- Nervous markets react to external events with ferocity when feeling threatened.
- Avoiding companies with significant exposure to escalating conflict may be an appropriate short-term strategy.
- Economic news this week, including the FOMC announcement and the Employment Situation Report, may be additional challenges.
"The Bear" is waking up.
Whether you interpret that to mean that Russia is seeking to return to some of its faded and faux glory left behind as its empire crumbled, or that the stock market is preparing for a sustained downward journey, neither one likes to feel threatened.
As we prepare for the coming week, the two bears may be very much related, at least if you believe in such things as "cause and effect."
It now seems like almost an eternity when the first murmurings of something perhaps going on in Crimea evoked a reaction from the markets.
On that Friday, 2 months ago, when news first broke, the DJIA went from a gain of 120 points to a loss of 20 in the final hour of trading, but somehow managed to recapture half of that drop to cap off a strong week.
Whatever happened to not going home long on the brink of a weekend of uncertainty?
Since that time, the increased tensions always seemed to come along on Fridays and this past week was no different. Except that on this particular Friday, it seems that many finally went home with lighter portfolios in hopes of not having lighter account balances on Monday morning.
As often is the case, these kind of back and forth weeks can be very kind to option sellers who can thrive when wandering aimlessly. However, while we await to see what if any unwanted surprises may come this weekend, the coming week packs its own potential challenges as there will be an FOMC announcement on Wednesday and the Employment Situation Report is released on Friday. Although neither should be holding much in the way of surprises, it is often very surprising to see how the market reacts to what is often the lack of news even when that is the expectation.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.
With the prospects of some kind of uncomfortable beginning to the coming week, there may be reason to stay away from those companies or sectors that might have enhanced risk related to any kind of escalating "tit for tat" that may occur if events in and around Ukraine and Russia deteriorate.
Bed Bath and Beyond (NASDAQ:BBBY), which as far as I know has little exposure east of Bangor and west of Los Angeles, is one of those companies that suffered the wrath of a disappointed market. Like many that stumble, but whose underlying business, execution or strategies aren't inherently flawed, there comes a point that price stability and even growth returns. While it has only been 2 weeks since earnings, Bed Bath and Beyond has withstood any further stresses from a wounded market and has thus far settled into some stability. While some may question the legitimacy of using this past winter's weather as an excuse for slumping sales, I'm not willing to paint with a broad brush. In fact, I would believe that retailers like Bed Bath and Beyond, typically not located in indoor malls, would be more subject to weather related issues than mall-based, one-stop shopping centers.
Having been to a number of other countries and having seen the high regard in which coffee is held, it's not very likely that Keuring Green Mountain (NASDAQ:GMCR) would feel any serious loss if exports to Russia were blocked as part of sanctions. At the current high levels, I'm surprised to be considering shares again, but I have had a long and happy history with this very volatile stock that has taken on significantly greater credibility with its new CEO.
Because of its volatility its option premiums are always attractive, but risk will be further enhanced as earnings are scheduled to be reported the following week. Shares are approaching that level they stood at before its explosive rise after the most recent earnings report.
Aetna (NYSE:AET) for a brief moment looked to be one of those reporting earnings that was going to capitalize on good news. Following a nice advance on the day of earnings, it started on this past fateful Friday with another 1.5% advance on top of a nearly 6% advance the day before. Within 10 minutes and well before the market started its own decline, that early gain was completely gone.
As pro-Russian militias may say if they believed that any expatriate nationals might be threatened in France, "C'est la vie." While that is certainly the case, such unexpected moves re-offer opportunity as the health care insurers are in a position to bounce back from some recent weakness. With earnings now out of the way and little bad news yet to be reported regarding the Affordable Healthcare Act transition, Aetna can get back to what health insurance companies have always been good at doing, besides lobbying. Although its dividend is on the low side, Aetna is a company that I could envision as a long-term core holding.
Dow Chemical (NYSE:DOW) also reported earnings this past week and beat projections the old-fashioned way. It cut costs in the face of falling revenues. While that says nothing good about an economy that is supposed to be growing, Dow Chemical's value may be enhanced as it has activists eyeing it for possible break-up. On the other end, defending the status quo is a hardened CEO who is likely to let little fall through the cracks as he pursues his own vision. While shares are trading near their highs, the activist presence is potentially helpful in keeping shares trading within a range that entices me to consider shares now, after a small drop, rather than waiting for a larger one on order to re-open a position. With its option premiums, generous dividend and opportunity for share appreciation, Dow Chemical is one stock that I would also consider for longer-term holding.
I'm on the fence over Cypress Semiconductor (NASDAQ:CY). I currently own shares and always like the idea of having some just as it trades near its strike price. It has a good recent habit of calling $10 its home and works hard to get back to that level, whether well above or well below. However, befitting its high beta, it fell about 5% on Friday and has placed itself quite a distance from its nearest strike. While I generally like paying less for shares, in the case of Cypress, I may be more enticed by some price migration higher in order to secure a better premium and putting shares closer to a strike that may make it easier to roll over option contracts to June 2014, if necessary. Holding shares until June may offer me enough time after all of these years to learn what Cypress Semiconductor actually does, although I'm familiar with its increasingly vocal CEO.
This is another week replete with earnings. For those paying attention, a number of companies were brutalized last week when delivering earnings or guidance, as the market was not very forgiving.
There's not much you can say about Herbalife, other than it may be the decade's most unpredictable stock. Not so much in terms of revenues, but rather in terms of "is it felonious or isn't it felonious?" With legal and regulatory issues looming ahead, the next bit of truly bad news may come at any moment, so it may be a good thing that earnings are reported on Monday. At least that news will be out of the way. Unlike many other volatile names, Herbalife actually move marginally higher to end the week, rather than plunging along with the rest. My preference, if trading on the basis of earnings, would be to sell puts, particularly if there is a substantive price drop preceding earnings.
Twitter lost much of the steam it had picked up in the early part of the week and finished at its lows. I already have puts on shares, having sold them about a month ago and rolled them forward a few times in the hopes of having the position expire before earnings.
However, with its marked weakness in the latter part of the week, I'm interested in the possibility of selling even more puts in advance of earnings on Tuesday. However, if there is price strength on Monday, I would be more inclined to wait for earnings and would then consider the sale of puts if shares drop after earnings are released.
Yelp is among those also having suffered a large drop as the week's trading came to its close. As with Twitter, the option market is implying a large earnings related move in price, with an implied volatility of nearly 15%. However, a drop of less than 21% may still be able to deliver a 1.1% return.
For those that just can't get enough of earnings related trades when bad news can be the best news of all, a more expanded list of potential trades can be seen.
Finally, Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) are part of what now everyone is affectionately referring to as "old tech." A few months ago, the same people were somewhat more derisive, but now "old tech" is everyone's darling. Intel's ex-dividend date is May 5, 2014, meaning that shares would need to be owned this week if hoping to capture the dividend. Microsoft goes ex-dividend during the final week of the May 2014 cycle.
Both stocks have been frequent holdings of mine, but both have recently been assigned. Although they are both trading near the top of their price ranges, the basic appeal still holds, which includes generous dividends and satisfactory premiums. Additionally, both also have in common a new kind of leadership. Intel is much more focused on operational issues, befitting the strength of its new CEO, while Microsoft may finally simply be ready to "get it" and leverage its great assets, recognizing that there may be some real gems beyond Windows.
Traditional Stocks: Aetna, Bed Bath and Beyond, Dow Chemical, Microsoft
Momentum: Cypress Semiconductor, Keurig Green Mountain
Double Dip Dividend: Intel (ex-div 5/5)
Premiums Enhanced by Earnings: Herbalife (4/8 PM), Twitter (4/27 PM), Yelp (4/30 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.
Disclosure: I am long CY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may buy/add shares or sell puts in AET, BBBY, CY, DOW, GMCR, HLF, INTC, MSFT, TWTR and YELP. I am currently short TWTR puts.