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Fear & Greed Trader
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INDEPENDENT Financial Advisor / Professional Investor- with over 30 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • Call Writing Strategy Part 54 - Sold NUAN Calls

    I Sold the NUAN AUG 18 calls today for $0.95. The proceeds from this sale covers the cost of buying back the June calls last week.

    The Portfolio

    (click to enlarge)

    4 stocks are now covered with options sold against them. Total income now exceeds $56,500 since portfolio inception date of June 5, 2013.

    A similar 100 K investment in the S & P (2121) in the same time frame would now be valued at $131,902.

    This is a real portfolio and all trades are documented here in this blog.

    Best of Luck to all !

    Jun 23 1:34 PM | Link | Comment!
  • Call Writing Strategy Part 53 Selling Calls On FCX & DAL

    The June FCX Options with a strike price of 23 expired worthless last week. This morning I sold the FCX AUG series option with a strike price of 21 for $0.55.

    The DAL June options expired worthless as well, and I sold the AUG 45 calls today for $1.28

    The two sales today add $1152 to the account bringing the total income since inception to $55,791. Bringing the 100 K initial investment to $155,791

    (click to enlarge)

    The same investment made in the S & P 500 (2128) would now be worth $132,338.

    Three positions have calls sold against them (highlighted in yellow) , the other positions are uncovered as I wait for the opportunity to sell calls against them.

    This is an actual portfolio, all trades have been documented here in this blog.

    Best of luck to all !!

    Jun 22 11:29 AM | Link | Comment!
  • Market Update June 20 Greece , FOMC Meeting

    If you are looking for information and updates on Greece and the FOMC meeting, I'm sorry to say that you will be disappointed. I'll leave that to the market skeptics, as I'm sure they will write enough about these headlines to fill a section in a library. Instead let's move on to what investors really need to be looking at .

    The Economy

    From Cornerstone Macro

    PMIs around the world have reversed rather quickly, with the number of PMIs in contraction territory plunging from 52% in April to 35% in May and the number of countries in above-50 expansionary mode at a six-month high. Even during its winter lull, the global PMI never stopped expanding-it's been above 50 for 30 straight months,the longest streak in seven years. Led by the biggest rebound in new orders in a year, May's uptick suggests accelerating activity worldwide.

    Ned Davis Research notes

    While real GDP declined, Q1 real gross domestic income rose at a 1.4% annual clip; the Philly Fed and Conference Board coincident indexes put Q1 annualized growth at 2.5% to 2.9%, respectively; and Q1's vehicle miles driven accelerated 4% year-over-year (y/y). It's highly unlikely this metric would be rising if economic conditions were heading south. More recently, reports this week show business inventories rising but remaining balanced relative to sales, a good sign for Q2 GDP. And the volume of motor gasoline demand has been running above last summer's driving season peak, good news for consumption as we look to the second half. I have said in many speeches this year that I will fail to get worried as long as jobs keep improving.

    Strategas Research

    Anticipates an unleashing of pent-up consumer demand-a view reinforced by May vehicle sales, which surged to their highest level since July 2005, and by the recent spike in housing starts and home sales.

    The Philly Fed report

    Thursday's report on manufacturing activity in the Philadelphia region showed a nice rebound from May's reading, rising from 6.7 up to 15.2 and ahead of consensus expectations for a reading of 8.0. Just to highlight how uncommon better than expected readings in this indicator have been, this month's report was only the second better than expected report of the year.

    Empire Manufacturing

    If there is an economic indicator that has been especially weak over the last several months it has been the Empire Manufacturing report. Heading into Monday, the report had come in weaker than expected in each of the last four and seven of the last eight months. Additionally, over the last three years the report was weaker than expected 25 times. In other words, the report misses consensus forecasts more than two-thirds of the time. We have to start to questioning exactly what this indicator is telling us about anything.

    HomeBuilder Sentiment

    After disappointing Empire Manufacturing, Industrial Production, and Capacity Utilization reports to start the week off, the National Association of Home Builders sentiment index saw its largest monthly increase since July 2013, rising from 54 to 59. That reading of 59 was tied for the highest reading of the expansion and also considerably better than consensus expectations for a level of 56. That positive sentiment was spread across every region of the country.

    Housing Data

    Housing Starts for the month of May came in at a seasonally adjusted annualized rate (SAAR) of 1.036 million, which was 54K below consensus forecasts of 1.09 million. While this represented an 11.1% decline from April's level, it was the second straight month above the million level, which it dipped below in the winter. While Housing Starts missed the mark, Building Permits surged 11.8% to 1.275 million. This was the largest monthly increase since December 2010 and the highest since August 2007. It was also well ahead of consensus expectations of 1.1 million.

    Two data points that I have referred to during the course of the recovery are worth a mention once again. I refrain from getting into political issues and debates when it comes to investing. There is a lot of talk about the inequality of wealth and incomes and how that is perceived by many to be a negative. Opinions are like noses , everyone has one. Here are some facts.

    Household Balance Sheets

    Household net worth is at record highs, both in nominal, real, and per capita terms. Importantly, the latest surge in wealth was not driven nor sustained by any debt "bubble. Household leverage has declined significantly since 2008 According to the Fed, U.S. households' net worth rose $1.63 trillion in the first quarter of this year reaching a new, all-time high of $84.9 trillion. Most of the gains have been in financial assets and savings accounts.

    In my view this staggering amount of wealth creation that has taken place has and is filtering down to jobs, living standards even if it is in the hands of what many view as the some sort of villain in this recovery.

    The Federal Budget deficit

    Federal government spending has experienced very little or no growth for the past six years This has allowed the magnitude of government influence on the economy to shrink from over 24% of GDP to now just over 20%. This is already giving the private sector a lot more breathing room, at the same time as it has reduced the expected future burden of taxation. A positive going forward for the private sector for sure.

    With zero growth in spending versus relatively strong growth in revenues, the federal budget deficit is now approaching 2%, as shown in the chart below. Six years ago we were staring at budget deficits that would equal or exceed 10% of GDP for the foreseeable future. The doomers never envisioned that this dramatic improvement was possible. However this has as shown taken place even though the economy has struggled to grow. Nobody talks about this but it is ONE of the reasons the equity market has been able to advance as it has.

    A look at The last 10 years

    (click to enlarge)

    An historical perspective

    (click to enlarge)

    Deflation/ Inflation

    The fears not too long ago were deflation. When that didn't happen as forecast, the naysayers have flipped and now talk about preparing for inflation.

    It appears the U.K brush with deflation was just that as consumer prices rose in May.

    The Consumer Price Index rose slightly less than expected in May (+0.4%) , vs the forecast of +0.5%. Note that the PCE Price Index (the Fed's inflation gauge) has been trending about 0.4 percentage points (y/y) lower than the CPI.

    In my view they have both stories wrong an neither of these issues is an immediate threat to anything market related. The data that has been reported recently, coincides with that opinion.

    Earnings

    From Thomson Reuters

    The forward 4-quarter estimate this week was $122.12, versus last week's $122.09.

    P.E ratio: 17(x)

    SP 500 earnings yield: 5.84%

    Y/Y growth rate of forward estimate: -0.69%

    For those not familiar with the earnings projections, the forward 4-quarter estimate is comprised of the 4 quarters from Q2 '15, through Q1 '16.

    The Market

    seemed to agree with my assessment of what is important for investors to be concentrating on. I watched the market trade down to the S & P 2072 level and noted that it was the same level that garnered support on Tuesday June 9th. From there the S & P took that technical cue, shook off the "headlines" and made its move to the upper band of the trading range settling at 2109 on Friday.

    I mentioned 2 weeks ago that an upside target of 2165- 2170 was a possibility if the market did indeed breakout to the upside. I'm still going with that for a short term target and will stick with my first support of 2040 on the downside if we do in fact break lower.

    Translation - In the short term the S & P probably stays in the trading range, and once again individual stock selection will be "key" as we move forward into the 3rd quarter.

    There are three ways for the market to 'correct"---

    • prices decline
    • time ( sideways action)
    • sector rotation

    We have seen the "time" aspect play out as the S & P closed @ 2090 on Dec 29th,2014 and this week the average closed @ 2109. A mere 19 point difference in 6 months. But during that time , the " rotation " side of the equation has also played out. It is here that opportunities have been presented to investors.

    While the broad market has been flat as a pancake, certain sectors are looking better or worse than others. The Financial sector has been a standout on the upside recently as it looks to break out above 2014 highs. Health Care continues to trend higher, and Tech and Discretionary don't look bad either. Sectors like Staples, Telecom and Utilities, though, are trending downwards as defensive sectors become less attractive as investors perceive a higher interest rate environment.

    That move in the financials since the FED meeting is notable and a great example of how the market internals work. A couple of months ago, Financials had been one of the worst areas of the market to be in, but recently it has been one of the best. For Utilities we have seen the complete opposite.

    Although Dow Theory suggests that the Transports are a leading indicator for the economy, it is important to note that the Transportation industry group in the S&P 500 accounts for less than 3% of the entire index---- it's actually smaller than Apple. That being said, we would all would prefer to see them doing better. Unfortunately the market doesn't care what we as investors, want.

    However that statistic on the weighting of the transports in the S & P, is a clear indication as to why I will repeat that the weakness there will not take the entire market down.

    While many cite the transports as the Achilles heel of the market, and tout that, they conveniently dismiss that The RUT and the Nasdaq just tagged new highs this week. These myopic views of what is really going on are harmful to your financial health and it is a must for a successful investor to avoid.

    Speaking to the Dow 20 Transport average, here is an updated chart indicating that Long term support line that I am following is still holding.

    Note that this is a monthly chart, and that green support line is a 20 month MA. The reason I look and WATCH this LT view- In '09 it broke that LT MA , as did the S & P 500. It was then that I changed views and started to get defensive. The same occurred in 2000. it bears watching BUT remember it is only one sector. When I see the S & P 500 roll over, I will sit up take notice and let everyone know the change that is taking place. That time isn't now.

    While Transports are the worst performing industry group over the last six months, Consumer Services, which is made up of Hotel, Restaurant, and Leisure stocks is the top-performing industry group, (LQ and my new addition HLT are my favorites) followed by Health Care Equipment. Health Care Equipment is still in the second spot among the industry groups. As mentioned earlier, the real standouts recently though have been Financial related groups to the upside while the Semiconductors and Food, Beverage, and Tobacco industry groups to the downside. No surprise on the Semis as the SOX index is consolidating from a recent high. Moves like this reinforce the point that while certain "trends" may feel like they are fully entrenched, things can and often do change quickly. it's just more evidence of "rotation".

    Check out the recent moves in Insurance and Banks in the last several days. Last week, Insurance was in the middle of the pack on a relative basis, but it has now moved all the way up to the third spot in terms of outperformance.

    Sentiment

    There has been no shortage of pessimism and negativity making the rounds lately. Looking at these headlines, its quite evident.

    Five highlighted examples of articles and associated commentary written and published THIS week here on SA.

    "The biotechs are in a bubble" ,

    Everyone needs to pare down equity holdings ,

    Oh, the Shiller PE says we are too expensive and way overvalued.

    There is Overwhelming evidence of indicators hitting new highs but a plethora of divergences suggest different.

    The detractors, INSIST that there is Euphoria, where ?

    I can't comprehend how new market highs are extrapolated to euphoria every time they occur. Its sheer convoluted thinking. According to some we were all euphoric when the S & P broke out in March 2013 and set a new high. Where would we be if we ignored that signal ? I'll tell you where-- 550 S & P points lighter in our portfolios.

    Some of the new "worries" out there.

    Last week it was "Margin Debt" that was cited as a reason that the market is over exuberant and about to crash. This week the focus is on the "Buffet market cap to GDP indicator" and how the equity market is so overvalued.

    The blog post I penned on May 20th clearly defines why this indicator may in fact be of little use. The detractors want one to believe that foreign sourced profits which have grown from 10 to 30% of U S corporation's total profits should NOT be included in this calculation. Right now the Market cap to GDP ratio that is being bandied about as too excessive, is ignoring 30% of the profit portion of this calculation as those profits are not in the GDP number.

    Of course for the frustrated bears trying to spin a data point to make their case for overvaluation it makes perfect sense, but for the clear headed thinkers out there it's evident that this ratio as calculated is deeply flawed.

    • New "Highs" are shrinking

    As the S&P 500 is nearly half way through what has been one of its most uneventful years ever, the daily list of new highs has been getting smaller and smaller.

    Stats from Bespoke

    Coming out of the October lows last year, the average daily number of S&P 500 net 52-week highs (highs minus lows) through year end was above 55 (11%). This year, the daily average number of highs has dwindled by more than half to less than 23 (4.5% of the index). More recently, the list of highs has been even weaker as there have only been two days in the last three weeks where the daily net number of highs was above the 4.5% level.

    I'll now add that in a rising market you want to see the list of new highs expand not shrink. The key here, though, is that the market has not been rising as discussed earlier.

    When you combine that with the fact that the index has been trading in one of its most narrow ranges in years, it makes perfect sense that we haven't seen an expansion in the list of new highs or new lows. The key will be to watch what happens when the market breaks out of its current range. Whichever way the market breaks, the list of new highs should follow suit, so an upside breakout should be accompanied by an expansion in the list of new highs and a break lower should be accompanied by an increase in new lows.

    • The "rally is shallow"

    "The NYSE composite a very broad measure of the market is hardly up this year"

    Really? The NYSE is up 1.8% YTD , the S & P 500 is up 2.4%, this divergence is hardly cause for concern unless one is using a magnifying glass to look for divergences to make a case to be negative on the market at these levels. I suggest that is what is occurring when issues like these are surfaced.

    Watch Individual Stocks

    Plenty of rotation and 'correcting" of individual stocks has been the key to watch this year as that has created opportunity, case in Point Celgene -- CELG down 17 % from it's high of $128 this year to a recent low of $105---- while the S & P sits 1% from its all time high.

    I picked up shares for my personal account in the $109 area and have it in my 2015 playbook. Fundamentally sound and they just announced a $4B stock buyback this past week.

    (click to enlarge)

    The chart indicates a nice bounce off support at its 200 day MA. It's a prime target to start accumulating here as a core holding. There is no "bubble" here and those suggesting that this name be included with the "50x revenue biotechs" are completely out of touch with this sector.

    Step back for a moment to GILD when the "short" sellers were making their bear case and the stock was @ $90 based on a headline. It closed this week @ $120. The self ordained experts running with that headline seem awfully quiet now.

    Summary and Conclusion

    Here is a comment I heard over and over this week. "The market hasn't gone anywhere", and that is a sign of a weak market.

    My response is -- No, if you start looking at other facts and examples ---- not really

    How quickly many forget the 30% S & P gain in 2013 followed by the 11% gain last year. Now if the S & P were to continue on that pace everyone would be calling it a bubble with negative connotations, yet while the market has stood in place it is still deemed a negative. The latter assumption is completely wrong.

    But some see the fact that the S & P is flat as a troubling sign and hence they jump to the popular conclusion " The market is at a top" That bandwagon is full of "parrot like folks" that simply repeat the dire scenario that the other guy has stated. Why, because it sounds so good when meshed with the other "issues" that are percieved as negatives.

    What we are witnessing is what I expected might happen with the S & P, this year. A trading range , correcting over time, and plenty of rotation. Many that are suggesting this as being a negative also told us all last year last that the RUT which traded in a tight trading range was a precursor to a overall market decline. How foolish are those words now as the RUT has just made a new high.

    In general, an investor shouldn't be uncomfortable holding stocks here. Use the fact that there is plenty of rotation in this market and individual names are self correcting while the S & P just under 1% from it's all time high to selectively add or initiate. CELG is just one example of that, this market is filled with opportunities, despite the cries of overvaluation.

    The 'rotation" we are witnessing in this market is a show of STRENGTH not weakness. The naysayers like to point out that anything 'transport" related, anything "oil related", are signs that the market is in trouble when they fail to rally. Nonsense, as these sectors are out of favor, they won't rally when the S & P is up 20 points because money is rotating to the stronger portions of the market. And when they don't rally it is NOT a sign of overall market weakness. These sectors will have their day. That time will come when the strong sectors, like the financials, healthcare and tech come "back in". Investors should be looking for opportunities in these out of favor sectors and position themselves to add and accumulate for the LT. My last purchase of KSU is an example of just that.

    Conclusions

    I mentioned last week that one of the biggest risks I see in this market is listening to the nonsensical ramblings of the "chicken littles" that quite frankly have been dead wrong on this market since 2012. The LT trend is still in play, there will be sufficient time to react and make portfolio adjustments If and when those LT trends are violated. A lot of that commentary is automatically construed as being a Perma Bull.

    Let's clarify ---- Nobody should be a "perma" anything. But if you must err to one side or the other, as a default setting of sorts, the right way to lean is obvious. Optimism as a Default Setting is the only way to successfully fund a retirement over the long stretch. Unless you believe that you have the god-like ability to dance into and out of the markets with good timing on a consistent basis.

    On the other hand pessimism is intellectually seductive and the arguments always sound smarter, especially when they dovetail with our own worries. "Sounding" smarter doesn't necessarily produce the desired results. Just look at the results of the "top callers" and the "short sellers" since 2012.

    That has been proven over & over in market history and is so abundantly evident during this secular bull phase that we are currently experiencing.

    This picture is "dated", one can now add 15% to the Equity balances depicted.

    (click to enlarge)

    What has transpired here in the stock market in the last few years is history and to attempt to downplay the results of anyone that has been in the bullish camp is disingenuous at the very least.

    I tend to follow those (economists, strategists, etc.) that have had the market story correct when making my stock market assumptions and strategy, and yes I do dismiss those that have perpetually had it wrong . As I keep saying to all, why should I follow them now ? Are they now "due " to finally make a correct call.. ? Sorry, MY money wont be going with that choice.

    These missives aren't about following my market strategy, its about making the right choices for your own investment portfolio.

    If you do nothing else, avoid the noise, stick with your plan and intermingle the thoughts and ideas of those that have had the market story correct. Over time it will become abundantly clear who those economists, strategists and firms are.

    It will also become abundantly clear who isn't part of that select group. Avoid them at all costs.

    Best of Luck to all !

    Jun 20 6:31 PM | Link | 1 Comment
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