Correction Chatter Abound…

Here come the pundits! Over the past couple of weeks the conversations of a significant market correction have spiked along with market volatility.  From billionaire investor David Tepper’s comment that “the markets appear to be dangerous” at last week’s annual SALT conference to Dennis Gartman of the renowned “Gartman Letter” stating we are in a correction as we speak. There is certainly no shortage of opinions flooding the airwaves. Now granted, recently stocks have been in somewhat of a downward trajectory especially the so called “momo” (which stands for momentum) stocks and the more riskier small-cap asset class. In fact, the small-cap Russell 2000 (chart) has been sold off more so than any other index losing around 10% from its high in early March. This while the Dow Jones Industrial Average (chart)  recently made an all time high at 16,735.51. I think it’s safe to say there has been a rotation going on, a rotation out of riskier assets into the bellwether blue chip stocks.

So what about this apparent correction that is about to happen? Some pundits are calling for as much as a 20% correction at any time. I am not so sure about that. Seemingly, when the markets do become vulnerable and volatile regardless of why, the bears begin to come out of hibernation. Yes, this bull market does appear to be a bit long in the tooth, but in my opinion one factor that still stands in the way of a severe market correction, you guessed it, the Federal Reserve. Even though the Fed has begun to taper its bond and asset purchases, they have also indicated that should the “facts on the ground shift” hence, our economy heads into a recession or should the markets experience a severe sell-off, that it would be prepared to make adjustments to its policies, in other words, another form(s) or an extended version of stimulus would most likely occur. So how can anyone bet against these markets when you continue to have the Federal Reserve as the floor to any potential significant selloff? This does not mean that volatility will not increase or that we couldn’t see pullbacks or even quasi-corrections and should this be the case, I have got to believe the bulls would step right in and deploy their capital right along with the Fed.

So if you are currently bearish on equities or you are buying into the chatter of an imminent market correction and have gone short, you may want to consider covering your positions in the event of a 5 or 10% retracement or for that matter, a breakout from the current levels. Personally, I will look to add to certain positions should we see the correction many are talking about. Of course, it is always best practice to consult a professional financial advisor(s) before developing a market strategy or making changes to your portfolio. Good luck to all.

Memorial Day weekend is coming up and the markets will be closed on Monday May 26th. Both Paula and I wish everyone a safe and healthy Memorial Day and we want to thank and are grateful to all of the veterans and their families who gave the ultimate sacrifice serving our beloved country. We also want to thank the brave men and women who are currently serving our country and protecting our freedoms.


~George & Paula

Despite a Partial Government Shutdown, Stocks Rally…

No matter what has been thrown at this bull market over the past few years, nothing seemingly can slow it down. After the key indices finished the month of September with unlikely gains, stocks continued their upward trajectory today even though Congress couldn’t agree on a short term budget deal to keep our government fully operating.

For the first day of October, the Dow Jones Industrial Average (chart) finished up 62.03 points, the Nasdaq (chart) +46.50 points, the S&P 500 (chart) +13.45 points and the small-cap Russell 2000 (chart) closed the day up 13.64 points. Pundits are speculating that with the government in a partial shutdown, Congress will now have to address the debt ceiling and budget at the same time which a likely compromise will come forward on both issues, hence, bullish for stocks. Not sure if I fully agree with that thesis. Furthermore, the bulls make yet another case that by having this budget and possible debt ceiling impasse, this will keep the Federal Reserve in full accommodative policy mode. Now this in my opinion would be a more bullish thesis. However, lets not forget we have now entered into the fourth and final quarter of the year and third quarter earnings reporting season is on its way.

Needless to say, the markets have a ton to digest over the coming weeks including Q3 earnings reporting season and I am expecting volatility to continue to increase. From a technical standpoint, the Nasdaq (chart) and the small-cap Russell 2000 (chart) stunningly hit new 52-week highs today and continue to outperform the Dow Jones Industrials (chart) and the S&P 500 (chart). The Dow and S&P did bounce off of key support levels yesterday and have resumed their uptrends, at least for now. In addition, both the tech-heavy Nasdaq (chart) and small-cap Russell 2000 (chart) are once again approaching overbought territory heading right into earnings reporting season, which could be of interest to the bear camp.

As volatility increases, one strategy that can potentially bode well is to sell option premium on select indexes or stocks in order to capitalize on the increased vol. This strategy is not for the novice and one should consult with a certified financial consultant before implementing any strategy, especially options strategies. But for the more advanced investor or trader, this type of environment is almost perfect to participate in a “selling option premium” program. Option premium is essentially income generated by an investor who sells premium to another party and hopes to keep the entire premium without having the option exercised. Let’s look at one example of a “selling premium, covered call strategy”. Let’s assume you own 1000 shares of Facebook (NasdaqGS: FB) at $50 per share. You can choose to “sell” a.k.a.”write” a covered call option on the Facebook shares you own. If you take the monthly October $52.50 calls that are currently trading for $1.20 and sell/write them against your position, you would take in $1,200.00 less transactions costs. This is the premium you would receive for writing/selling this covered call. If Facebook closes below $52.50 on expiration day you keep the entire premium as well as your 1000 shares. If Facebook closes above $52.50 on expiration day you still keep the entire premium earned, however, your 1000 shares of Facebook would be called away at $52.50 because you sold your rights to the stock you own to another party for $52.50. If this is the case, you would be a not only be benefiting from the options premium income, but also a stock appreciation outcome for in this example the initial cost basis for the Facebook position is $50.00 per share. So you would gain an additional $2.50 per share in profit. Please note that a covered call strategy is typically a bullish strategy and again this is just one example of how “selling options premium” can work. In closing, this is not a recommendation just an illustration on how an investor or trader can potentially benefit with option premiums. Please remember it’s always best to consult with a certified financial planner(s) before implementing any investment strategy.

Good luck to all 🙂