Month: March 2014

Daily Market Update – March 20, 2014 (9:30 AM)

After yesterday’s late day swoon following some confusion and maybe too much candor from new Federal Reserve Chairman Janet Yellen, it looks as if the market is willing to forget the brief pseudo-panic and move forward.

After a few years of press conferences in which very little was said that surprised anyone or took the markets for a ride, it was an unexpected reminder of how tentative and fickle prices may be at any moment in time.

The market’s initial reaction to yesterday’s confusion was a good example of the perils of trading at or near historical highs even when there is news to support such highs. When the support is less than compelling it probably doesn’t take too much to see a sudden shift in gear.

What you never know and sometimes sit in fear of, is at what point do you reach a breaking point or when frenzy begins to feed upon itself. In the case of a short squeeze most of us like that kind of self-feeding frenzy, but when the market is heading lower it’s a completely different set of emotions.

However, there was never really a true sense of panic at any time during the 56 minutes or so of reaction and the market did recover nearly half of its very quick loss, so the news can’t be all bad.

When these kind of things happen it does have to make everyone watching increase their level of unease, even if you can put somewhat of a positive spin on the outcome. Even if the phenomenon is short lived it has to leave at least a little bit of an imprint on people’s minds and maybe a little bit of hesitancy regarding increasing risk levels or the kind of risk taken on.

On the flip side you’ll find those who will now say that some of the uncertainty regarding interest rates may now have been removed and that lifting of uncertainty clears the way for the market to move higher.

The nice thing is that either of those scenarios will eventually come true. One or the other. Unlike 2011 when the market finished unchanged for the year or when green comes up on the roulette wheel, something is likely to happen and one group will be able to point to their visionary prowess while the other will conveniently ignore their position and pretend to be unwounded and just move forward.

What you can be certain of is that some algorithms are being re-tweaked and certain words in official statements, speeches, or off the cuff remarks will be given new weightings based on yesterday’s comments. That’s despite the fact that there is no definitive intent confirmed in yesterday’s comments. Instead, they’ve been interpreted in any number of ways.

For me, my vision runs out at the end of each week. I just want to get to that endpoint and start wiping off the lenses to see what may be on the next near term horizon , which generally happens to be a week or two away. I’m not thinking ahead to this Fall, nor much less to the Fall of 2015, as those focusing on interest rates have suddenly set their sights.

With a reasonably calm opening looking likely that provides some level of comfort that yesterday’s sell off won’t do irreparable damage to the ability to see respectable numbers of assignments and rollovers tomorrow.

This is looking like another in a recent series of weeks in which relatively few new positions have been opened. Fortunately there have been a number of existing positions finding cover, even if only briefly for “DOH Trades” but that does help add to returns, little by little.

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Daily Market Update – March 19, 2014 (Close)

With what appears to be a day of relative quiet coming from Europe and not too much expected from the FOMC minutes the only thing capturing attention today is the prospects of Janet Yellen having a slip of the tongue during her first post-FOMC release press conference.

Although I was listening, I’m not certain of what she said that at 3:04 PM EDT set off a massive sell off. Looking at this minute by minute chart of today’s trading, you don’t see many precipitous drops like the one in the late afternoon.

We’ve started taking these press conferences for granted, but it wasn’t too long ago when we were all shocked when Ben Bernanke announced that he would hold a first ever such press conference. Given the very precise and methodic way in which Bernanke weighed each word, he could have spoken daily without spooking anyone unless that was his intention.

Now there’s clamoring for the press conferences to become a monthly event despite the fact that it hasn’t really yielded much in the way of new or market moving information.

At least if you ignore today.

Although there are people hoping for some new information to be passed along, even if unintentionally, the past hasn’t indicated that to be the case, but the past has only included a single individual in control of the words.

I didn’t expect much different from Janet Yellen. It would be hard to imagine that after so many years of public exposure and lots of opportunities to have provided unintentional information that she would start doing so today. However, her precision in defining the time frame of actions related to interest rates may have caught some by surprise. She put, what some may interpret as a concrete time frame of 6 months for rates to rise after Quantitative Easing ends.

There was confusion regarding her precision and then her imprecision in referring to whether referring to this year’s fall season or next year’s. That’s because QE is likely to end in January 2015 and one would have interpreted her initial words to mean that interest rates would be expected to rise some “considerable time” thereafter. However, she then referred to that time as “this fall,” instead of “next fall.”

That reportedly got traders or their algorithms nervous.

Whatever.

Coming up to the mid-way point of the week I’m not seeing very many more new positions for the week but am hopeful that there are more opportunities for getting new cover and hope to see a reasonable number of assignments as the monthly expiration comes to a close on Friday.

For those having done this long enough you do know that even when there is nothing new in an FOMC release that doesn’t mean that the market will just find itself in a big yawn. Sometimes the reaction is really inexplicable.

Today was just one of those times, but it was pretty orderly, even though it did reflect a nervous market.

What can make those kind of moves especially frustrating and maddening is when that inexplicable reaction occurs just days before that expiration, especially a monthly expiration and serves to steal your fantasies of being awash in assignment cash and rollovers.

Never take anything for granted; don’t count your chickens before they’re hatched; or whatever aphorism you prefer, but there is a lot to be said for that warning.

For that matter that may also apply to the belief that absolutely nothing of news will come from today’s events.

You never do know until it’s all said and done.

Heading into the monthly close I am still optimistic regarding assignments and maybe even some additional rollovers to help next week get off to a decent income flow start. Today turned out to be a quiet day other than for the past 56 minutes.

While the first two days of this week have been a good antidote to the  successive losses of last week, it has removed some of the ability to spend on new positions. Who knows, maybe the final hour’s sell-off created some new opportunities, but I didn’t really have the  desire to test the market.

While still optimistic that the market may go higher, based on the volatility pattern I mentioned earlier in the week, I did take the opportunity yesterday to purchase some portfolio protection in the form of a Volatility ETN.

On the one hand while low volatility causes low option premiums it also makes such insurance relatively inexpensive.

In this case I purchased iShares S&P 500 Short Term Volatility ETN (VXX) at about $44 and sold January 2015 $100 calls.

For those that understand the ETN vehicle, they really aren’t meant for long term holding as they get re-balanced everyday and can lose some value each time. Compound that loss over time and it can add up even if your directional bet is correct.

The Volatility ETN acts as portfolio protection because it tends to move higher when the market moves lower and it tends to do so in a leveraged fashion, so you buy a position that is much less in overall value than your typical new position. For example, a 1% decrease in the market may show a 5% increase in the Volatility ETN. In that case your portfolio will show a smaller loss. How much smaller depends on how convinced you are that insurance will pay off and at what levels you are willing to purchase it.

I didn’t purchase very much but may add even more if volatility gets even cheaper, especially if heading back to about the 2 level on the underlying index.

The use of this kind of portfolio protection is just like any other kind of insurance. Sometimes you’re happier if it never gets used, but it does represent a cost and detracts from your overall ROI if purchased.

Purchasing the protection is an expression of  bearish sentiment, but at some point if shares are inexpensive enough you can dally with it without really making a strong statement regarding your sentiment.

Or you can look at it as simply hedging your hedges and then take it to yet another derivative when you also sell calls on the hedge. Whatever its use, these volatility products are very high maintenance and can lead to disappointment on their own, so know about it, but don’t go rushing in to any of them.

PS: The early morning version of the Daily Market Update referred to Janet Yellen in a gender specific fashion that was pointed out by one reader to have been incorrect. In fact, it is inappropriate to refer to Janet Yellen using the word “his,” although if you do close your eyes she does sound like Woody Allen.

Daily Market Update – March 19, 2014 (9:15 AM)

With what appears to be a day of relative quiet coming from Europe and not too much expected from the FOMC minutes the only thing capturing attention today is the prospects of Janet Yellen having a slip of the tongue during his first post-FOMC release press conference.

We’ve started taking these for granted, but it wasn’t too long ago when we were all shocked when Ben Bernanke announced that he would hold a first ever such press conference.

Now there’s clamoring for it to become a monthly event despite the fact that it hasn’t really yielded much in the way of new or market moving information.

Although there are people hoping for some new information to be passed along, even if unintentionally, the past hasn’t indicated that to be the case, but the past has only included a single individual in control of the words.

I don’t expect much different from Janet Yellen. It would be hard to imagine that after so many years of public exposure and lots of opportunities to have provided unintentional information, she’s probably not going to start doing so today.

Coming up to the mid-way point of the week I’m not seeing very many more new positions for the week but am hopeful that there are more opportunities for getting new cover and hope to see a reasonable number of assignments as the monthly expiration comes to a close on Friday.

For those having done this long enough you do know that even when there is nothing new in an FOMC release that doesn’t mean that the market will just find itself in a big yawn. Sometimes the reaction is really inexplicable.

What can make it especially frustrating and maddening is when that inexplicable reaction occurs just days before that expiration, especially a monthly expiration and serves to steal your fantasies of being awash in assignment cash and rollovers.

Never take anything for granted; don’t count your chickens before they’re hatched; or whatever aphorism you prefer, but there is a lot to be said for that warning.

For that matter that may also apply to the belief that absolutely nothing of news will come from today’s events.

You never do know until it’s all said and done.

Heading into the monthly close I am optimistic regarding assignments and maybe even some additional rollovers to help next week get off to a decent income flow start.

While the first two days of this week have been a good antidote to the  successive losses of last week, it has removed some of the ability to spend on new positions.

While still optimistic that the market may go higher, based on the volatility pattern I mentioned earlier in the week, I did take the opportunity yesterday to purchase some portfolio protection in the form of a Volatility ETN.

On the one hand while low volatility causes low option premiums it also makes such insurance relatively inexpensive.

In this case I purchased iShares S&P 500 Short Term Volatility ETN (VXX) at about $44 and sold January 2015 $100 calls.

For those that understand the ETN vehicle, they really aren’t meant for long term holding as they get re-balanced everyday and can lose some value each time. Compound that loss over time and it can add up even if your directional bet is correct.

The Volatility ETN acts as portfolio protection because it tends to move higher when the market moves lower and it tends to do so in a leveraged fashion, so you buy a position that is much less in overall value than your typical new position. For example, a 1% decrease in the market may show a 5% increase in the Volatility ETN. In that case your portfolio will show a smaller loss. How much smaller depends on how convinced you are that insurance will pay off and at what levels you are willing to purchase it.

I didn’t purchase very much but may add even more if volatility gets even cheaper, especially if heading back to about the 2 level on the underlying index.

The use of this kind of portfolio protection is just like any other kind of insurance. Sometimes you’re happier if it never gets used, but it does represent a cost and detracts from your overall ROI if purchased.

Purchasing the protection is an expression of  bearish sentiment, but at some point if shares are inexpensive enough you can dally with it without really making a strong statement regarding your sentiment.

Or you can look at it as simply hedging your hedges and then take it to yet another derivative when you also sell calls on the hedge.

Daily Market Update – March 18, 2014 (9:15 AM)

Yesterday was a great day in the market and a perfect example of why not to listen to Wall Street adages.

In this case, “buy the rumor and sell the news,” would have led you astray as events in Crimea had come to their initial conclusion and the entire chain of events and speculation started with selling and ended with some kind of jubilation yesterday.

While events were in their nascency there was lots of uncertainty and that’s precisely what the markets were reacting toward. Upon casting the final votes in the referendum at least the first phase of that uncertainty was completed.

This morning’s pre-open showed that the market values words more than actions. The pre-open had been headed lower until Russia’s President Putin addressed his Parliament and seemed to give an indication that Crimea was an endpoint for Russian expansion interests and that there was no interest in dividing Ukraine. He specifically said that no one should believe those who said that Crimea was just the beginning of Russian actions.

At that point the futures turned around and headed higher, despite the fact that this was the same man who a month earlier had denied that Russia had any interests or intended actions in Crimea. World history is filled with those kinds of statements of denial of intent.

But words have value as they point toward the future, while actions are so yesterday.

With actions still to come in response to any steps taken by Russia in the aftermath of the referendum in Crimea, there may still be some short term risk as sanctions, whether meaningful or not are going to be met by a “tit for tat” kind of response so reminiscent of the Cold War.

While the market’s early reaction seems to be one of confidence it just seems hard to put too much faith into the words. It also points out that the market is susceptible to disappointment, having already experienced that kind of disappointment as events began to initially unfold.

Most people don’t like to see the markets being swayed back and forth by external events upon which we have no control. Deciding what side to take is purely one of guesswork, made palatable by the knowledge that every event driven series of events comes to an end sooner or later.

Waiting for a conclusion isn’t necessarily a strategy as a multitude of events in waiting can easily become a streaming source of uncertainty. A few years ago it was Greece, then Spain, then the debt ceiling and on and on.

As always that shouldn’t preclude at the very least consideration of taking new market positions even in the face of an actively developing situation. While the market, as a whole, may have downside risk related to specific events, it’s often very difficult to extend that risk to specific individual stocks, other than what they may experience through some contagion.

Not that Best Buy is a great stock, but what does Best Buy or an investor in Best care about what is occurring in Crimea? T-Mobile? Where is the added risk with an expansion of the Russian Federation?

Increasingly, as the market is working its way higher against common sense both the laggards and the losers have greater appeal for me, particularly after an acute loss.

With a small number of new positions to start the week there’s still some room for more this week even as we wait for international events and Janet Yellen’s first press conference as Chairman of the Federal Reserve. However, following yesterday’s run higher many positions just aren’t as appealing as they had been as the market closed on Friday.

While the pre-open turnaround and move higher hasn’t re-created what seemed to be relative bargains just a few days ago, sometimes the market comes to its senses. Waiting a little while to see whether this morning’s early optimism really has any legs will make some sense, although I wouldn’t mind a repeat of yesterday and the opportunity to just watch exisiing shares go higher.

Daily Market Update – March 17, 2014 (Close)

It was nice seeing the market pointing toward a higher open in the early trading to start the week, despite the fact that I usually like to see a weak start so that there is some opportunity to pick up early bargains.

It was even nicer see it add to that early move higher and never even give the slightest hint of faltering.

In this case, however, after 5 straight losing days, as with any stock that you’re interested in buying after a sustained fall, it’s always nice to see some stability return before making your commitment.

The stability that is appearing this morning is reportedly due to quiet over the weekend from Crimea after the referendum and then no real further news as the day wore on, despite the announcement of some very limited sanctions.

But none of what has transpired over the past couple of days and the US response should have come as a surprise. The result was fully expected as should have been the realization that the Ukrainian people and Army had enough discipline to not so anything stupid while there is a Russian Army looking for the slightest pretext to unleash some force.

In all likelihood the only wild card in the equation is whether there are further unilateral acts by the Russian Army, especially within the borders that are universally recognized as being part of Ukraine, even by Russia.

While the appearance of stability brings with it some comfort, it’s not enough to immediately start with a personal “buy program.” As has been the case the past month the first hour of trading hasn’t necessarily reflected where the rest of the day will go, especially if that first hour has been a move higher.

As may be appropriate at a time when we’re all looking to the East to see what kind of a pall may be cast over the markets, before I’m ready to dip into cash there’s a need to “trust, but verify.”

While there’s no real way to verify that the market means what it appears to be doing, there’s good reason to discount initial appearances for now.

With cash standing at about 36% I am, however, more optimistic than in the past few weeks and am willing to get down to a 20% level.

I doubt that will be the case, but I am looking for volatility to stop its upward movement and along with that there is the expectation that the market itself will equilibrate while events play themselves out.

For today, at least, volatility was stopped dead in its tracks, but I couldn’t justify just chasing anything, although there was enough reason to consider a few purchases as well as some personal put sale trades for the day.

At this point the script still calls for the Russian Parliament to make some decision regarding the fate of Crimea, whether to annex it or have it as an autonomous region. Then comes any further reaction from the United States and, perhaps Europe. With those reactions and counter-reactions may come trickle down to the markets, but I don’t expect that there will be anything of substance. In fact, there is reason to believe that last week’s weakness may already have been the result of selling by Russian nationals looking to remove money from the United States in advance of any potential freeze in the assets.

What I don’t understand is the belief that Europe will not express it’s disapproval in concrete ways because it is beholden to Russia for energy sales. Aafter all, who else is Russia then going to sell to? They need the currency as much as Europe needs the energy. At this time of the year, maybe even more than Europe needs it and China, if it is slowing down, doesn’t need to stock pile energy just to help Russia.

With international events put to the side this week’s FOMC isn’t likely to lead to anything of great substance either, although as we’ve seen in the past the way the market reacts doesn’t necessarily have to be tied to substance.

Those particular series of events in the making don’t have a particular chilling effect on me this week and I plan to use the level of attractiveness of premiums, especially in the outer week as a guide for this week’s purchases, as there are already a fair number of positions expiring this week as the March 2014 cycle comes to its conclusion.

If outer week premiums look promising and provide additional value then there is reason to look for longer time frames. Otherwise, there will be additional positions added to this week’s list of expiring names.

Hopefully this will be a better week than the last even though the overall portfolio outperformed the market. While it’s always nice to beat the competitor, it’s even better when you don’t come out of the match totally battered.

For those who believe that hope isn’t a strategy, it couldn’t hurt.

Daily Market Update – March 17, 2014 (9:00 AM)

It’s nice seeing the market pointing toward a higher open in the early trading to start the week, despite the fact that I usually like to see a weak start so that there is some opportunity to pick up early bargains.

In this case, however, after 5 straight losing days, as with any stock that you’re interested in buying after a sustained fall, it’s always nice to see some stability return before making your commitment.

The stability that is appearing this morning is reportedly due to quiet over the weekend from Crimea after the referendum.

But that shouldn’t have come as a surprise. The result was fully expected as should have been the realization that the Ukrainian people and Army have enough discipline to not so anything stupid while there is a Russian Army looking for the slightest pretext to unleash some force.

In all likelihood the only wild card in the equation is whether there are further unilateral acts by the Russian Army, especially within the borders that are universally recognized as being part of Ukraine, even by Russia.

While the appearance of stability brings with it some comfort, it’s not enough to immediately start with a personal “buy program.” As has been the case the past month the first hour of trading hasn’t necessarily reflected where the rest of the day will go, especially if that first hour has been a move higher.

As may be appropriate at a time when we’re all looking to the East to see what kind of a pall may be cast over the markets, before I’m ready to dip into cash there’s a need to “trust, but verify.”

While there’s no real way to verify that the market means what it appears to be doing, there’s good reason to discount initial appearances for now.

With cash standing at about 36% I am, however, more optimistic than in the past few weeks and am willing to get down to a 20% level.

I doubt that will be the case, but I am looking for volatility to stop its upward movement and along with that there is the expectation that the market itself will equilibrate while events play themselves out.

At this point the script calls for the Russian Parliament to make some decision regarding the fate of Crimea, whether to annex it or have it as an autonomous region. Then comes the reaction from the United States and, perhaps Europe. With those reactions and counter-reactions may come trickle down to the markets, but I don’t expect that there will be anything of substance. In fact, there is reason to believe that last week’s weakness may already have been the result of selling by Russian nationals looking to remove money from the United States in advance of any potential freeze in the assets.

By the same token, this week’s FOMC isn’t likely to lead to anything of great substance either, although as we’ve seen in the past the way the market reacts doesn’t necessarily have to be tied to substance.

Those particular series of events in the making don’t have a particular chilling effect on me this week and I plan to use the level of attractiveness of premiums, especially in the outer week as a guide for this week’s purchases, as there are already a fair number of positions expiring this week as the March 2014 cycle comes to its conclusion.

If outer week premiums look promising and provide additional value then there is reason to look for longer time frames. Otherwise, there will be additional positions added to this week’s list of expiring names.

Hopefully this will be a better week than the last even though the overall portfolio outperformed the market. While it’s always nice to beat the competitor, it’s even better when you don’t come out of the match totally battered.

For those who believe that hope isn’t a strategy, it couldn’t hurt.

Daily Market Update – March 14, 2014 (Close)

The Week in Review is now posted and the Weekend Update will be posted by noon on Sunday.