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Daily Market Update – July 15, 2014 (8:30 AM) For the next two days Janet Yellen will be providing some testimony in front of congressional banking and finance committees. Based on her latest two rounds of public statements it has been pretty clear that anyone with money who was inclined to invest would be better off in stocks as their vehicle as opposed to alternatives, such as bonds. For now, though, at least until the first potential newsworthy words coming from Yellen’s comments, the story is again on the financials, as more good news is awaiting the opening bell. With JP Morgan and Goldman Sachs reporting earnings this morning that were in line with the previous day’s report from Citigroup, there’s reason to believe that the economy may be heating up. When the financial sector does well it’s not a far stretch to imagine other sectors doing well, although that’s not always a given. Over the past 4-6 quarters there have been a couple of earnings seasons that started with the financial sector reporting better than expected earnings but with no follow through from other market sectors. Sooner or later, though, the rest of the market has to catch up to good fortunes in the banking world. Goldman Sachs, for example, actually reported revenues that were a $1 billion more than expected. Additionally, both JP Morgan and Goldman Sachs seem to have indicated that their own fortunes significantly improved during the latter part of the past quarter. For its part, Johnson and Johnson also reported this morning and their revenues came in $600 million higher than expected. Yesterday’s strong gain was fueled by Citigroup’s results. This morning the impact of the early reports weren’t as obvious, although they did turn the pre-open around from mildly negative to mildly positive. Yesterday’s triple digit gain came close to setting another record on the DJIA, although the broader market didn’t perform quite as well. It was good enough for most people, however. I tried to get some trades in yesterday in Bed Bath and Beyond, Cypress Semiconductor and even Riverbed Technology. However, while there was a fair amount of volatility with share pricing yesterday, representing give and take between buyers and sellers, despite the fact that the actual indexes were virtually unchanged during the day, there was very little such give and take in the option markets. What that meant was that even as share prices changed the option prices didn’t follow along, making it a challenge to get trades done, as the “Net Debit” prices couldn’t be realized. In all likelihood that meant that those in the option markets weren’t convinced by yesterday’s trading. Buyers and sellers just couldn’t come to agreement. That was fairly frustrating. Generally I don’t mind being the one to give in on pricing because I’m motivated to get the trade done. However, when volatility is so low and the premiums are, as well, that kind of giving in makes it harder to justify the trade on an ROI basis, especially as the market is sitting at such heights. When looking at charts of so many potential positions it certainly looks as if there’s more room to drop than there is to climb, even though the potential climb is unlimited. With the small premiums, if using them for downside price protection they don’t offer very much to counter the risk. However, if using the premiums for income, then it’s a little easier to justify the transaction, but still not as easy as even a few months ago. Today will be yet another day with cash available to spend and a willing, but not reckless spender, looking for an opportunity. Hopefully the two sides of the transaction equation can come together better today than they did yesterday.
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