Market still mixed; Seasonality to the rescue?
Another week of “noisy” market action has once again left the overall market trend picture a very mixed bag. For example, the DJIA and S&P 500 are almost completely neutral, the Nasdaq is still clearly intermediate-term positive, and the Russell 2000 is biased negative.
The mixed picture applies to market sectors as well: Oil Service, Energy, Materials, and even Technology are positive; Financials, Semiconductors, and Consumer Discretionary are negative; and Consumer Staples, Health Care, Industrials, and Utilities are varying degrees of neutral.
Sentiment isn’t much help here either – it’s also somewhere in the middle. The best clue to market action over the near term may come from seasonality factors – December and January tend to be favorable months for stocks, so this may tilt the odds in favor of the positive side.
New positions
Ambac (ABK) – On Friday I sold some January 22.5-strike puts on ABK as the stock sold off along with others in the sector on news that Berkshire Hathaway was entering the bond insurance market:
ABK remains in an intermediate-term downtrend, while the short-term trend is neutral/down. Downside support is at ~23 and at the recent lows at around 21. Given the above-average uncertainty involved in this stock, I only put on half my usual position size. Longer term it’s hard to argue with the potential value opportunity here, and in other beaten-down financials.
Bank of America (BAC) – On Friday I sold some January 40-strike puts on BAC as it dropped on weakness along with the rest of the sector:
Although oversold, BAC remains in a strong short- and intermediate-term downtrend, and may or may not hold at the 40-41 support level. A break below that would suggest a drop to the next lower support around 38-39, and below that, 35-36. As with many of the financials, valuations here seem fairly reasonable from a longer-term investment perspective.
Group 1 Automotive (GPI) – On Friday I sold some January 22.5-strike puts on GPI as it fell to new lows, presumably on the latest recession-related fears brought on by that morning’s worse-than-expected new home sales numbers:
Although oversold, GPI remains in a strong short- and intermediate-term downtrend, and appears headed for support at ~22. The next levels of support below that are ~20, and then ~18. Valuation seems reasonable here from a long-term investment perspective.
Wal-Mart Stores (WMT) – Last Thursday I sold some January 47.5 puts on WMT as the stock fell along with the market:
The stock is currently in an intermediate-term uptrend. It remains to be seen whether the recent strength is just another failed attempt to break through the 50 level, or the beginning of a longer-term uptrend in the stock. A break below the ~46 level would change the intermediate-term picture.
Watchlists
“Upside strength” candidates of interest this week include Anheuser Busch (BUD), Bowne & Company (BNE), The Gap (GPS), McCormick & Co. (MKC), Meadowbrook Insurance Group (MIG), and Rayonier (RYN).
Candidates of interest on the “oversold” scans this week include Bed Bath & Beyond (BBBY), Benchmark Electronics (BHE), FedEx (FDX), Huntington Bancshares (HBAN), The McGraw-Hill Companies (MHP), and Williams-Sonoma (WSM).
Dear Sir,
Congradulations on another good month.. Nice way to end the year.
Comments..
First, a very Happy and Healthy New Year to you and your family. May this new year bring you good fortune, wisdom and wealth.
Question if I may.. On your “called away options”, you indicate that you are still intitled to the option of the stock ? Is that correct ? (never had a stock called that still paid a div after it was called).
On your ABK Put sale, via your less then normal options writes, are you more concern or cautious now on the future direction or just on ABK ?
I’m somewhat concern overall, but have to say the markets could be consolidating for a nice run up ..
Thank you for past year posts and hopefully continued interest to share your trading..
Best Regards,
F.S.
Hi,
Thank you, and all the best to you as well.
In answer to your questions:
The dividend for BGG will be paid on 01/02/08 (the “payable date”) to all owners of the stock on record as of 12/03/07 (the “record date”). Rather than take profits in my shares of BGG by selling them outright prior to 12/03, I instead sold in-the-money calls against them – in effect locking in the profit while still remaining a shareholder on record as of the record date, and eligible to receive the dividend. (It isn’t uncommon for me to receive dividend payouts from stocks I no longer own a week or two after they’ve been called away.)
My smaller-than-normal position in ABK is due entirely to the uncertainties and risks associated with that stock and sector. This is reflected in the option volatility, which is currently well over 100%. So even though I sold fewer puts, there was still plenty of premium to be had.
I’m currently positioned to take advantage of both up and/or down moves in the market, so I’m just waiting opportunistically to see which way it goes. Also I’m focusing mostly on individual stocks and not worrying too much about the overall market, which right now is definitely a bit of a mixed picture. If I can sell puts on good dividend-paying stocks that are trading at “bargain” prices, I know that the odds of coming out ahead, sooner or later, are likely to be in my favor, regardless of what the market may do in the next few weeks or months.
Thanks again for your interest.