Not All Free Falls Are Exhilarating

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Includes: ANF, CSCO, GM, HAS, JWN, LB, M, MAT, MSFT, WMT
by: George Acs

Summary

Retail stocks led the market lower this week as oil took a back seat.

There is little evidence that the consumer is actively participating in the economy and if employment data continues to be disappointing, may represent a lead weight.

After a nice upswing to erase 2016's early and large losses. the past 2 months have gone nowhere, but retail may have us at a precipice.

It took every last bit of my courage to jump out of a plane.

That was with a parachute and I only did so after suspending all of the logical and rational thoughts that I possessed.

Sometimes you do very uncharacteristic things when you want to impress someone for some other kind of excitement.

No other level of excitement could ever be high enough to get me to further suspend logic to engage in a free fall, though.

I don't care how exhilarating it might be, staying alive seems more exhilarating to me.

Some free falls don't require your consent, though and unless you've positioned yourself short in advance of the free fall, it's definitely not an exhilarating process.

The past week was one in which oil wasn't the prevailing theme even as it had its own large moves.

Instead, it was the free fall of retail, led by Macy's (NYSE:M) and Nordstrom (NYSE:JWN), arguably among the best of the major national retailers, that characterized the stock market.

Of course, Macy's and then Nordstrom took most every other retailer down with them and were able to drag along many others.

That kind of free fall, though, leaves open the question of exactly where the floor happens to be.

On a positive note, hitting the floor after a market free fall is probably a lot better than hitting the floor following a recreational free fall and you do get the chance to play the game a bit longer.

What Macy's and Nordstrom may be telling us, and what Limited Brands (NYSE:LB) suggested the prior week, is that the consumer isn't exactly a willing participant and may instead be a lead weight on the economy.

That lead weight won't speed up a free fall descent, as we are fortunate to be governed by some inviolate laws of physics, but they sure can make it difficult to climb back up again.

With a disappointing Employment Situation Report and disappointing GDP growth, for those, such as myself, who had hoped that perhaps retail could paint a somewhat different picture of consumer participation, there was no different picture.

It seems that investors are appropriately recognizing the weakness in retail and the weakness in job growth as not being worthy of celebration.

Sometimes bad news really is bad news.

There are many more important retailers reporting this week, but it's not too likely that there will much in the way of upside surprises, unless expectations for Wal-Mart (NYSE:WMT) are so low and results buoyed by those who, in the past quarter, stopped shopping at Macy's.

With last week's loss, we are about to enter the sixth month of the year with the S&P 500 barely 0.1% higher.

The first 3 months of 2016 was a story of two equal halves moving in big ways and in opposite directions. The past two months, however, have been a story of vacillation and moving nowhere and leaving few fulfilled.

We may find out exactly where the floor may be as the coming week comes to its end.

As usual, the week's potential stock selections are classified as being in the Traditional, Double Dip Dividend, Momentum or "PEE" categories.

For the first time in 2016 I have a decent number of options contracts expiring as the monthly cycle comes to its end.

For me, 2016 has been a year of very little trading and I'm looking forward to the opportunity to get some assignments and rollovers, as long as that free fall doesn't continue.

While there are some positions that I wouldn't mind adding this week, it may be yet another week with very little reason to add any new positions.

Among those that have some interest for me are ex-dividend stocks Mattel (NASDAQ:MAT) and Microsoft (NASDAQ:MSFT).

I had shares of Mattel assigned at $33 in January 2016, after 15 months of holding.

There was a time when I would have thought that an 18.4 % return, including dividends, for a 15 month period was pretty mediocre.

During that same time period, the S&P 500, without accounting for dividends, was 3.3% higher.

That's even more mediocre.

Mediocre may be a good way to describe Mattel, particularly in relationship to Hasbro (NASDAQ:HAS), as Mattel just seems to wax and wane along with Barbie. Going on the "Mattel Shop" website doesn't do too much to make you believe that there is anything exhilarating to be had.

What I do like about Mattel is a chance to buy shares, at a price lower than where I had them assigned away from me, and a chance to capture the dividend.

When I last owned Mattel shares it only offered monthly option contracts, but now there are weekly and extended weekly contracts. If buying shares, I would sell the weekly at the money call, but if faced with the need to rollover the position, I would consider a longer term and a higher strike price.

Microsoft has just started to have a little recovery from its sharp earnings related decline. It's not that often that you can find Microsoft trading at a nearly 10% discount to where it had recently been, but this is one of those opportunities.

It's not likely held hostage by the price of oil, nor by the fortunes at Macy's, nor Wal-Mart.

What it has is upside potential following that fall, a nice dividend and an attractive premium.

As it goes ex-dividend, I would likely consider the same strategy, as with Mattel, if faced with the need to rollover the short call option position.

As long as we're in the technology arena, Cisco (NASDAQ:CSCO) reports earnings this week and will be ex-dividend in early July.

Normally, I like to consider the sale of weekly puts on an earnings related trade when it offers a 1% ROI or greater at a strike level that's outside of the limit defined by the "implied move."

In Cisco's case, that's not the case, as the implied move is 5.6% and the reward that I seek for that risk just isn't there, at least not for a weekly put sale.

Where I do see some potential for reward is in the belief that Cisco may have already sustained a decline fueled by Microsoft and may have some upside potential in the months following.

For that reason I am considering the purchase of shares and sale of longer term calls prior to earnings being reported. However, if that is more exhilaration than someone is willing to endure, the alternative is to wait until after earnings and then in the event of a decline in price, to consider doing the same, but at a lower strike price.

General Motors (NYSE:GM) is recovering from its February 2016 lows and doing so through a series of higher lows. I like that pattern and also have an eye on its upcoming ex-dividend date in the early part of June.

With a price increase in mind and that eye toward the dividend, I would consider the purchase of shares and again select a longer term call option sale than I would normally prefer when initiating a new position. In this instance, that would mean a June 2016 or beyond expiration date and select an out of the money strike level.

Finally, if you believe in "death by retail," there's always Abercrombie & Fitch (NYSE:ANF).

These days, no one has great admiration for the company, but you do have to admire the steady climb it made, beginning with earnings in November 2015 and again in February 2016.

Of course, you also have to be in awe of its history of sharp declines, which now includes the past two months.

Abercrombie & Fitch doesn't report earnings until May 26, 2016 and could easily get dragged down this coming week as other retailers take center stage.

Along with that uncertainty associated both with the sector and with Abercrombie & Fitch itself, the premium for the sale of out of the money puts is fairly attractive.

In the event that shares do take a decline and you are faced with having to take assignment of shares, a decision has to be made as to whether to attempt to rollover those short puts into the week of earnings, when the premium will truly be enhanced, or to take the assignment.

The key factor may be the as-yet-unannounced ex-dividend date.

Abercrombie & Fitch has an attractive dividend and I am loathe to sell puts in the face of an ex-dividend date.

If the ex-dividend date is in the same week as earnings, I'll be more inclined to take assignment of shares and then sell out of the money calls on those newly assigned shares, utilizing a longer term time frame.

If the ex-dividend date is the week following earnings, then I'll consider simply rolling over the puts to the week of earnings and then playing it by ear, once again coming to the same decision tree if faced with the option buyer exercising their rights.

These days, dividends and premiums and the chance to serially accumulate them are all the exhilaration that I need or can survive.

Traditional Stocks: General Motors

Momentum Stocks: Abercrombie & Fitch

Double-Dip Dividend: Mattel (5/17 $0.38), Microsoft (5/17 $0.36)

Premiums Enhanced by Earnings: Cisco (5/18 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/we are long ANF, CSCO, GM.

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 ANF, CSCO, GM, MAT and MSFT