way related to their disappointing performance, Under Armour's CEO, Kevin Plank, was a perfect study in how to present his company when under public scrutiny.
While it received a downgrade about 3 weeks ago and subsequently fell more than 7% in that aftermath, it fell an additional 9% from that sentinel point late this week as it was carried along with the rest of the deluge. As with many others, the selling was in the absence of substantive news.
With earnings season beginning this coming week, Under Armour is among those announcing early in the process on April 17, 2014. Its volatility is commanding a health option premium at a time when many others are languishing, however, the risk may be compounded during the following week. For that reason, if considering the purchase of shares I would likely use a weekly contract and if necessary roll that over to a longer term contract in anticipation of that enhanced risk. As earnings approach, Under Armour may also turn out to be a potential earnings related trade through the sale of out of the money put options.
Finally, a number of years ago, I was studying two stocks with an eye toward adding one to my regular rotation in need of another energy sector position. They were Anadarko (NYSE:APC) and Apache (NYSE:APA). For a while I would get their stock symbols confused and really had a difficult time discerning their differences. I still have no real idea of what those differences may be, but for some reason I gravitated toward Anadarko.
This week, that dalliance may have come to an end, at least for the time being, as my shares were assigned following an untimely and unexpected end to the Tronox litigation that was an unwelcome part of its Kerr McGee purchase.
Whatever positive comments I would normally make about Anadarko relative to its prospects for trading in a range and offering an attractive premium can now be transferred to Apache. The best part, though, is that Apache is approximately 10% below its recent high and can make me forget about Anadarko for now.
Traditional Stocks: Apache, Comcast, MasterCard, Starbucks
Momentum Stocks: Apollo, Coach, Herbalife, Under Armour
Double Dip Dividend: Aetna (4/8), Abbott Labs (4/11)
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.
Additional disclosure: I may buy/add shares or sell puts in ABT, AET, APA, APOL, CMCSA, COH, HLF, MA SBUX and UA