- Markets are again approaching all-time highs but doing so in a very tentative manner.
- Ten weeks of alternating gains and losses may foretell of diminishing energy and ability for the market to continue its move higher.
- With earnings season nearing its end another catalyst is needed to offset the disappointments and erosion of confidence in more speculative stocks.
A few hundred years ago, Sir Isaac Newton is widely credited with formulating the Law of Universal Gravitation.
In hindsight, that "discovery" shouldn't really be as momentous as the discovery more than a century earlier that the sun didn't revolve around the earth. It doesn't seem as if it would take an esteemed mathematician to let the world know that objects fall rather than spontaneously rise. Of course, the Law is much more complex than that, but we tend to view things in their most simplistic terms.
Up until recently, the Law of Gravity seemed to have no practical implications for the stock market because prices only went higher, just as the sun revolved around the earth until proven otherwise. Additionally, unlike the very well defined formula that describes the acceleration that accompanies a falling object, there are no such ways to describe how stocks can drop, plunge or go into free fall.
For those that remember the "Great Stockbroker Fallout of 1987," back then, young stockbrokers could have gone 5 years without realizing that what goes up will come down, fled the industry en masse upon realizing the practical application of Newton's genius in foretelling the ultimate direction of every stock and stock markets.
The 2014 market has been more like a bouncing ball as the past 10 weeks have seen alternating rises and falls of the S&P 500. Only a mad man or a genius could have predicted that to become the case. It's unlikely that even a genius like Newton could have described the laws governing such behavior, although even the least insightful of physics students knows that the energy contained in that bouncing ball is continually diminished.
As in the old world when people believed that the world was flat and that its exploration might lead one to fall off the edge, I can't help but wonder what will happen to that bouncing ball in this flat market as it deceptively has come within a whisker of even more records on the DJIA and S&P 500. Even while moving higher it seems like there is some sort of precipice ahead that some momentum stocks have already discovered while functioning as advance scouts for the rest of the market.
With earnings season nearing its end, the catalyst to continue sapping the energy out of the market may need to come from elsewhere although I would gladly embrace any force that would forestall gravity's inevitable power.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.
As a past customer, I was never enamored of Comcast (NASDAQ:CMCSA) and jumped at the first opportunity to switch providers. But while there may be some disdain for the product and especially the service, memories of which won't easily be erased by visions of a commercial showing a comedian riding along in a service truck, you do have to admire the company's shares.
Having spent the past 6 months trading above $49 it has recently been range bound and that is where the appeal for me starts. Its history of annual dividend increases, good option premiums and price stability add to that appeal. While there is much back story at present in the world of cable providers and Comcast's proposed purchase of Time Warner Cable (NYSE:TWC) may still have some obstacles ahead, the core business shouldn't be adversely impacted by regulatory decisions.
Also, as a one-time frequent customer of Best Buy (NYSE:BBY), I don't get into their stores very often anymore. Once they switched from a perpendicular grid store layout to a diagonal one they lost me. Other people blame it on Amazon (NASDAQ:AMZN), but for me it was all about the floor plan. But while I don't shop there very much anymore, its stock has been a delight trading at the $26 level.
Having had shares assigned for the fourth time in the past two months, I would like to see a little bit of a price drop after Friday's gain before buying shares again. However, with earnings coming up during the first week of the June 2014 option cycle, you do have to be prepared for nasty surprises as are often delivered. There's still more time for someone to blame cold weather on performance and this may be the retailer to do so. With that in mind, Best Buy may possibly be better approached through the sale of put options this week with the intent of rolling over if in jeopardy of being assigned shares prior to the earnings release.
There's barely a week that I don't consider buying or adding shares of Coach (NYSE:COH). I currently own shares purchased too soon after recent earnings and that still have a significant climb ahead of them to break even. However, with an upcoming dividend during the June 2014 cycle and shares trading near the yearly low point, I may be content with settling in with a monthly option contract, collecting the premium and dividend and just waiting for shares to do what they have done so reliably over the past two years and returning to and beyond their pre-earnings report level.
Mosaic (NYSE:MOS) is another one of those companies that I've owned on many occasions over the years. Most recently, I've been a serial purchaser of shares as its share price plunged following announcement of a crack in the potash cartel. Still owning some more expensive shares those serial purchases have helped to offset the paper losses on the more expensive shares. Following a recent price pullback after earnings, I'm ready to again add shares as I expect Mosaic to soon surpass the $50 level and stay above there.
Dow Chemical (NYSE:DOW) is also a company whose shares I've owned with frequency over the years, but less so as it moved from $42 to $50. Having recently decided that $48 was a reasonable new re-entry point that may receive some support from the presence of activist investors, the combination of premiums, dividends and opportunity for share appreciation is compelling.
HollyFrontier (NYSE:HFC) has become a recent favorite replacing Phillips 66 (NYSE:PSX) which has just appreciated too much and too fast. While waiting for Phillips 66 to return to more reasonable levels, HollyFrontier has been an excellent combination of gyrating price movements up and down and a subsequent return to the mean. Because of those sharp movements, its option premium is generally attractive and shares routinely distribute a special dividend in addition to a regular dividend that has been routinely increased since it began three years ago.
The financial sector has been weak of late and we've gotten surprises from JPMorgan (NYSE:JPM) recently with regard to its future investment related earnings and Bank of America (NYSE:BAC) with regard to its calculation error of capital on its books. However, Morgan Stanley (NYSE:MS) has been steadfast. Fortunately, if interested in purchasing shares its steadfast performance hasn't been matched by its share price which is now about 10% off its recent high.
With its newly increased dividend and plenty of opportunity to see approval for a further increase, it appears to be operating at high efficiency and has been trading within a reasonably tight price range for the past 6 months, making it a good consideration for a covered option trade and perhaps on a serial basis.
Since I've spent much of 2014 in pursuit of dividends in anticipation of decreased opportunity for share appreciation, Eli Lilly (NYSE:LLY) is once again under consideration as it goes ex-dividend this week. With shares trading less than 5% from its one-year high, I would prefer a lower entry price, but the sector is seeing more interest with mergers, acquisitions and regulatory scrutiny, all of which can be an impetus for increasing option premiums.
Finally, it's hard to believe that I would ever live in an age when people are suggesting that Apple (NASDAQ:AAPL) may no longer be "cool." For some, that was the reason behind their reported purchase of Beats Music, as many professed not to understand the synergies, nor the appeal, besides the cache that comes with the name.
Last week I thought there might be an opportunity to purchase Apple shares in order to attempt to capture its dividend and option premium in the hope for a quick trade. As it turned out that trade was never made because Apple opened the week up strongly, continuing its run higher since recent earnings and other news were announced. I don't usually chase stocks and in this case that proved to be fortuitous as shares followed the market's own ambivalence and finished the week lower.
However, this week comes the same potential opportunity with the newly resurgent Microsoft (NASDAQ:MSFT). While it's still too early to begin suggesting that there's anything "cool" about Microsoft, there's nothing lame about trying to grab the dividend and option premium that was elusive the previous week with its competition.
Microsoft has under-performed the S&P 500 over the past month as the clamor over "old technology" hasn't really been a path to riches, but has certainly been better than the so-called "new technology." Yet Microsoft has been maintaining the $39 level and may be in good position to trade in that range for a while longer. It neither needs to obey or disregard gravity for its premiums and dividends to make it a worthwhile portfolio addition.
Traditional Stocks: Comcast, Dow Chemical, HollyFrontier
Momentum: Best Buy, Coach, Morgan Stanley, Mosaic
Double Dip Dividend: Microsoft (5/13 $0.28), Eli Lilly (5/13 $0.49)
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 COH, MOS, JPM. 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 BBY, CMCSA, COH, DOW, HFC, LLY, MOS, MS and MSFT.