With all the negativity surrounding our economy, with the stock market testing its November lows and with consumer confidence on life support, this author is about to write a positive column. Am I insane? The re-incarnation of Crazy Eddie perhaps (remember him?). As I sit here in my home office typing away, I can just envision investors all over the world curled up in a fetal position feeling sorry for themselves, enumerating the myriad of folks and circumstances to blame for their misfortunes.
The truth is that many of these folks are correct in their assumption that if the government did its job, if greed was eliminated from Wall Street, if our financial institutions practiced responsible lending procedures, things in the investment world would be quite different. But as the expression goes: *%#&^%$ happens! The question is how do we respond to these rare but brutal circumstances. Here are our choices:
1- The above-mentioned fetal position approach.
2- Put your money in cash or fixed investments until the market normalizes and the economy rebounds. I-bonds will gurantee that you beat inflation.
3- Invest cautiously, but invest, because there is still money to be made even in this market environment.
Blue Collar Investors all over the world, know that option #1 is never to be considered. Whenever emotion plays a role in our financial decisions, failure is inevitable. So choosing between staying on the sidelines in cash or careful, non-emotional investments is our dilemma. This is a personal decision that only you can make because risk tolerance and market experience and savvy need to be factored into this determination.
I have decided to use a combination of the two. I am selling covered calls, but with a conservative percentage of my total stock portfolio. The February contract period was a good month for this investor as I carefully integrated sound financial principles, common sense and employment of exit strategies to achieve a decent degree of success. Because of the market volatility, I have been selling predominently I-T-M strikes thereby achieving slightly lower returns than if I sold more O-T-M calls. I am, however, getting the downside protection that allows me to sleep better at night.
The purpose of this article is to show you why I don’t subscribe to the doom and gloom philosophy. Even in the stock market crash of 1987, there were industries that flourished and stocks that appreciated significantly. It is the mission statement of The Blue Collar Investor to locate these stocks and their industries. Bottom line: The Blue Collar Stock Market consists of the greatest performing stocks in the greatest performing industries. That’s our stock market. The S&P 500 is everybody else’s stock market.
The S&P 500:
This is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping. It is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/reward characteristics of the large- cap universe. This is what investors look at when they refer to “the market”. Currently, this index is testing its November lows and it is understandable why investors are overwhelmingly negative when referencing this benchmark. Here is the chart:
S&P 500 as of 2-21-09
One glance of this graph will understandably cause most investors to liquidate their stocks and put their assets into fixed investments or cash. However, although this index does tell an important story that we can’t ignore, it is not our stock market, its everybody elses. Just as in the Crash of 1987 there are industries and stocks that are non-conformists. Even Cramer says that there is a bull market somewhere and he’s going to find it for us. Blue Collar Investors can locate these markets as well. Many times, we find them first!
Over the past few months, this site has highlighted several industries and stocks that have fallen in favor with the institutional investors…these are the modern day non-conformists. A few have been located by YOU and I simply passed the information on to our group. So, after having viewed the brutal chart of the S&P 500 above, let’s now look at the charts of these highlighted industries and stocks and then see what conclusions we come to:
Gold/Silver Industry 2-21-09
NEM of the Gold/Silver Industry
Coal/Energy Industry 2-21-09
FCL of the Coal Industry
Computer Services Industry
HMSY of the Computer Services Industry
Schools Industry
APOL of the Schools Industry
For a FREE WEBSITE to access industry charts, use the following link:
http://www2.barchart.com/sectors.asp?base=industry
Conclusion:
Listening to the media, market experts, friends or general public sentiment can be a mistake for Blue Collar Investors. There is only one person who should determine your investment plan and that is YOU! Yes, we should factor in the information put out by others, but consider these comments just one small piece of the puzzle. Only you know your risk tolerance. Only you know your market experience.
If you choose not to invest at this time then that is the correct decision for you. But don’t let this opportunity go by. Paper (practice) trade through this volatile market. Put in the same time and effort as if you were risking your hard-earned money. What a great learning experience. You will have the confidence that if you can navigate your way through the current economic trials and tribulations, your profit potential will be limitless in normal market conditions.
For those of us who do decide to invest in these difficult markets, it is comforting to know that our market is far superior to their market. With all due repect to the S&P 500, it is just not good enough for the world of The Blue Collar Investor.
Last Weeks Economic News:
President Obama signed the economic stimulous bill (The American Recovery and Reinvestment Act) into law. The Feceral Reserve minutes showed that “participants thought the fiscal stimulous was a necessary and important complement to the steps the Federal reserve and other agencies were taking, and that it would help foster economic recovery.” The Fed was concerned, not about inflation, but rather deflation ( A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum). This concern was supported by the fact that the year-over-year rise in consumer prices reached its lowest point in over 50 years.
On a positive note, the Conference Board’s Index of Leading Indicators surprised analysts by rising 0.4% for the month of January. This was the index’s second consecutive gain that could mean that the recession is slowly beginning to ease.
For the week, The S&P 500 declined by 6.9% for a year-to-date return of -14.7%.
My best to all,
Alan
What a great post! Becoming an active investor, using your own abilities to make investment decisions, taking back your financial life from the banks, Wall Street, Insurance Companies, etc., is really the only way to find success in today’s environment. When I get fearful I just remember those days when I was dependent on those so called “experts” who were really just industry mouthpieces and I realize even if I make a mistake, it is my mistake, therefore part of the learning process, and will only make me better in the long run.
Hi Alan:
Stocks that I am in and trade:
TTEK – a buy under $29 and a large buy under $18
CYBS – a buy under $12 and a large buy under $10
DXO – a buy under $1.80 and a large buy under $1.70
Sincerely,
Ken Kovanda DDS
TTEK- Let’s work the numbers:
As the market nears closing today, let’s look at our option choices for one of Ken’s recommendation’s (see above comment), TTEK:
Current price = $21.50. We can sell the more conservative $20 call ( I-T-M) or the more aggressive $22.50 call ( O-T-M).
1) I-T-M
– Sell 1 x March $20 call @ $2.20
-ROO = 220-150/2000 = 3.5% = 42% annualized. We deduct the intrinsic value from the option premium and divide by the “bought down” value of the stock. See chapter 9 in “Cashing in on Covered Calls.”
– Downside Protection = 150/2150 = 7%
– This means that we are guaranteed a 1-month return of 3.5% (42% annualized) as long as our shares do not depreciate in value by more than 7%.
2) O-T-M
– Sell 1 x March $22.50 call @ .90
– ROO = 90/2150 = 4.2% = 50%
– Upside Potential = 100/2150= 4.7%
– This means that we get a 1- month return of 4.2% (50% annualized).
– If our shares appreciate beyond the $22.50 strike price, we can generate an additional profit of 4.7% for a total 1-month return of 8.8% or 106% annualized.
In unpredictable markets such as this one, I favor the I-T-M strikes for a majority of my option trades.
Thanks to Ken for sharing his research.
Alan
IMPORTANT E-Mail question from Bob G:
Hi Alan
Is it OK to keep asking questions or is this an imposition?
I followed your procedure for creating a watchlist
1. Start with IBD 100 3/20/09
2. Eliminate those not optionable (about 30)
3. Eliminated those with Overall < A-, Technical, Fundamental, Attractiveness < B (about 3) 4. Eliminate those with MSN StockScout rating < 5. (none) I then ran a screen for options with uncalled return and called return of 4% or greater (181) The 2 lists have very few stocks in common. Almost all of the stocks on the watch list have returns < 4%, Does that mean I have to chose between higher risk and lower return (so what's new)? What return percentage do you accept? Bob My response: Bob, My goal is to answer as many email questions as possible. There are times you may not get an immediate response because of the number of contacts I am receiving. My responses to questions like this one is one man's opinion; but based on many years of successful investing in this modality. However, this is one of the most important questions I could ever be asked! It is also one that I feel very strongly about: NEVER, EVER select a covered call position based on option return. I consider that a sucker's bet. Tempting as it may be, these investments are too risky and will adversely impact your portfolio in the long run. See Golden Rule # 2 on page 12 of my book (Taser). In normal market conditions, I look for returns of 2-4% per month. This applies to markets that are moderately bearish to moderately bullish. Also, the % of I-T-M strikes vs. O-T-M strikes will impact your returns. At the beginning, settle for the safer, more conservative returns especially in the current market environment. If you are a neophyte at cc writing, paper trade for at least a few months and this will all become crystal clear. Alan
Locating stocks by volume:
Two of the most actively traded stocks today that have appreciated in value are ESRX and SEPR. Neither one meets all the criteria of our system but checking out other stocks in the same industry may help us locate some gems.
Here are a few stocks in these 2 industries for you to check out and see if they belong on your watchlist:
1- Medical Services (ESRX):
WOOF, DGX, MHS
2- Medical/ Biomed (SEPR):
GILD, GENZ, DNA, AMGN
A stock going up in value on high volume means the “big boys” and taking positions in these stocks and their associated industries. Oftentimes, that bodes well for other corporations within those same industries.
Alan
Keep an eye on HRL and VTR:
These two stocks will be added to the S&P 500, replacing ACAS and JNY. The very popular S&P 500 Index funds will be required to purchase shares of these 2 companies and sell those of the replaced corporations.
Although neither currently meets our system criteria, things could change as shares are purchased by these institutional players.
Alan
Excellent information.
STOCK SPLITS AND LOCATING GEMS:
Another method I use to l0cate great performers is to check stocks that have declared splits. In many instances (but not all) a corporation will declare a stock split as a result of an increasing share price. By splitting the stock, the price will be decreased allowing many investors to purchase more shares at the lowered price. We DO NOT get additional value from the split, just an opportunity to buy more shares at the lowered price. For example, in a 2-for-1 split, 100 shares of a $50 stock becomes 200 shares of a $25 stock.
Tuesday, after market hours, MYGN declared a 2-for-1 split. I checked to see if it met our system criteria and it did. It is now on my watchlist.
At the time of this post, MYGN was priced @ $82.73/share. If we sold the March $80, I-T-M call, it would return $7.40.
The ROO = (740-273/8000) = 6% 1-month return or 72% annualized.
Our downside protection is 273/8273 = 3%.
We generate a 6% 1-month return as long as our shares do not decrease by more than 3% before March 20th.
I plan to write a detailed article on stock splits and their impact on cc writing within the next month or two.
My best to all,
Alan
Don’t touch that gold, it’s still hot!
Just finished taping a radio program interview. I checked the strong industries of the past few weeks that continue to show strength and Gold/Silver is still up there.
LIHR is currently selling for $21.70. If we sell the 3/20 call, we collect $230.
Our ROO = 230-170/2000 = 3% 3-week return
Our downside protection = 170/2170 = 7.8%
This means that we are guaranteed a 3%, 3-week return as long as our shares do not depreciate in value by more than 7.8%.
Working on a really interesting article for this weeks publication. Don’t miss it!
Alan
Alan,
Sorry…finger slipped on the last email. If you have the time in the near future, can you do a detailed piece on the issues surrounding when you do an ITM, ATM, or OTM. I’m comfortable with ATM and OTM, but you’ve discussed ITM writing a lot lately and I need to get more comfortable with making that decision.
The best,
Barry
Barry,
I will include more detailed thoughts relating to I-T-M strikes in the near future (perhaps part of next weeks article). In the interim, here’s a link to an article I wrote a few weeks ago that may answer some of your concerns:
https://www.thebluecollarinvestor.com/blog/selecting-the-best-strike-price/
Alan