Climb Every Mountain. Or Not.

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Includes: BX, EBAY, FAST, JPM, LVS, M, UAA
by: George Acs

Summary

More all-time-record closing highs may be leaving investors in a precarious position.

The market's ascent has been virtually without rest and is a potential liability for those wishing to make up for lost opportunities.

There have been very few instances in which markets have climbed an additional 2% from a closing record high.

"When you're a hammer, everything looks like a nail."

That old saying has some truth to it.

Maybe a lot of truth.

When you think about stocks all day long everything seems to be some sort of an indicator as I look for a rational explanation to what is often a prelude to an irrational outcome.

Reducing the intricate character of what is found in nature to a mathematical sequence is both uplifting and deflating.

When the very thought of uplifting and deflating conjures up an image of a stock chart it may be time to re-evaluate things.

When you start seeing the beauty in nature as a series of peaks and troughs and start thinking about Fibonacci Retracements, it is definitely time to step back.

Sometimes stepping back is the healthy thing to do, but as the market has been climbing its most recent mountain that has repeatedly taken the S&P 500 to new closing highs, it hasn't taken very many breaks in its ascent.

You don't have to be a technician, nor a mountain climber to know that every now and then you have to regroup and re-energize.

You also don't have to be a mountain climber to know that standing on the edge of a cliff is fraught with danger, just as each step higher adds to risk, unless there's a place to rest.

Some mountains may not even be meant to be climbed except by the very best of the best.

I'm certainly very, very far from that, but even if I were not, I would still be very, very leery.

For all of the fears that surfaced after the "Brexit" vote and all of the speculation regarding its impact on earnings guidance, those fears have been quickly dismissed and the guidance delivered, thus far, has ignored the conventional wisdom.

Whether JP Morgan (NYSE:JPM) or eBay (NASDAQ:EBAY), among those that were on the top of the Brexit hit list, there has been nary a mention of the impact of divorce on their future earnings and the broader market has taken note, as have investors in those individual stocks.

And so, as earnings have been coming in, and as they accelerate in the coming week, the mountain continues to be scaled as no one really knows where the peak happens to be.

As that peak gets higher and higher, it probably draws in two kinds of people.

The best of the best generally got that way because they are nimble in their trading and may recognize a breakout in the making when they see one.

The other kind that gets in are the ones afraid of missing out or are of the belief that what's going on will keep on going and maybe they can finally make up for their lost opportunities over the past 7 years.

For my part, I'm going to remain circumspect and have done very, very little trading, other than rolling over positions and the occasional opening of a new position or two in any given week.

I don't anticipate that changing too much this week as the S&P 500 has now climbed nearly 9% after its Brexit low of less than a month ago.

That's a little too steep for me and it has been almost a straight line higher.

Being nearly fully invested, although preferring to have more cash, I'm happy to go passively along for the ride, but am not terribly interested in adding to my commitment.

Sometimes it really is better to be safe than sorry about missing out.

While a fall from a top a mountain may be a terminal event, there's always another opportunity after a fall from a market peak and I would rather wait for that opportunity.

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

Although I my be of a mind to not commit any cash this week, I've been of that mind before and it is sometimes difficult to resist a trade.

For me, with a frequent focus on trades that include a short position on weekly options, the character of the market as the week begins is often the invitation to participate or the closing of the door.

I'm unlikely to ignore my reticence to participate if the market continues its climb on Monday morning. However, if there is some weakness, especially if there is some real pronounced weakness, I may change my mind.

With earnings season really getting into full gear this week, earnings or impending earnings has to be part of any equation that has a short term time frame.

Macy's (NYSE:M), which was battered following its last earnings report and is a company in transition and likely facing greater transition in the near future, doesn't report earnings until August 11, 2016.

While earnings met the whisper numbers last quarter, revenues were down. More ominously, though, Macy's revised its yearly guidance significantly lower at that time.

My expectation is for an "under promise and over deliver" scenario in a few weeks, but my focus is in the coming week.

I think that the downside risk is low, unless the broader market is hit with a substantive decline. For the risk, there is ample reward and Macy's is also an imminently liquid options position, if faced with the need to rollover the short call position.

I wouldn't mind that opportunity, and there's an optimistic outlook for its shares as earnings are around the corner. So I'd been inclined, if faced with an option expiration, to take advantage of the earnings enhanced premiums to consider a longer time frame rollover and increase the strike price at that time.

With the Brazil Summer Olympics ready to begin, I still think about the controversy during the last Olympics regarding Under Armour's (NYSE:UA) swimsuits, which many blamed for the poor performances by United States swimmers.

CEO Kevin Plank handled the controversy as well as any CEO could ever have done and the story disappeared from the headlines faster than anyone could have predicted.

Under Armour does lots of things very well in a very competitive industry, but what it hasn't done well in the past 3 months, following its last earnings report, has been to keep pace with the S&P 500.

That's a little ironic for a company that has been a pace leader and that has been unaccustomed to falling behind.

Under Armour, unlike Macy's, increased its annual guidance last quarter, so there is always that opportunity for disappointment. But Kevin Plank likely knows his business well enough to not stick his neck out too far, or to sully his own reputation and credibility.

In the meantime, the option market is implying an 8.1% price move next week. There isn't too much enhancement to the option premium that you can derive by selling out of the money puts, as you can potentially receive a 1% ROI, but at a strike price that is only 9.3% lower.

That's not too much of a cushion, but Under Armour shares are ones that I wouldn't mind owning heading into the Olympics, particularly if there is a ban on some athletes from Russia.

Fastenal (NASDAQ:FAST) just reported earnings and just had its ex-dividend date, so there's nothing terribly exciting on the horizon.

Then again, there's never anything terribly exciting about Fastenal.

It just reported a miss on earnings and shares have lagged the S&P 500 by almost 9% since then.

That decline left shares at a price below the mid-point of the high and low of 2016.

If you believe that there is some chance of a pick up in the kind of economic activity that's usually among the first to improve after people go back to work, then Fastenal may be a good place to park some money.

Blackstone Group (NYSE:BX) just reported its earnings and they came in at the mid-point between consensus and whisper, although on a decline on top line revenues.

So how do investors respond?

In the 2 days remaining on the week following the earnings announcement, Blackstone shares climbed almost 5%, while the S&P 500 fell 0.2%

Normally, I wouldn't have too much interest in considering a stock that had just gone up 5% on non-exceptional news. But those shares are ex-dividend this week and even after a dividend reduction, the yield is very attractive, as is the option premium.

One consideration that I have for this stock is to sell in the money calls with an expiration date the following week.

By example, using Friday's closing bid - ask prices, if purchasing shares at $27.42 and selling August 5, 2016 $27 calls, you would receive a $0.64 premium.

With the ex-dividend date on July 28, 2016, if shares close the previous evening above $27.36, there is a chance of early assignment. The deeper in the money at that time, the greater is the likelihood of assignment.

If assigned, the 3 day ROI would be 0.8% and the opportunity to then re-invest the assignment proceeds.

On the other hand, if those shares are assigned the following week and you get to retain the dividend, your 2 week ROI would be 2.1%

To put that into some relative context as provided by Eddy Elfenbein, the market has only risen 2% or more on 3 occasions after hitting a record closing high.

If you don't follow Eddy Elfenbein on Twitter, you should consider it more than any of this week's selections. He is the funniest, most gracious and offers the best factual information that can be found on Twitter.

Finally, it's only appropriate to consider an earnings related gamble with Las Vegas Sands (NYSE:LVS).

For a number of years, Las Vegas Sands was a stock that I had some really good fortune with in buying shares and then selling calls and then doing it over and over again as shares were assigned and subsequently the share price fell, putting it back into my portfolio.

That seems like an eternity ago, as I still sit on two very expensive lots of shares that are both uncovered.

The only saving grace has been the generous dividend, which would likely continue to be safe as long as Sheldon Adelson, the Chairman and CEO is in charge and has a vested interest in the dividend.

Did I mention that Adelson was also the Treasurer?

The option market is implying a 6.2% price move next week. That seems a little low to me, but what I find appealing is that even with a 9.3% decline in share price, it can be possible to generate a 1% ROI by selling out of the money puts.

With the next ex-dividend nearly 2 months away, this might be a position that I would welcome an opportunity to rollover in the event of an adverse price move this week.

Somewhere deep down, I'm of the belief that the peak of the bad news coming from its operations in Macau are about to be reached and expect to hear some hint of that as guidance is provided.

I'm also prepared, however, to fall off the cliff, but still live another day in that event.

Traditional Stocks: Fastenal, Macy's

Momentum Stocks: none

Double-Dip Dividend: Blackstone Group (7/28 $0.36)

Premiums Enhanced by Earnings: Las Vegas Sands (7/25 AM), Under Armour (7/26 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.

Disclosure: I am/we are long FAST, LVS,M.

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 BX, FAST, LVS, M and UA