- Another weekend of uncertainty hangs over the market as it is again near all time highs.
- Economic growth continues to elude confirmation by most metrics.
- "Risk On" and "Risk Off" are again in vogue strategies and sentiment is frequently shifting into and out of perceived safety or reward.
The instant the Employment Situation Report was released and news of the creation of 288,000 new jobs was known, the spin and the interpretations started like wild.
Even partisans have to notice how detached they and their counterparts are from a true grasp of reality as they contrive ways to take credit or lay blame without regard to truth, in the expectation that no one will notice.
Whenever substantive economic news is released you can be certain of the immediate race to blanket the media with a version of the "truth" and talking points to reinforce one side's continuing infallibility over the other.
Never before has the "participation rate" received so much attention as those seeking to downplay the robust numbers found their voice. Others focused on having cake and eating it too, while pointing to increased jobs and increasing insurance enrollments under the Affordable Care Act.
It's always the same and thrives in a world where classic comments like "I was for ... before I was against it," barely get noticed and flip-flops are never considered as anything other than recreational footwear.
For those paying attention those flip-flops have been increasingly frequent in the markets as "risk off" and "risk on" are again concepts in vogue. They alternate with one another for investor favor on a very regular basis as there's little indication of direction, other than the expectation by some that the relentless move higher will simply continue.
With better numbers than expected the initial positive reaction from the market quickly gave way to the interpretation of their meaning with regard to the Federal Reserve's Qualitative Easing taper and the forward momentum was quickly lost. As the day progressed it was clear that the thought process of the past, that "good news is bad news" and bad news will make us wealthy, was returning.
More importantly, however, in helping to shape up the day was the fact that it was a Friday. Just as Tuedays are once again pre-ordained to be market gainers, so too are Fridays recently consigned to the loss camp.
Over the past two months you could be equally certain that the final trading day of the week was most likely a Friday and that the trading week would end with renewed concerns of some escalating conflict involving Russia. Why things seem to stay quiet during the week and then come to a head on Fridays is somewhat of a mystery, but that's been the clear trend since the onset on the crisis in Crimea.
Amazingly, yet another week that was fairly quiet during the first four trading days saw a flare up of tensions overseas on Friday and again had an impact on the markets, taking some luster off what were otherwise predominantly positive weeks. The key is that it has only been the luster, thus far, as the market hasn't been taken down to its bare, perhaps rusting metal base.
So powerful has this trend been that another well established trend is flailing by comparison. After an impressive run of nearly two years where the markets were statistically significantly more likely to have a higher move on the date of the release of the Employment Situation Report, this Friday marked the second consecutive month where that wasn't the case, although the pattern of the entire week of the report release being positive continued.
While economic reports are released, the FOMC announces and Russia foments, earnings are being released. Thus far, there hasn't been very much to suggest that there is a growing economy, yet we keep reaching new market highs. The recent GDP report didn't add anything to that belief, either, although as the ever optimistic like to point out, "it is a backward looking measure," as if forward looking measures have greater validity than that which was actually measured, rather than fantasized about.
We've seen this scenario before. While there are signs of tiring market the retreats to safety, such as utilities or consumer staples hasn't lasted very long and risk is re-embraced after only the briefest of absences. While the most risky of all have been exhibiting some bubble-like behavior that brings back memories of days past and those memories aren't necessarily good ones.
While the uncertainty continues, to me it also continues to be surprising of the relative confidence that exists that saw this Friday close with only a modest loss. While the precious metals market was demonstrating some nervousness the equity markets thought it safe to go home for the weekend and discounted the likelihood of a meltdown in overseas decorum, despite the signs that it was already occurring.
In the past, that would have been unusual, but now it is just more of the same, as nothing can stop the relentless march higher.
We've all heard that before, too.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.
While I'm not thrilled about the prospects about buying Apple (NASDAQ:AAPL) shares after their significant run higher fueled by the announcement of a 7 to 1 split and an 8% increase in the dividend, I do like its reasonably predictable pattern of behavior in its peri-ex-dividend period. While not a certainty, that behavior tends to see price increasing going into the ex-dividend date and then shortly thereafter. With that ex-dividend date this week I would like to consider a purchase and hopefully a quick exit from the position.
While many are of the belief that Apple shares will continue their appreciation after the split, I think those waiting for the split are likely to be disappointed as the money will have been made by those taking some profits by selling their appreciated shares to those clamoring for a piece of the pie.
Lately, pharmaceutical companies are hot. Imagine being so confident that you would consider a $100 billion buyout offer to be insufficient. Yet, while they are in play there are also concerns about even more regulatory pressure, but this time over sky high pricing for potentially life saving drugs.
Bristol-Myers Squibb (NYSE:BMY) straddles the worlds of "big pharma" and bio-pharma and its shares have found a nice home in this price range for the past 6 months. With earnings having been reported I think this is a good time to enter or add shares, not just for the option premium, but also for share appreciation as the sector is suddenly of interest.
MetLife (NYSE:MET) also just reported earnings and is currently trading a little above the mid-point of its recent comfortable range. It has actually held up nicely while interest rates have fallen and the 10 Year was testing the 2.5% level. MetLife would have been expected to also lose some luster in a falling rate environment, but it has shown very nice resilience. In addition to its usually attractive option premium shares are ex-dividend this week, compounding its lure.
Starbucks (NASDAQ:SBUX) also is ex-dividend this week and I've resigned myself over the past month that shares won't be returning, hopefully, to the levels that I previously thought represented fair pricing. I've only owned 3 lots of shares in 2014, but each time I hear Howard Schultz speak the more inspired I get regarding his vision for the company that goes well beyond ingestibles. It has become one of those companies upon which I like to use out of the money call options when adding shares, as I think there is always room for its short term appreciation.
eBay (NASDAQ:EBAY) is one of those companies that so many people love to disparage. Of course its decision to repatriate foreign cash this week and pay taxes is somewhat puzzling, although perhaps should be cheered as being patriotic, it evokes policy discussion, particularly as other companies seek tax inversion benefits by moving offshore.
Certainly Carl Icahn can't be terribly pleased with what eBay is doing, as he likely interprets the decision as a squandering of his billions, so I expect things to heat up at eBay. However, even without the tax issue and even without Carl Icahn as part of the equation, eBay has been as reliant of a covered option play as can be found and with some patience can be a very reliable partner in the creation of an income stream. The only thing that would make its shares more appealing to me would be the initiation of a dividend, so I hope Carl Icahn is reading.
Chesapeake Energy (NYSE:CHK), speaking of Carl Icahn, reports earnings this week. It has long been one of my very favorite covered option trades, but my last lot was assigned more than $2 ago. As opposed to many trades that I like to make when earnings are announced and which are done through the sale of put contracts, with no desire to own shares, I wouldn't mind ownership of shares.
As the week begins its trading it will simply be a question of whether a covered call position or the sale of puts provides a better rate of return and future prospects for continuing generation of income or quick closure. At the moment I'm more inclined to consider the sale of puts, however the initial market sentiment may shift my own, especially if shares open and stay higher.
Also reporting earnings this week is Nu Skin (NYSE:NUS). Unlike Chesapeake, and much more like Herbalife (NYSE:HLF), I'm not terribly interested in owning shares. NuSkin last reported earnings just 2 months ago after a delay of about a month in reporting its previous earnings. That;s never a good thing. In addition, its business practices are also occasionally called into question even by governments, as it has significant interests in China, which has alleged that the business ay be a pyramid scheme.
NuSkin, for its part, has re-started its distributor recruitment after nearly 3 months of abeyance in China. WHile earnings may adversely impacted, and its shares certainly dived after the initial news in January 2014, I believe that it is already baked into expectations. What I do expect is positive guidance, even though there's possibly reason not to believe much from companies in those kind of business. While I can't make a compelling case for owning shares, there may be a case for selling puts prior to earnings or for the more cautious, doing so after earnings if there is a plunge in reaction to the report.
GameStop (NYSE:GME) reports earnings later this month. Since January 2014 its chart looks very similar to NuSkin, which is not meant as a compliment. It is one of those companies that makes you wonder how it is that it still exists in this world of streaming data. it's most recent challenge was news of Wal-Mart (NYSE:WMT) getting into the used video game business in exchange for Wal-Mart vouchers. I sold puts at that time following the sharp drop in shares and happily saw the position quickly expire,as so often the initial response has little reason to head in the same direction as cooler heads prevail.
With well known short interest that is always mentioned in the same breath as its name, GameStop had fully recovered from its Wal-Mart induced loss, but has recently faltered again. It appears to have some decent price support within about $3 of its current price and the kind of option premiums that could make that risk - reward proposition appealing for some, although May 22, 2014 earnings do add to the potential risk.
Finally, I was watching the action of JP Morgan (NYSE:JPM) closely during the final hour of trading on Friday. That's because I was expecting shares to be assigned, but a late decline in shares was threatening to see it dip below the $55.50 strike level. Ultimately shares closed at $55.58, but after the closing bell immediately slumped about a dollar lower as it announced the expectation that its trading revenues would drop 20% in the next quarter and that it had some exposure in the Russian market.
Part of the covered call strategy that I like to employ is the serial or recurrent purchase of positions. Nothing seems to work better than having shares assigned and then buying them back at lower prices.
Those kinds of opportunities are always serendipitous and you certainly can't take credit when they occur, but they do occur with reasonable frequency. Any further erosion in shares on Monday morning may be a good opportunity to welcome shares back after a weekend apart.
Traditional Stocks: Bristol Myers Squibb, eBay, JP Morgan Chase
Double Dip Dividend: Apple (5/8) , MetLife (5/7), Starbucks (5/6)
Premiums Enhanced by Earnings: Chesapeake Energy (5/6 PM) , NuSkin (5/6 AM)
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 AAPL, BMY, CHK, EBAY, GME, JPM, MET, NUS and SBUX