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Friday, March 29, 2024

Choppy Trading and Low Conviction Equals All-Time Highs?

This is a great chart from Morgan Stanley (click for bigger view):

We've sat out the summer rally, for the most part, waiting for a correction that never came and now we enter the last full week of August and we have to consider whether to move some of our cash off the sidelines or to wait into next earnings before making commitments.  Surely there are still bargains to be had and we'll be picking up stocks that are still in the bargain basement but I'm still not willing to chase the ones that are pressing the tops of their ranges – simply too rich for my blood.

We don't need to be "bullish" to make money.  Our Options Opportunity Portfolio (OOP) has gained $5,000 since our last review on 8/5, which is 5% in two weeks (now up 86% for the year) – it has a very healthy mix of bullish and bearish positions and, of course, the bullish positions are our big winners AND we have a very healthy amount (50%) in CASH!!!

Our strategy has been to pick up bargain stocks over the course of the year like Micron (MU) last Sept, Natural Gas (UNG) in Oct, IBM in Oct, Gold (GLD) in Nov, Marvell (MRVL) in Dec, Disney (DIS) in Dec, Biotech Ultra-Long (LABU) in Feb, Oil (USO) in March, Apple (AAPL) in April, Twitter (TWTR) in April, GoGo (GOGO) in May, SunPower (SPWR) in June and Kate Spade (KATE) in Aug – so it's not like we haven't bought anything over the summer – just not much.  

Image result for dividend monopoly cardIt's a very similar strategy to the one we use in our Long-Term Portfolio, over at PSW but with protective elements from our Short-Term Portfolio added in to make a single, well-hedged portfolio that began with just $100,000 last August.  Our most conservative portfolio is our Butterfly Portfolio and that went into expirations up 180% in it's 3rd year – that one is also self-hedging and market-neutral. 

We don't want to rush into things because we're still concerned about China (China Is Grappling With Hidden Unemployment) and we're still concerned about Japan (Japanese Firms Head for Profit Reckoning Next Month as Yen Gains) and Europe is still a mess (Mission Impossible Looming for Italy’s 2016 Economic Growth Goal) and the Fed are certainly going to raise rates at some point, strengthening the buying power of our sidelined Dollars so what's the hurry to rush back in – let's enjoy the end of summer!  

Though earnings season is "over" there's still plenty of action and now we have so much information that we can make some intelligent bets on those that remain.  Best Buy (BBY), for example, has been range-bound and it's very unlikely they'll get back over $35 judging by what others in the sector have reported yet you can sell Oct $35 calls for 0.75 and pick up $75 per contract if they don't pop 10% on earnings and stay down through Oct expiration (60 days).

TOL, on the other hand, has low expectations and they are my 2nd favorite builder.  They are down from $40 last year to $28.78 but they are on track to earn $2.60 per share this year for a p/e of 11 and they are only expected to earn 0.61 tomorrow morning but they beat last Q by 10% at 0.51 in a much slower quarter so I like Toll Brothers (TOL) here and the play I'd make is:

  • Buy 10 Jan $26 calls for $3.90 ($3,900) 
  • Sell 10 Jan $30 calls for $1.70 ($1,700) 
  • Sell 10 2018 $25 puts for $2,50 ($2,500) 

That's a net credit of $300 on the $4,000 spread and, if TOL is over $30 on Jan 20th (expiration day), you will collect $4,000 back for a $4,300 profit (1,433%) in 151 days but you will still have the obligation to buy 1,000 shares of TOL at $25 through Jan 2018, so make sure you REALLY want to be a long-term owner  – just in case it does fall below $25 (-10%).  Still, a 10% discount is not bad for your worst-case, right?

We've seen much-improved housing data, jobs are on the rise and rates are still low – that's how we make a decision to buy a stock with a p/e of 11 – it's not rocket science…  We use option strategies to leverage our cash and, in this case, we're using no cash at all ($300 credit) and simply using our sideline margin ($2,500) to promise to buy the stock if it goes below $25.  For that we are being paid $2,500 by the stockholder who wants a guaranteed floor.  

It's another slow data week but we have GDP on Friday, a couple of Fed reports and some housing data, so not nothing – just not much.  Yellen also speaks on Friday so buy those dips, I guess but I can only imagine she's speaking because GDP is disappointing so I will be continuing our plan to be "Cashy and Cautious" through the holiday weekend.  

 

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