In the end, market direction up yesterday was indeed just a bounce. It comes down to earnings really and the perception among investors that the global economies are improving or not. The perception yesterday was that they are. The perception today is that they are not. But in the end earnings can really tell you a lot about what is happening with your economy anyway. If you read between the lines of the recent earnings from Alcoa, Intel, Johnson and Johnson, Coca Cola, you can see that revenue, which is the real driving engine is down.
Companies can do whatever they want to try to boost the earnings side, but it is revenue that drives a company. If revenue declines eventually the earnings side will pull back as companies cut as much as possible to generate income. Intel announced plans to slash capital spending by 1 billion.
Revenue Drives Trading Strategies For Put Selling
That tells me that Intel is not shooting up to $25 or higher any time soon. It does not matter what analysts tell us or what “pie in the sky” figure they come out with, revenue is the driving engine and with a 1 billion hit to capital expenditures, this advises that they do not see the growth they expected in coming quarters. It is very prudent of them to decide now to begin cost cutting measures, but it also tells me that it is time now to consider rolling strategies that reduce the number of naked puts that I have in the money and roll lower. It also means looking for opportunities to do more Put Selling on large dips in Intel Stock. That Put Selling continues to bring in more income and it helps reduce the overall cost of in the money naked puts.
Set A Goal and Then Build The Plan
I have been mentoring a number of investors and we have been lowering their break-evens on Intel naked puts that got caught deep in the money. I have one investor who started with 30 naked puts at $29 and we have reduced his cost all the way down to $23 and 20 naked puts, all for a credit and no losses. Meanwhile he continues to earn income and keeps reducing his cost basis. His goal is to eventually end up with 10 naked puts at $21 which he wants to hold, take assignment and then sell calls using the Hide and Seek Covered Calls strategy or the Building Wealth Covered Calls Strategy to reduce his cost of ownership.
You have to set a goal, pick your strike price and then figure out the plan to get there. It is consistency that breeds success with investing. If you need some ideas you can contact me through this link.
Spy Put Options For Today
I was late getting into my options. I had expected some weakness based on my market direction technical indicators from last night. However I did not expect the bigger drop. I bought my Spy Put Options at 10:30 and I will hold them at least until 2:30 or 3:00 as I am expecting a deeper pullback. I would think at least 170 points on the Dow and probably 20 to 23 on the S&P as a minimum.
Correction Is Underway
I believe that the correction started last week and we are now underway. I have rolled my Apple Put Selling Bi-weekly trade lower and I have yet to sell my ABX naked puts which I bought back yesterday.
Barrick Gold Stock
Barrick is showing all kinds of strength but whether it can last in the face of a declining bullion price, I am not sure. I would think $15 would be in order and I will not be surprised if Barrick cuts its dividend until it sorts out the mess at Pascua Lama mine. Anything is possible with Barrick Gold Stock. Personally I like the volatility in ABX Stock and will continue to trade options against it, but this stock is not for many investors. Those who put sell and never want to own the shares but are simply Put Selling and then waiting to expiry could be disappointed. Some naked puts cannot be left unattended and I do believe Barrick Stock needs to be watched and adjustments made including trading within the puts. As well the Shark Trading Option strategy is well suited for Barrick Gold Stock.
Market Direction Intraday Summary
Intraday the heatmap is red with very few green spots. This is the sign of a general sell-off in stocks and with so many investors freshly into stocks from the start of this year, most will be reluctant to hold out. I believe we will see more selling as investors remain emotional. Investing rarely changes. Investors buy fearing they will miss a big rally and then sell out fearing they are wrong and the market will plunge. Fear of another 2008 to 2009 crash will be with the market for years. The bear market of 2000 to 2003 scared a lot of investors. Most did not return until late 2006 and into 2007. That did not work out well. Most investors wait too long to buy back in and this year was typical as analysts talked about how equities was the only place left to invest and dividend stock were where to put your money. Dividend stocks were talked up like they were a guaranteed investment. They are not. Earning 3% on a dividend and watching the underlying stock pull back 10% is a recipe for disappointment and selling.
IWM Russell 2000
The Russell 2000 has been warning for some time now that the market direction higher was in trouble, as IWM refused to break free of the 50 period moving average. Today it is back below it as it leads stocks lower.
Bull Markets Must Correct
Bull markets must correct. When they do though, investors turn nervous especially when the market direction has been up since January and all the indexes have broken to new heights including the NASDAQ which is higher than in 2007. But when selling begins investors hang on at the outset, then as the selling continues they sell a little. As the selling still does not stop, they then sell a lot. I keep my cash at the ready but there is no point in committing it until the selling is intense and this still is a long way off.
Stocks Are Still Overvalued
The run-up since the start of the year has pushed many large cap stocks into overvaluations. We will need significant pull backs to get stocks back to levels that are truly attractive. This may be the start of that move lower but remember, as it is a bull market we may still not get to that level, which is why I use options and enjoy Put Selling at prices I believe make more sense as an investor.
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