Stocks, commodities: About to reverse course?
The ongoing rally in stocks has reaffirmed a positive weekly trend picture, but has also carried many market averages into overbought territory – just as the DJIA and S&P 500 (see chart below) are retesting their May highs. This isn’t necessarily a bearish sign – “overbought” (and “oversold“) conditions signal strength in a given direction and often suggest that a move has further to go – but it certainly could be setting the stage for some sort of a pullback.
Conversely, with their recent sell-off (see charts below), commodities (gold in particular) and energy stocks are now clearly oversold. Given their previous run-up they still appear to have plenty of room left on the downside, but I’ll increasingly view further weakness from here as offering potential put-selling opportunities.
The S&P 500 is almost back to its May highs, but is also now technically “overbought”:
The Commodity Research Bureau (CRB) Index is in the midst of a nasty “third-wave” decline:
The Energy Sector SPDR ETF is also experiencing a significant sell-off:
New positions
Bristol Myers Squibb (BMY) – Last Monday I sold some October 22.5 calls against my long position in BMY in order to substantially hedge the position against another decline:
Not great timing as it turned out (the stock jumped higher the next day on news of the CEO’s departure), but I didn’t want to risk another sell-off if the news had been negative.
Polaris Industries (PII) – Last Wednesday I sold some September 40 puts on PII as it dipped below the 40 level:
For more on this position, see “Options Expirations Results” below.
Options Expiration Results
- Analog Devices (ADI) – The September 25 puts I sold on 8/11 expired out of the money (OTM), for a five-week net return of 1.7%.*
- M.D.C. Holdings (MDC) – The September 40 puts I sold on 9/7 expired OTM, for a one-week net return of 2.7%.*
- Merck (MRK) – The September 40 calls I sold on 8/24 against my long position in MRK (purchased 8/18) expired in the money (ITM), and my shares were called, for a one-month net return of about 3.8% on the position, not including an expected dividend payment due in early October.
- Polaris Industries (PII) – PII closed the week above 40, and the puts I sold last Wednesday expired OTM for a two-day net return of 1.3%.* I’ll be looking to sell puts again on further weakness.
- Unilever (UN) – The September 22.5 calls I sold on 8/28 against my long position in UN (purchased 5/19) expired ITM, and my shares were called for a four-month net return of 6.3%.
- Verizon (VZ) – The September 35 calls I sold on 8/30 against my long position in VZ (purchased in July of last year) expired ITM, and my shares were called for a fourteen-month net return of 4.1%, not including the ~4.5% dividend I collected over that period. In retrospect I should have sold October puts instead so that I could have collected another dividend payment (ex-date 10/5).
Watchlist
New (and recently re-added) additions to the “upside strength” list include Applied Materials (AMAT), Family Dollar Stores (FDO), First American Corp. (FAF), St. Paul Travelers (STA), and Wyeth (WYE).
New (and recently re-added) additions to the “oversold” list include Alcoa (AA), ASA Limited (ASA), Marathon Oil (MRO), McClatchy Co. (MNI), Occidental Petroleum (OXY), and Patterson-UTI Energy (PTEN).
* 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.
