The Dow Jones industrial blues
For the most part the market went sideways last week, which is consistent with a consolidation – or at least the beginning of one – of the current uptrend. The current trend analysis of the major indices supports this, with only a few short-term red downtrends marring otherwise all-green charts.
Except, that is, for the Dow Jones Industrials.
There the picture is decidedly mixed. While there’s still a hint of green showing, the mostly pink and red trend analysis chart of the Dow Jones Industrials reflects the recent underperformance of many of its components – names like 3M (MMM), Alcoa (AA), DuPont (DD), IBM (IBM), Microsoft (MSFT), SBC Communications (SBC), and Wal Mart (WMT) – which have been moving down, with some now approaching their recent lows.
What does it mean? One interpretation could be that the market is breaking back down again and some of the big-name industrial blue chips are leading the way.
However, the degree of strength in all of the broader indices suggests a more positive scenario: These stocks may simply be out of phase with the rest of the market and in the process of finding an intermediate-term bottom while the rest of the market consolidates its recent uptrend, setting the stage for both groups to then head higher. This continues to reflect my current outlook.
This past week I again tried selling puts on a variety of issues including Intel (INTC), Wells Fargo (WFC), Whirlpool (WHR), SBC Communications (SBC), Consolidated Edison (ED), and Microsoft (MSFT), with little to show for it. Only on Friday did one of my limit orders trigger, when I finally sold some June puts on MSFT.
This coming week appears likely to offer more opportunities. I’ll continue to look at June puts, but increasingly I’ll be focusing on July options. Low market volatility and a very near-term expiration add up to some pretty skimpy premiums.
My current list of put-selling candidates can generally be broken down into two categories:
- Oversold and/or beaten-down “value” stocks that may be in the process of bottoming out (at least for the near to intermediate term)
- Relatively strong recent performers that appear to be correcting within an ongoing uptrend and appear to ultimately have higher to go (in the near to intermediate term)
The first group includes stocks like Anheuser Busch (BUD), Deere (DE), Dow Chemical (DOW), General Motors (GM), Kohls (KSS), 3M (MMM), Microsoft (MSFT), Morgan Stanley (MWD), Parker Hannifin (PH), Sara Lee Corp (SLE), United Parcel Service (UPS), Vodaphone (VOD), and Verizon Communications (VZ), among others.
Examples of the latter category include Abbott Labs (ABT), Allstate (ALL), Chubb Corp (CB), Consolidated Edison (ED), General Mills (GIS), HCA-Healthcare (HCA), Intel (INTC), Gillette (G), Johnson & Johnson (JNJ), Nicor (GAS), NiSource (NI), and Target (TGT).
In both cases I’m only considering stocks I’d be willing to own for a while. And I’m only looking to sell puts at stock prices somewhat below current levels, usually accomplished through limit orders reflecting downside targets on the respective stocks. I’ll explain more on how I calculate the option pricing for the limit orders at another time.
