Daily Market Update – May 28, 2014 (9:45 AM)
Another new high.
It’s said that the title to the movie “Annie Hall” was derived from “anhedonia,” which refers to the inability to experience pleasure.
While I don’t mind seeing all of these new highs as long as it translates into something equally good at home the amount of exhiliration is nothing close to what you would expect.
I’m not jumping up and down and certainly the market isn’t expressing any great optimism. The fact that you don’t see people pounding their chests and raving about their successes is telling. Most people aren’t shy about letting the world know how great they’re doing.
This week, in addition to being a shortened trading week, also has almost no economic news of great importance.
That makes it one of those weeks with the potential to act as if in a vacuum. You could just as easily see large moves higher as you could see them go lower. You could also just as easily see very little happening as people will keep re-evaluating the old “Sell in May and go away” aphorism.
This morning saw a little reversal of the mildly positive pre-open trading by the time the morning bell rang but that means very little.
As with many days in the past couple of months it warrants just sitting and watching during the first 30-60 minutes just to see how things unfold, but there really is no over-riding theme in the markets at the moment.
While I continue to believe that there just has to be some kind of market retreat and an end to this historically low volatility, it just doesn’t happen. It continues to fascinate me that the market is able to continually go higher and higher.
While on the one hand you don’t want to miss out on the party, you also don’t necessarily be the last one to leave or come to a late realization that the party is over.
Sitting mid-week with plenty of cash to party it’s hard to resist joining in, but despite recent history indicating a really resilient market, the simple question becomes one of a consideration of “the margins.”
“The margins” means looking at each incremental unit of change. At the market’s current level what is the likelihood of continued upside movement as compared to the potential for downside? Not only the likelihood, but in terms of the number of units of movement in both directions. Does the market have as much realistic potential to move to the upside by an amount that is greater than the potential to move to the downside?
I think that the downside risk and the amount of risk is now greater than the upside reward.
Most people have their own notion of what constitutes an acceptable risk to reward ratio. While there may continue to be upside reward, after all the market hasn’t exactly been rational in moving higher, it’s hard to discount the gap between the current level and where support exists below that level.
For some the small semi-corrections means that there are intermediate support levels that could take the market down just a little at a time.
To the cynic those aren’t really support levels, rather just resting spots to get the market to finally have a meaningful correction.
The reality is that we just don’t know, because the historical precedence isn’t very strong and that is it’s own vacuum.
Like so many other times over the past few years sometimes it helps to sit back and wait for some indication of a macro move, whether based on market dynamics, external world events or anything else, before making too large of an additional commitment.
Hopefully the rest of this week will offer some additional opportunities to sell new cover and maybe a new purchase here or there, but for the moment, I want some sign before digging too deeply
PS: For those with the Feb 18, 2014 Transocean lot, sorry about the late rollover trade. I was really on the fence with this one because I wasn’t certain that the June 21, 2014 $42 calls would be assigned early to capture tomorrow’s $0.75 dividend, despite closing at $43.35.
Despite being $1.35 in the money, I’m still not certain that shares have a high probability of early assignment to capture the dividend, but I really wanted to keep this dividend and believe that Transocean has more room to climb.
Ultimately, doing the “what-if” scenarios convinced me that taking a net debit on the rollover, which actually is still a net credit thanks to the premium received for the $42 sale last week, was worthwhile.
If shares were to have been assigned early at the $42 strike the ROI would have been 8% compared to 4% for the S&P 500 over the same period.
If shares wouldn’t be assigned early and the dividend was received the ROI, if assigned at the end of the June 2014 cycle would have been 9.7%. However, given that shares closed about $0.60 over the threshold level of $42.75 there was some chance of early assignment, even though nearly 4 weeks remain on the contract.
With the rollover up to a $43 strike in exchange for going to a July 2014 expiration the likelihood of early assignment is virtually non-existent and if eventually assigned the ROI would be 11.5%
The final part of the equation was the question of what else could have been done with the money if assigned early. Given the recent low volatility the monthly ROI is at the low end of the range that I’ve been accustomed to achieving. In essence the question became could I achieve a 3.5% ROI over the 8 week period? WHile I like to believe that the answer is “yes” the belief that Transocean doesn’t have much in the way of near term downside ultimately made the decision relatively straightforward. I looked at the rollover as providing a relatively low maintenance return with greater safety that alternatiuves.