Market diagnosis: Good news, bad news
The market’s weakness last week only further confirmed the now almost completely negative trend picture for the major U.S. indices, reflecting an ongoing intermediate-term (measured in weeks to months) downtrend. The only exception is the DJIA, which is displaying a mixed – but still biased negative – trend spectrum.
One potential positive in the short term is that the speed and extent of the sell-off so far has already been enough to bring intermediate-term price oscillators on the technical charts close to oversold levels not seen since last October. The good news is that this may mean a rally could be in the offing; the bad news is that such oversold conditions may also be signaling just the beginning of an intermediate-term or longer market downtrend.
Options Expiration Results
I went into last week’s options expiration with short options positions in a variety of stocks:
- Gannett (GCI) – The May 55 puts I sold on 4/13 expired out of the money (OTM), for a five-week net return* of 1%.
- Lear (LEA) – The May 20 covered calls I sold on 4/19 against my remaining long position in the stock expired in the money (ITM), and my shares were called. I actually took a net loss of 2.7% on this portion of the position, but overall – start to finish – I ended up with a small net gain on my total LEA position. I would have done much better if I’d been a little more patient, but after the company suspended its dividend, I was no longer interested in holding onto the shares.
- UST Corp. (UST) – The May 45 puts I sold on 4/17 expired ITM, and I was put the stock, for a net cost basis of about 43.55. I may look to sell calls against the position on strength, and more puts on weakness, but with its annual 5%+ dividend yield, I’m in no particular hurry to take action.
- Bunge (BG) – Right after I sold the May 50 puts on this stock on 4/27 it did a U-turn to the upside and never looked back, and the puts expired OTM for a three-week net return* of 1.1%.
- Ameren (AEE) – The May 50 puts I sold on 5/2 expired ITM, and I was put the stock, for a net cost basis of about 49.20. Utility stocks have broken down here like most of the rest of the market, so I’m not currently too thrilled about this stock’s near- or intermediate-term prospects, but its 5%+ dividend yield is a reason to be patient.
- Fresh Del Monte (FDP) – The May 17.5 puts I sold on 5/2 expired ITM, and I was put the stock, for a net cost basis of about 17.22. I’m going to play this one by ear, but will probably look to exit the position or sell calls against the shares on any decent rally.
- Molson Coors (TAP) – The May 70 puts I sold on 5/2 expired ITM, and I was put the stock, for a net cost basis of about 68.28. I’ll look to sell calls against the position on strength, and puts if the stock drops back down to the 60 level.
- Unilever (UN) – The May 70 puts I sold on 5/4 expired ITM, and I was put the stock, for a net cost basis of about 68.32. This is another stock whose near- and intermediate-term prospects I’m no longer too sanguine about, so I’ll probably look to exit the position or sell calls against the shares on any decent rally. On the other hand, if I’m “stuck” with the stock for a while, I won’t complain about its 4%+ dividend yield.
Watchlist
Stocks of interest showing strength amidst the weakness this week include Allstate (ALL), Borg Warner (BWA), Clear Channel Communications (CCU), Coca Cola (KO), Colgate Palmolive (CL), Comcast (CMCSK), Disney (DIS), Hershey (HSY), and Kellogg (K), and Manor Care (HCR). I’m definitely watching these closely for any put-selling opportunities.
Certainly it’s no surprise that there are lots of interesting “oversold” candidates to consider as well, including Boston Scientific (BSX), Carnival Corp. (CCL), Deutsche Telecom (DT), eBay (EBAY), Ford (F), HCA Inc. (HCA), Home Depot (HD), Intel (INTC), Microsoft (MSFT), and Tribune (TRB). Further declines of 5% to 10% in these stocks – which seem quite possible – will definitely attract my interest.
* As always, the return on these “cash secured” put sales was based on the premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for the possible assignment of the stock.
