- Increasing geopolitical conflict disrupts the vacuum that puts the current market at risk for unexpected moves in the absence of obvious catalysts.
- Investor complacency may be better reflected by the discounting of potential risk than through the use of a backward looking measure, such as Volatility.
- Recent past crises have been a stepping stone for market gains rather than sustained consolidation.
It's hard to believe that there was ever a period of a few hundred years with relative peace and little military expansion.
It's not too hard to believe that almost 2000 years have passed, but given that the Pax Romana was followed by the Middle Ages we may want to re-think the idyllic and beneficial nature of peace.
The "Pax Romana" sounds so quaint in an era when even a week without new conflict seems like a gift from the heavens, but the markets need some kind of conflict, physical or otherwise, to keep it functioning in a rational manner. Otherwise it gets left to its own self and that could have consequences.
This past week was one in which there was no real scheduled news and very little was expected to be happening to shake markets. It was a week when I thought the real challenge would be balancing new market highs achieved in very tentative fashion with the vacuum that can generate largely uncatalyzed moves.
In that vacuum too much quietude can lead to lots of introspection and over-analysis, not to mention those voices that start telling you what you really should be doing. In that vacuum it's not too unusual to see over-exaggerated responses to otherwise benign factors.
Who knew that the vacuum could be so easily magnify the results of a primary election in a small congressional district?
For some reason that was the conventional wisdom explaining the first of two triple digit losses mid-week, despite little rational reason to believe that the political landscape could get any less accommodating. Why in the world a roadblock toward achieving immigration reform could jeopardize stock health is a difficult thesis to weave, but that was the story and everyone stuck to it, while ignoring the fact that the World Bank had cut its forecasts for global growth.
However, the following day there really was something to be concerned about and that was the disruption of a week's worth of world peace as news came of a mostly unknown army beginning to conquer Iraq and marching toward its capital with Patton-like speed.
Its name "ISIS," an acronym for "The Islamic State in Iraq and Syria" is an unfortunate situation for Isis Pharmaceuticals (NASDAQ:ISIS). It reminds me a bit of the early 1980s and the one time popular diet suppressant, AYDS. Hopefully, Isis Pharmaceuticals will respond better than the decision to rename a product as "Diet Ayds."
But with tensions rising as this past week came to its close, the market once again did the unexpected, just as it had done through much of 2011, 2012 and 2013.
If the lessons of the Crimean and Ukraine crises have taught us anything, it's that Friday crises tend to be good for whatever it is that's ailing the markets.
Going into a weekend of uncertainty the market again failed to sell off and abide by the age old wisdom of not staying long going into a weekend of uncertainty.
Lately, it seems that the market thrives most when peace, whether that of political compromise necessary for a budgetary agreement or that of a cease fire, is itself at risk. With all of the recent talk about complacency, while the Volatility Index may reflect the level of past complacent behavior, the decision to ignore the unknown that may come from a marauding army marching into a nation's capital is a true measure.
While we all want peace in every aspect of our lives, there is a sense of "schadenfreude" that may exist when realizing that it is ongoing tension that may serve to keep markets thriving rather than focusing upon itself and realizing that sometimes heights are untenable.
As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum or "PEE" categories.
In addition to the certainty of conflict that seems to occur on a very predictable basis, so too is there certainty lately that General Motors (NYSE:GM) will be in the news and not for a good reason. With even more recalls announced last week, there really hasn't been much good news for quite a while, but as we saw last week, that didn't seem to have any impact on sales.
To its credit, despite all of the adverse news General Motors has defended the $35 level very nicely, as long as you've had a little bit of faith and patience while others either took profits or panicked.
Following a little bit of weakness and demonstrating that shares can absorb incredible amounts of bad news, General Motors offers some good opportunities for use in a covered option strategy, as it offers an attractive dividend that results from its frequent price gyrations. With its equally attractive dividend, it is easier to be patient while watching shares move up and down. The availability of expanded weekly options adds considerable latitude in how shares are managed while awaiting those price movements.
With the recent revision to GDP, there may not be much reason to be optimistic about near-term economic growth. However, with continuing and steady growth in employment and perhaps bolstered by news from one-time leader Intel (NASDAQ:INTC) of increasing fortunes, I again took to my proxy for economic growth, Fastenal (NASDAQ:FAST).
I already own shares that may be assigned this coming week, but would not be averse to rolling them over as they approach the purchase price after some recent weakness. I would also consider either replacing those shares, if assigned, or even adding additional shares and would further consider using some longer-term options, such as the July or August 2014 contracts. The latter also adds the possibility of capturing a dividend payment.
Nike (NYSE:NKE) isn't a company that I've owned very often, although it is one that I look at each week when thinking of possible replacements for assigned shares. Unfortunately, this week I didn't have any assignments and that makes me a little more guarded about adding new positions and eroding my cash position. However, it's hard to formulate a thesis whereby Nike is disproportionately damaged by any breach of peace in the world. I also look at shares of Nike as currently being on sale after some recent losses.
Lowe's (NYSE:LOW) on the other hand, is a company that I've owned with some frequency, as recently as a week ago. It, too, is on sale after last week's market movements and without any real reason for its price drop.
Lowe's fits the profile of companies that have been especially kind to me in that it tends to move within a defined range, deals with an easily understandable product and happens to offer reasonable option premiums and a fair dividend.
While there's nothing terribly exciting about the company that sits in the shadow of a larger competitor and isn't too likely to gain from future growth nor suffer from growth disappointments, there is something exciting about booking profits at a tolerable level of risk.
With some recent concerns about its future in the Russian marketplace having been put at ease, MasterCard (NYSE:MA) has rebounded from its recent lows. It is among those stocks that has seen me hoping for a drop in value and did so a bit over the past week. My comfort level with purchasing new shares is in the $76 range and it is currently just below that level, inviting some consideration. However, I may be inclined to sell puts on shares as my preference is a lower entry price. If doing so and the shares dropped below the strike, I would assess whether to attempt to rollover the puts in an effort to get an even lower entry price or whether to accept assignment and position myself to sell calls and perhaps collect the trivial dividend early next month.
The week's two potential dividend plays are very much at extremes of the spectrum. General Electric (NYSE:GE) is fairly staid, moves in small doses, while Las Vegas Sands (NYSE:LVS) is quite the opposite.
General Electric is a company that I don't own often enough and am never quite certain why that is the case. It too tends to trade in a definable range, is not terribly volatile, offers a reasonable option premium and an excellent dividend. All of that sounds compelling to me, with perhaps this being the week, as the dividend serves as a lure.
Las Vegas Sands, which I purchased last week and may lose to early assignment, is still at the lower end of its recent trading range, despite the good showing last week. While I don't particularly like chasing stocks that have risen, regardless of how much higher they may still need to go to get to recent highs, here too, the dividend may be a potent lure. While the premium is always attractive, I think that the near-term lower boundary on the trading range may have been defined at about $72.
Finally, everyone who loves dysfunction would certainly be attracted to Darden Restaurants (NYSE:DRI).
Not too long ago its CEO, Clarence Otis, was hailed as a genius and in touch with the casual dining needs of the nation. Now, he is castigated as caring only about his own fate and selling Darden's assets at ridiculously low valuation in an effort to fend off activists.
I rarely want to consider an earnings related trade unless there are weekly and preferably expanded weekly contracts available and then usually consider the sale of puts. Sadly, in Darden's case there are only monthly contracts, but this happens to be the final week of the monthly cycle, so in a perfectly executed strategy this could be a weekly trade.
However, despite that, I look at a potential share purchase of Darden and looking at a longer-term commitment, with consideration of selling July 2014 calls in the hope of also capturing its very healthy dividend.
Dysfunction can sometimes play the same role as conflict. Sure, normalcy is far easier to deal with, but as with peace, where's the excitement in that?
Traditional Stocks: Fastenal, Lowes, MasterCard, Nike
Momentum: General Motors
Double Dip Dividend: General Electric (6/19), Las Vegas Sands (6/18)
Premiums Enhanced by Earnings: Darden Restaurants (6/20)
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 shares of DRI, FAST, GE, GM, LOW, LVS, NKE, MA.