Practical Money

The market was mixed today, reflecting the action of last week where indecision seemed to be the theme. Today, the focus was on higher interest rates, which is why financial stocks did well today while tech lagged. Mind you, the discussion about higher interest rates have been on and off for years now. And it has been shown that a single day’s rise frequently does not hold up. That does not stop people from offering opinions though, and there were a lot of these today. It is sobering to watch the market react to a what may turn out to be nothing.

There was also talk about the government’s potential shut down, which has the market worried despite the fact that prior shutdowns have had little or no tangible impact on companies. Another miasma that infects the market.

Meanwhile, in the real world companies are dealing with real-time problems. Supply constraints which have been talked about on and off, are now becoming a major topic. It appears small companies are scrambling, particularly worried about the Christmas retail season, while larger companies are finding, sometimes expensive work arounds. And higher energy prices are hitting everywhere, much to everyone’s surprise. It appears all the hype about alternative energy and ESG has not taken into account that, practically, we still need oil and, unhappily, coal. It takes years to supplant energy sources, wishing we were green will not make it so.

It brings back to the purpose of this blog. I know there is a lot of opinion about the market, its direction, the best stocks, what is hot and what is not. But at the end of the day, the best way to invest is to be practical. Do not worry about the possible or the maybes, concentrate on the reality. Interest rates are unlikely to rise above 2% before 2022, even then it unlikely to impact most companies very much. What the government does, short of tax policy, has only selective impacts. But logistic issues and higher energy costs? They will have real impact on next quarter’s earnings and should be factored in when considering which companies to buy stocks in. Actionable reality

If you want to trade, you need to pay attention to the rumors and the headlines. The buzz and the trader talk. It is not for everyone. I think the focus on new investors would always be on the practical.

Market Today: Value stocks, those purchased for long term holding, did well today. Did not trade a lot, closed a couple calls and tech puts lanquished. Letting the market find a direction. Patience.

Uncertainty

The week ended up neutral - the indices gaining back most of what they lost the first two days of the week. Most people are unsure of what that means. No one is sounding the all clear just yet. While some people are buying, others are raising cash. There are very strong conflicting messages coming from both sides. Most market participants are flummoxed, which means there is a strong ‘wait and see’ bias in the market. In general, uncertainty can actually be good for the market, too much euphoria is worrisome.

So why the uncertainty? On the bear side, companies are reporting that labour shortages persist, inflation is a problem and supply shortages are impacting performance. Bulls point out that while that is true, it appears that Covid numbers are coming down, the Fed is in neutral and people are cashed up and ready to spend. In a consumer economy like the US, this is very good news. We also increased productivity over the pandemic so companies are doing more with less. This next earnings season will be very interesting. The better companies will probably do very well, other companies will use supply and labor issues as an excuse to justify weak performance. Some companies have just managed a lot better through Covid.

I tend to lean on the more positive indicators. It feel like the supply constraints are working themselves out, albeit slowly. I would bet more companies are going to manage supply and inflation issues by passing on price increases. Once the supply issues resolve themselves, the higher prices will probably stick, increasing operating margins. While higher prices are not good in terms of inflation, the increases will probably not be widespread or high enough to alarm the Fed longer term.

So the strategy is as it always is, buy if the stock is one you want to own and the price is right. Remember, you buy for the longterm upward trend. Use September’s volatility to rebalance your portfolio. Drops are to be welcome, as it put stocks on sale. And next week we will be doing this all over again.

Market Today: Another up/down day so it was pretty much all options, but equal calls and puts. Took advantage of the downturn in tech to sell some puts there on stocks I want to own, but not to many as I do not want to risk getting put too much in another swish down. I did listen to Nike earnings commentary as it was down over 6% at one point. I think Nike is a good company and I sold a put as I thought it might be time to buy some. With the volatility, the Nike option became less negative at one point so, bird in hand, I bought it back. Look for these kinds of opportunities to get into a stock you want. From what I heard, Nike looks to have simply had a bad quarter due to supply constraints. If it is down again on Monday, I will either re-write a put or buy it outright. 10.4

Buffet wisdom

The market adores Warren Buffet and many of his observations about investing have become almost gospel for Wall Street. But today I heard a new one that I had not heard before. I think it may become my new favorite. Josh Brown paraphrased it on the Halftime Report, so I checked and the quote is, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." (Aug 30,2019) Could not agree more, especially when I find myself having to reassure people not to panic and sell in a downturn. Part of what make Warren Buffet such a great investor is that he has seen it all, and market gyrations just don’t rattle him. He has his views, changes them as situations change and generally is just a steady force for good. He would be the first person to advise you to have a list of what you want to own, at what price you want to pay and just stick to your guns. Do not sell into a sudden downturn, but perhaps look to buy.

This week has been a perfect example of that. On Monday, panic was in the air and the selling was significant. “The long awaiting downturn is here! Batten down the hatches!” Tuesday the drop spluttered: Up, but then down and the day ended flat, confusing everyone. All day Tuesday there were both bulls and bears on the airwaves, but both sides were qualifying their predictions. Wednesday, the downturn became a rally, and buyers returned. Then today, Thursday, the rally really told hold, it looks like the week may end up ahead.

If you bought a little on Monday, stocks you like that were on sale, congratulations. You are probably looking at a gain. If you did not panic and sell, congratulations, you are not paying the tax man and having to get back in at higher prices. Your temperament matters. Steady as you go, that’s the way to make money in the market. Be calmly opportunistic when gifts like Monday’s decline are handed to you. Stick to your buying thesis. Find your market Zen.

Market Today: It was a rally day. Not back to where I started on Monday but close. Very few option trades as market was up so selling puts would not give me much premium (plus the VIX is back down) I was able to close three good puts on Salesforce (CRM), Applied Materials (AMAT) and PayPal (PYPL), sold and then bought to close calls on ROKU (ROKU) twice. Only sold two calls, on Abbvie (ABBV) and BioNtech (BNTX) as we are still not at market highs and sold two puts; Nvidia (NVDA) and LiveNation (LYV). Should be quiet tomorrow. 10.3

Headlines and Rumors

When I first learned about valuing companies, that is trying to determine what a particular company is worth, I was told it was all about earnings. In the simplest terms, I was instructed to look at how much a money a company made, extrapolate that into the future (usually about 10 years out) and then discount that earnings flow back to today’s dollars. That was a company’s value. That was my finance training, it was math and it was good.

Then I learned the term market value and the neatness of that cash flow analysis was history. Market value is simply what people are willing to pay to own a company and, sadly, that may have nothing to do with what the company currently earns (or even realistically could earn). Market value is simply the price of the company’s stock times the number of shares of the stock that is outstanding. The price of the stock is dictated by the market, it is what people are willing to pay for the stock. And what they are willing to pay depends on a lot more than just what a company earns. It can be a mish-mash of factors, ranging from the power of a brand, who the CEO is, their projected growth, even the perceived social good the company does, It is also a product of how people feel about the stock and the stock market. Is it logical that all companies drop 10% in a stock market correction? Shouldn’t the better companies not slide as much as the poor ones? Is a slight miss of one quarter’s earnings justify a 5% drop in the company’s value? Probably not. But declines are often driven by emotions not reality.

They talk about animal spirits in the stock market. It’s an odd term but it applies. The mood this September is somber. since the height of the summer, a lot of great companies have come down in value 10-20% off their highs. While it is not clear those companies highs were justified, it is also not clear, looking at their earnings, that a 20% drop makes sense. It’s been what they are calling a rolling correction. The cautious mood has let these stocks slide. People are nibbling at the market but not jumping in with confidence. So we swing up and down, often a lot, each day.

So news and rumors have an outside impact. And if you are willing to do the work, and consider out of fashion concepts like earnings, balance sheet strength and a company’s products and potential you might just find a gem. Then when you have a day like today, when good news out weighs the bad, and rumors seem less likely to become reality, you may find you have made a tidy profit. Take advantage of headlines and rumors, but don’t let them outweigh logic. Cool heads make money.

Market Today: Up day, based rumor that China will not fall apart economically, Fed did as expected and generally things looked better than they did Monday. Calls worked today but puts were better. Closed a lot of older contracts. Old standby puts all worked: United Health (UNH), United Rentals (URI), Shopify (SHOP), Disney (DIS), etc. Another solid day. 13.3

Turn around Tuesday?

There are quite a few idioms used by Wall Street. Today the one everyone’s lips was the term turn around Tuesday. Usually this applies to a strong Tuesday rebound from a deep Monday sell off. This rebound does happen frequently enough to warrant the idiom. But was it a true turn around today? Not really. In fact it was remarkably undecided day. We were up, then down, then up and it looked like it would be positive into the close (which would have been a good signal for the bulls). But in the last ten minutes, there was a sell off and we generally ended up where we started. So was it a good day for the bulls or the bears? The answer is neither.

Tomorrow afternoon around 2pm the Fed will have a press conference. A lot of people are waiting to see 1: if they announce a tapering timeline and then 2: will the market react to it. I believe this is a large part of why the market seems so undecided today, it is more of the ‘just wait and see’ mentality that is defining this September. To make matters more unsettled, tomorrow is the fall equinox. Believe or not, this date has frequently been a pivotal one for markets. Market old timers think this is to due to harvests changing hands around this period, the original markets. Others think it is tied up in the overall seasonality of the market. Not sure about either of those but a lot of market watchers are superstitious, so tomorrow could be interesting. Quad witching last Friday may have contributed to this weeks decline, so who is to say the equinox will not be in play tomorrow? I think the Fed will announce a taper timeline, but pushed into into next year. That will result in a minor market hiccup. And then back to normal.

You may be asking, do you have to know all these market idioms and superstitions, key economic events and history to make money in the market? The quick answer is no. But knowing them helps to inform your view as to possible market direction and overall sentiment. And honestly, sentiment seems to move the market more than reality, especially in times of market stress. Sentiment moves stocks.

So given this uncertainty, how does it effect my trading? Given that there is no way to know what direction we are headed in, I hedge my bets and try and have trades that will work either way the market breaks. I have calls options to close if we drop and puts options to close if we rise. About equal number of each. I avoid buying anything unless it is down more than 10%. I trim stocks to raise money if the shoot up. And I wait. I don’t sell.

Market Today: Market opened up which made it easy to offload the Albelmarle (ALB), Chevron (CVX) and Coinstar (COIN) puts I sold yesterday at the close. I quickly wrote calls on (BioNtech) BNTX and Zoom (ZM), which I own, and got to close the calls profitably later in the day when the market slipped and then resold them. I sold three puts into the close, betting on FedEx who reported lousy earnings (which means my put will be very negative tomorrow). I also bought puts on DIS (which dropped today on poor subscriber predictions) and Crowdsource (CRWD). All up, I only did 13 trades, all options. The shares I bought yesterday were positive today. Any day I do less than 20 trades is a slow day, and so it was. Tomorrow may be a make or break day. Good to have money on the side…

And so it begins…

I have been talking about the inevitable downturn in the market and woke up this morning to a pre-market slated to be down 600 points (the Dow index that is). Predictions did not disappoint and we got down as low as 800 at some point, a full 2% drop. This “improved” by the end of the day to 1.8% loss (over 2% for the Nasdaq). The mood was glum.

A 2% pullback in a year when we are up about 20% is nothing. There is likely to be more, maybe a lot more. Let me assure you, if we get a 10% correction it will feel a lot worse than today. For those of you who have not lived through a full correction, just stay calm. It is part of the market cycle. In the last few years, pull backs have been small and rebounded quickly. Mostly because people have bought the dip. This one may be bit different. There are loads of negatives on the horizon and most people seem resigned to a further market drop, which makes people hesitant to step in and buy stocks on sale. (Cramer listed 8 negatives about impacting market mood and we broke the 50 day moving average of the market, a technical warning sign).

I don’t like downturns either but I also tend look at the economy realistically. The world is not ending, but Covid will. Sure, there are international tensions, but no major wars being fought. People have money in their pockets and have demonstrated a willingness to spend. Money is cheap. Inflation is edging up, but not in any alarming fashion. Things are OK. We are not on the brink of another Depression.

It was China spooked the market today. Their real estate companies are in trouble and since they are highly leveraged, the banks in China (owned by the government) could be too. There is concern that Chinese bank failures could impact the worldwide financial system. Doubt it. Risks in China have been known for a while now and the smart money has probably cleared out already. This is not a new risk.

I was looking to buy today, but the stocks on my shopping list only slipped a percentage point or two. I need at least a 5% decline before I even begin to pick. I can wait, as everyone should do, until the down turn begins to show a sign of bottoming. A bottom traditionally occurs after a major ‘washout’, that is a flush of selling that sends the market hurtling downward. Once sellers exhaust themselves, buyers begin to creep in and we have a bottom.

Market Today: Down and out. I did 16 options trades, closed seven calls, three puts (two of which I wrote and closed today - MRNA and NVDA). I also sold six puts all of which were solidly negative by the end of the day. I always have calls on my positions, particularly big boring stocks like Blackstone (BX), PacWest (PACW) and Wells Fargo (WFC). When we have a day like today, I close them. I didn’t want to be called on them, but I sell the calls on the positions anyway just to generate income. It also softens the blow of a down day as I was able to pocket some “free” cash. I did buy a little bit of Cleveland Cliffs (CLF) today as it was down 10%. I just checked, stock futures are up - here’s hoping a least a couple of the six options I sold (CVX, FSLR, COIN, SHOP, CRWD and ALB) will come good when the market opens tomorrow.

The Winner’s Circle

It’s interesting to me to talk to people about their experience with the stock market. I grew up in a household where the stock market was an abstract concept, My parents both planned on their pensions and social security to carry them through retirement. They never owned stocks and their friends didn’t either. We were part of the 45% of Americans who have not stake in the stock market; it meant nothing to us. We believed only rich people owned stocks.

Sadly, it was not until I was in my 40s that I actually began to pay attention to the stock market. By then we had paid off most of our debts and were saving. It came as a bit of a shock to me that I was now among the 55% of Americans who did own stocks. I certainly didn’t feel rich. We relied on an investment advisor to help us and he bought and sold on our behalf. Four times a year he would show us charts that proved what a terrific job he was doing, compared to the benchmarks that he of course selected. Occasionally we broadly compared notes with friends over dinner or drinks, they too were part of the 55%. Usually, we got the uneasy feeling that we were not doing as well as we thought, but we believed we didn’t really have time to pay attention to it. We trusted our untrustworthy advisor.

After our losses in 2008, I began to manage our investments and sought out other investors to help me learn. I found there were excellent books, You Tube videos and of course the business channels. No one suggested that investing was simple, in fact some people and guides made is sound incredibly complex. Everyone suggested, however, that once you got the hang of it, you would be in the winners circle.

As I began to trade, I sought out other people who invested. I would shyly admit I had started to buy a few stocks, and ask if anyone knew of good ones I should consider. I would get eager suggestions, the vast majority of which came from men. Of course, these men were winning in the market. All the time. I was regaled with stories of the killing they had made on company X or Y. I just listened. I was embarrassed that when I had had winners, I had clearly sold them too early. I already knew that I held my losses too long. Everyone seemed to be better at stocks than I was.

What I came to learn years later is that all stock traders love the winner’s circle. They have stories of the doubles or triples they had had. The stock they bought for a dollar that was now worth one hundred times that. On the business channel, it was all about the winners. It was rare anyone admitted to losing money or recommending a stock that lost money. Even when they admitted to a mistake, it was because they had ‘gotten in too early’ or were ‘waiting for a thesis to play out.’ You rarely heard when they gave up on a trade or sold out of a losing position.

I began to wonder. I was handily beating the indexes, despite my sometime painful losses. Just doing the math, knowing many of them did not post annual gains as high as mine, suggested they must have some losers offsetting all those wonderful wins they talked about. They just weren’t getting a mention. Now when I meet a fellow trader, I try and get them alone and then ask, “What was the worst loss you ever had and what did you learn from it?” These stories are the ones I remember, and the ones I learned the most from. Better than any suggested ‘sure winner’ stock tip.

No one wins all the time in the stock market. Don’t be discouraged by the braggart out there. It is not the winner’s circle all the time, but then again it doesn’t have to be. I do very well even with my losses.

Market Today: Another slow day but again surprised myself by ending the week meeting my weekly goal. The market moved up and down, quad witching meant I could open and close favorites options like Shopify (SHOP) and Moderna (MRNA). We are still flagging for the month but commentary is getting bit more positive. Still in wait and see mode through. I set myself up for Monday with equal amount of calls and puts so I should make money on Monday’s open no matter what.

Is it time to buy?

With the September malaise in full swing, and many stocks over 20% off their highs, many people wonder if it is a good time to buy. Normally, the consensus advice for people looking to get into the market, particularly for the first time, is to buy into an index ETF that mimics the S&P 500 (look at SPDR, VOO, and IVV). These funds have low expenses and diversify holdings automatically. If you have limited cash resources and do not have the time or inclination to monitor your holdings, this is the way to go. Most retirement plans only offer these types of funds - it limits decision making for people and allows them to track performance easily - if the index is up, their holdings will be up too. It’s straightforward.

I think a little differently. If you are just starting investing, particularly if you are young, I recommend you actually buy and hold a few stocks. This is because making the effort to find and research a stock, actually putting the order in, seeing it filled and then keeping an eye on your stock is the best way to get comfortable with investing. There is no better way to learn than by doing, and the mistakes you make when just starting out are the best lessons you will ever get. Your first loss is your best loss and it is better that this first loss is a small one on a single stock rather than a large one on many.

The best time to buy a stock is when the market is down, preferable down a lot, or the stock of a good company has dropped a great deal in an over reaction to a market event like weak earnings or a shock to a particular segment. Patience is very important. No one can time the market, but you can get in when the the market is down and have the satisfaction of seeing an immediate return on your investment when the market corrects itself. Mind you, it is hard to buy when the market is down. Warren Buffet said 'Be Fearful When Others Are Greedy and Greedy When Others Are Fearful'. This means that you have to wade in when things look dire and buy. Just try a little at first and over time you will get more comfortable with buying in downturns. I always wait to reinvest the dividends in my IRA until the market is down 5% or more.

So is it time to buy now? Not yet. Again, I think we will see more of a sell off. That said, I did buy little more Freeport McMoran (FCX) today and Wynn Resorts (WYNN.). Both were down a lot this week for different reasons and both are likely to rebound once Covid is under control. I may have bought a little early but I am convinced I will be happy I own them in a year’s time. Mind you , I will sell them both for a trade if they rebound 20% after tax before the year end (unlikely unless Covid is cowed). I will probably buy a bit more if they continue down. Meanwhile I will sell calls on them while I am waiting and I still have cash for the big down turn. (A lot of us have cash on the sidelines waiting for this mythical downturn.)

Market Today: Good news on retail sales (we are all still buying stuff it seems) meant the market started off positive, then fell only to rally later in the day and then fall into the close. All up, DOW and S&P only ending up down slightly for the day (Nasdaq up). A positive Nasdaq meant I could get out of tech puts like PayPal (PYPL), Shopify (SHOP), Nvidia (NVDA) and Crowdstrike (CRWD). A Moderna (MRNA) put gave me a boost. MRNA has replaced SHOP as one of the most reliable puts to make money on - volatile and lots of volume. And I made money on selling and re-selling ROKU calls. Playing with Coinbase (COIN) puts - pure speculation but I am not ready for Bitcoin yet.

Quadruple Witching

This Friday, contracts on four different kinds of financial assets expire. These assets are derivatives of stock index futures, stock index options, stock options, and single stock futures. Since all four happen the same day (which only happens four time a year) this day is referred to as a quadruple witching day. The term witching is used as normally there is a lot of volume and volatility on these days. Transactions take place in in milliseconds and machines are programed to settle outstanding contracts, particularly at market close. The trading volume, volatility and velocity can mean chaos in the market. There may be sudden large swings, particularly at the end of the day. No one know for sure exactly how the day will unfold, but there is generally at least 50% more volume, so it will be busy.

Despite all the talk on business news channels, for investors, quadruple witching days mean very little; just stand back and watch. For traders, there can be price swings in some stocks that can provide an arbitrage opportunity. They may dart in and out of particular stocks or options depending on market swings. The bigger issue for all market participants is that the volume of stocks traded on quad witching days often means the following week, things are quieter than normal as everything settles out. Given that the market is currently in a wait-and-see mode, this quiet may be seen as a further indication that the market is weak. It could tip the market into the negative for the rest of September.

Given I’m an option trader, and the market has been down, I will be put some stocks this weekend. I have four sets of contracts that expire this Friday, so the shares will simply appear in my account on Saturday morning. Of course, there is a corresponding reduction in cash in my account as well to pay for the shares at the strike price I agreed to. I keep cash in my account for just this purpose, I try to have ready cash to pay for any shares I am put. If I did not have the cash, I could borrow on the margin or sell other stock to pay for my new ones. I try very hard to never trigger the use of margin - I pay interest on that.

I’m already writing calls on these soon-to-be owned stocks. Since on quad witching days, options prices tend to fluctuate as well, I want to be in a position to capitalize on it. I am fine being put these stocks as I have wanted to own them. Since I do not really own the stock yet, the calls I am selling are uncovered calls. Normally, I would never write an uncovered call but owning them next week it as close to a sure thing as you can get in the stock market.

So unless you are actively trading, just be aware of quad witching days and their potential impact on the following week. It is good to learn the slang.

Markets Today: After many down days, the market paused and turned up a little. I think it was the a guest on the CNBC half time report that asked people to step back and look at the economy of the US and quit being so pessimistic. Covid will end, the supply bottlenecks will ease and people will get back to work. This bodes well for the market longer term. Basically: Chill. I agree, but meantime I continue to be cautious. Few trades today and I’m still selling more calls than puts. Waiting to get out of the options penalty box I have built for myself - which I will on Friday. Welcome the Witch.

Corrections

September is coming in weak (as predicted). The major indices have been down for six of the last seven days and unrealized gains are slipping away in most people’s accounts. There had been a drop of 1.8 percent since Sept. 1. That is a tangible pullback, painful for most of us in the market. There is probably more to come. Why? Because there is no clear positive catalysts out there. Earnings are over. The Delta variant has delayed the ‘back to normal’ post Labor Day promise. Kids are back in school but for how long? Office returns have been pushed back indefinitely. Meanwhile, tax increases are looming, our government is bickering like spoiled toddlers, the Afghan mess and a variety of economic indicators are suggesting the anticipated re-opening boom may be more like a burp. The mood of the market is cautious and a bit grey.

Market participants seem to be pulling out and cashing up, holding off doing anything until the skies clear a little. With people on the sidelines, there is limited stock purchases going on so nothing to stop the slide. For example, the casino stocks took a dive today as the Chinese continue their shotgun approach to their economy, this time they blasted gambling in Macao. Most of the big casino players fell by 10% or more, which would have normally brought in some bargain hunters. But today, keeping with the sideline mentality, there were very few buyers of these stocks (Mind you, I did buy some MGM). The lack of the ‘buy the dip’ players means that there is no way to halt a downturn and the slide will probably continue.

How much will we slide? Well, 10% off the high will mean we are in a correction. A correction is more than a ‘pullback’ (single digit declines) but less than a ‘crash’ (20% or more). I think we could see correction this month, but it will be selective. A lot of people do not realize that a large portion of the major indices (20% or more) is made up of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon.com (AMZN), and Facebook (FB). These stocks need to fall a lot to really see a major slide in the indices. Fortunately, these five stocks are also considered some of the safest stocks in market so people are unlikely to let them go into free-fall. If they do, there is likely to be buyers out there waiting to scoop them up. So any large slides are likely to be driven by the more speculative stocks, which have already been struggling. The correction is likely to hit selectively.

I say the best strategy is to have a shopping list ready. As the slide progresses be prepared to sell losers which are more speculative and don’t have earnings. Understand that many people have ridden out Covid with good jobs and their savings levels are high - what are they likely to spend money on as Covid wanes? Buy the stocks of the companies who will benefit most from consumer’s comeback. Think healthcare, travel and beauty. (Be careful though, people have discovered that they do not need as much ‘stuff’ as they bought before Covid. A new frugality is upon us.) Think also about building materials (the infrastructure bill and housing shortfalls) and environmental related plays (EVs, solar, HVAC improvements.) Use this downturn to get into stocks you have been waiting to buy, and sell losers now to have cash to invest. Look for good companies whose stocks have low P/Es as they generally fall less in downturn. Treat corrections as the opportunities they are. Remember, even if we are down 10% in September, the market will still be up 10% for the year.

Market today: After a muted inflation report, the market rallied only to slide again after the initial thrill wore off. This inability to hold a rally is telling. Again, I held back writing puts as there is an option expiration day this Friday and I will be put a fair bit of stock due to this downturn. I continue to make money on calls, however. I did take advantage of the overreaction of casino stocks to the Chinese government noise over Macau to buy some. If there is a jump tomorrow, I will probably sell for a quick profit.

Cutting losses

One of the most common mistakes new investors make it letting losses get out of hand. There is a saying on Wall Street that you should, ‘Cut your losses. and let your winners run’. This is easier said than done. It is hard to admit that a stock you carefully researched and then bought in cautious thirds has let you down. But it happens. Frequently. The trick is to have a plan.

It always surprises me that there is not more discussion about when to sell a stock. It should be front and center when you buy it. Are you expecting a quick gain or are you holding it for the long term? Is is a volatile stock or a steady, range bound income star? As a general rule, I will sell a stock if it falls 10% or more after I buy it. For stocks I have bought for a quick trade, I will simply put in a stop loss order at 10% below the price I paid. While this loss discipline is helpful, I find it is only applicable in about 40% of the cases. Some stocks I buy, especially if they are well below $100 a share and are volatile, may drop 10% in a few days, only to rebound 15% the following week. Others stocks may drop 10% in an overreaction to an earning report, only to rebound in the same day. A stop loss set at 10% would get me out of the stock but I would lose the rebound gain. Some other stocks pay a dividend of 5% or more, so a 10% drop in the price, is more like a 5% drop. One of the reasons you should not have more than 50 stock positions is that you need to be familiar enough with each position to know what the exit plan is for each one. And attentive enough to act, or not act, on a specific stock’s exit plan. It is helpful to commit yourself to that plan in writing - say on a printed spreadsheet or list clearly visible from the monitor you trade at.

Having a written plan is like making a contract with yourself. Keeping it front and center, visible where you trade, helps you keep to your strategy.

I rarely sell stocks I have bought for their dividend, even when they fall. If the reason for the drop is temporary, say a drop because of a natural disaster or a one-off earnings miss, I may even buy more if the price drops below my average cost per share. I will only sell when the stock’s story changes in a material way, say for example an accounting scandal or corporate or legislative action that undermines their long term viability.

If I have bought a stock for a short term trade, I buy and sell with firm gain/loss percentages. Usually I sell at a 20% after tax gain, or a 10% loss.

Volatile stocks are a judgment call. If the stock is popular, that is frequently mentioned by traders and pundits in the business press, I may hold after a 10% loss if there is still a lot of positive discussion about it. It frequently rebounds. If I find myself with a 20% loss, that baby is gone.

The biggest dilemma for me is when to sell big winners that suddenly go sour. For example, Chipotle when the contamination issues dropped the stock like a rock. I sold, only to watch the stock to rebound, then soar, the following year. I have similar stories with other big name stocks, bad stories drop the stocks like a rock that are later forgotten as the stock moves on to even greater highs. These are what I think of as ‘pain trade’ stocks. Hang on at your own risk. In general though, be aware that a quick sale at a 10% loss may allow you to get back later at a better price if you still think the company’s prospects are good. Just be aware that the wash sale rule means you have to wait 30 business days to get back in if you want to deduct your losses on you taxes. You may miss the rebound by then. Have a plan.

Market Yesterday (missed the midnight cut off): Quiet, up after declines. Not much trading as I am boxed in on my puts due to the steady market decline. Hoping to get out tomorrow if rebound continues.

Is the bad news priced in?

Today the Fed released its Beige Book (which literally has a beige cover, thus the name.) This report, released eight times a year, gathers anecdotal information on current economic conditions by each of the twelve Federal Reserve Banks (there are also 24 branches). The data comes from Bank and Branch directors and interviews with key business leaders, economists, market experts, and others. It is subjective but insightful. The stock market pays attention to it as it may provide clues as to how the Federal Reserve may move when it comes to their economic interventions.

Today the Beige book highlighted business concerns with inflation, supply and labor shortages. It said that businesses experiencing increases in costs were likely to pass them on to consumers (fueling more inflation). It also documented a slowdown in economic activity, largely due to a pullback in entertainment related activities due to the Delta variant of Covid (which was seen in the August job report which came in well below what was expected). Overall, it was not good news. So did the market drop dramatically? No, but it continued its three day swoon. Begs the question of why the reaction was not more pronounced.

Most market participants are suggesting that the market was relatively steady as it had already priced in the bad news. That is the impact of inflation and shortages are already incorporated in the market and that the prices of stocks reflect that. The logic is, that while these concerns are problematic, they have been common knowledge for so long the market has already discounted these worries. But no one really knows if that is in fact the case. `If companies begin to make negative pre-announcements about their upcoming earnings, as Pulte Group (home builder) and two paint companies did today, will the market ignore this very tangible data? I doubt it. A steady onslaught of bad pre-announcements are very likely to spook the market. And a spooked market can trigger a nasty decline. Talking about trends in the abstract is not the same as seeing real time results. Reality trumps theory every time. The market does not “know all”.

Market today: Another down day. Closed more calls than puts but did not buy any stock. Need a much bigger decline to trigger stock purchases. I had one speculative stock of mine fall 10% today - closed a call on it but did not buy more. I did not like the decline but still think its a good stock. If it falls another 5%, however, I will sell it. I am also toying with NFLX, which is becoming a buzzy stock. That is a stock that is mentioned a lot by traders, has a lot of buy recommendations and analyst upgrades and many people simply seem to be buying. NFLX is in fashion and fashionable stocks often make great option plays.

“To everything there is a season..”

It’s September and market watchers are talking about seasonality. In the stock market this term is used to highlight the tendency of markets to perform better or worse during certain periods of the year. Historically (or at least since 1950) November to April have been the best six months of the year, with August, September and October traditionally coming in last. March, however, can be terrible. October, in fact, is so feared there is even a term, the October Effect, that describes the psychological anticipation of a pending financial decline. This is due to the fact that three of the greatest market declines in history took place then; the Bank Panic of 1907, the Stock Market Crash of 1929, and Black Monday 1987.

There are other seasonality patterns in the market too. There is the Santa Claus rally, which tends to come in the last weeks in December (often followed by a weak January and February). The summer lull which has prompted the market advice to “sell in May and go away.” There is also sector specific seasonality. Retail tends to do better in the last quarter of the year as people buy for Christmas. Some healthcare or tech stocks will rally around specific annual conferences. Residential REITs (Real Estate Investment Trusts) do better in the spring.

There is a logic to some of these observations and they are worth paying attention to, if only because they seem to feed into the overall vibe of the market. I too get cautious in September and October as those are the months I have most frequently seen large declines in. Given there has been no major market pullback in months, seasonality is being talked about a lot on the business channels. As in, given the season, the big pullback must coming. It sometimes feels as if enough people talk about it, it will become reality.

In my experience, it pays to know about seasonality and specific sector patterns but never to bank on them. Every year will have exceptions to the rule. In the last the ten years, I have been down in August seven times (the summer lull), but up in three. In almost all of those down years, September and October more than made up for the losses (so much for the October Effect). Based on this experience, I tend to use the August lull to buy if there is some stock I have had my eye on that drops a lot. I may end up buying more in September and October if the market drops more. I watch for the patterns but do much better following real time events and taking advantage of them. The only pattern that consistently works for me is reversion to the mean. If stocks fall in one period then tend to rise in the next, and visa versa, seasonality be damned. Just look to December 2018 - no Santa Claus rally then and yet January and February were terrific.

In general, I do like the fact that market participants may be wary because of seasonality. There is a saying that the market climbs a wall of worry. This phrase highlights the stock market's ability to show resilience in the face of weak or bad economic, political or corporate news that might otherwise spark a selloff. Instead, after maybe a brief blip to digest the news, the stocks keep pushing higher. To me, this phrase means that the market is more likely to continue to rise when not everyone is bullish. So worry away, my market friends. Fear seasonality, keep that wall of worry strong and we should continue to see the market rise. But just in case, I am selling calls and buying a bit of protection. Never said you should ignore reality.

Market Today: The market slipped today. S&P and Dow were down and Nasdaq eked out a gain. Volume was very light (usual after holiday weekends). I traded in and out of my call options. The underlying stocks were negative (which made the calls very positive) but they all became less negative at certain points in the day, so I could re-sell them and buy them back. Two (eg ZM, ROKU) I did three times. I also sold and then bought back puts. Again I sold puts as the underlying stocks were negative, but as they became less negative during the day, the option value became slightly positive. Normally I wait to buy back calls or puts until the following day as the stock values tend to revert, making my options nicely positive. Given, however, that the market might drop tomorrow, I am cautious and close things when I can. I would rather make less but not leave myself as exposed.

The three Vs

So the jobs numbers were a bust. A third of what they were supposed to be. As a result the market slid. This Friday being a long weekend, the market slid even further into the close marking a weak week. There were still trades to be made though. Even when the market is down, as long as there are the three V’s - volume, volatility and velocity - there will be trading opportunities.

It is important to understand the difference between trading and investing. Traders are people who watch the market closely, daily. We go in and out of positions quickly, often in minutes. So any day can give us opportunities to trade. We may be in and out of the same position multiple times in a week or even a day. It’s a job.

Investing involves a much longer time frame. Usually years. It only takes about an hour a week to figure out a good stock to buy and then begin building up a portfolio. Before I began trading, I learned to invest. This meant I had to learn how to value stocks, when and how to buy stocks. I also started out with very little money and trading was not really an option. I simply did not have enough money. Once I had built up large enough enough positions in the ten stocks I owned, I begin trading options. But it was years before I had built up enough of a portfolio and really begin to trade. It was the time I spent learning how to invest that made me the trader I am today. Time is on your side. Do not rush learning about he market.

Market Today: The market was volatile today. It gave me the chance to open and close a number of option contracts. The bets I made on Docusign (DOCU) and Broadcom (AVGO) paid off. I was able to close quite a few contracts when the market rose up unexpectedly, and I rushed to do so as I wanted to as I knew the long weekend would probably result in a sell-off into the close. There was a plenty of volume so contracts were snapped up quickly. And I sold to open just two into the end of day slide, not sure what Tuesday after the long weekend will bring. Despite the market being down, the day was profitable.

Jobs Report paradox

Once upon a time, the government reporting employment statistics used to be a ho hum affair. Economists found it hard to drum up interest, and it barely caught the attention of the business press. Those days are long gone. For the last couple of years employment levels have been top of mind for politicians and economists. This makes sense. The US is a consumer based economy. We buy a lot of stuff and we can’t do that very well without a job to pay for things. Recessions are basically about job losses which generally means everyone buys less. So making sure there are lots of jobs are key to a healthy, humming economy.

While that simple relationship is easy to understand, there is a complication. Ever since the financial crisis, we have been in an odd place. The Federal Reserve has been stepping in to try and support our economy. They do this by increasing the money supply and setting interest rates low (lower rates means companies and people are more likely to borrow to fund new businesses and new buying). The stock market loves an ample money supply (liquidity) and low interest rates (which are great for businesses and valuing companies). In the recent past, when the Fed has suggesting it would limit the money supply and/or raise interest rates the market has taken it badly. The resultant drop has been nicknamed a taper tantrum.

So that puts the jobs report in a funny place. If the news is good, lots of jobs created and higher wages for jobs in general, is should be good news for the stock market. it means the economy is strong and people have money in their pocket to spend. But if the jobs report is too good, the Fed may be forced to react. It could trigger the Fed into pulling back some of their accommodations earlier than anticipated. Limiting the money supply and eventually raising interest rates. The market will not like that, so too good a jobs number may trigger a market sell off. Sigh. Paradox.

Tomorrow we get the August jobs report. Could be good, could be bad, could be too good or too bad. No one knows, so the market is holding its breath and we’ll see. Best case for traders is an overreaction to anything we get, then a reversal back to the mean. Best way to approach a report, frankly, is to ignore it. Have a longer term outlook and don’t sweat any one month’s numbers. Look to the long term and simple ask yourself, is the economy strong? Is it getting stronger or weaker? Longer term trends are the ones you should be paying attention to if you are investing. Traders, however, will probably be busy tomorrow. I suspect I will be.

Market today: Another day of gains and records as the unemployment claims dropped, suggesting Friday’s job numbers should be good. Delta is still an unknown factor, it may stay the Fed’s accommodation plans if the virus appears to be slowing economic activity. The jobs numbers will be out at 8:30am. I opened a fair number of contacts over the course of the day, hoping for a strong reaction one way or another at the open that then reverts to the mean. I bet on Docusign (DOCU) and Broadcom (AVGO) into earnings this afternoon. Both had good reports but are slightly negative, good report on jobs could help them turn positive. The rest of what I opened ranges across sectors but a little tech heavy. Let’s see how things go.

Industry sectors

One of the key investing principals that almost every professional stock investor heeds is the need to diversify a portfolio. This can be hard to do if your financial resources are limited. This is why most professionals will suggest a beginning investor start out with an index fund that mimics the market. These funds represent a basket of stocks so diversification is built in. And you do not have to watch your portfolio closely, it runs on automatic. This is why most retirement plans rely on index funds.

If you want to learn to trade though, and have the time and inclination to keep track of your stocks, I recommend buying stocks directly. This way you really begin to get a feel for the market, the bonus being you keep your dividends and avoid management fees. One of the most important things in building a portfolio, though, is to keep the concept of diversification front and center. The easiest way to do this initially is to purchase stocks across a range of industries. The reason for this is clear on almost any day in the market. For example, today the energy sector was down while real estate and utilities sectors were up. On any given day you generally find a couple sectors doing well, others lagging. Sectors also trend, technology has been doing well for years as we have all increasing relied on machines. Financials on the other hand have lagged for a few years as interest rates are low and new financial regulations came into play after the financial crisis. For the long term, having stocks in all industry sectors helps you even out your returns.

There are eleven sectors commonly used by the market. They are shown below:

Prepared by Motley Fool

When I began trading I made a point of trying to buy at least one stock from each sector as I built my portfolio. I began in communication services, then bought some healthcare, then technology, etc. Now, while I have at least 5% of my portfolio in every sector. I have slightly more stock in sectors I think will be strong the next ten years (like healthcare and financials) but less in ones that are currently expensive and have weak growth prospects (utilities). The proportions I hold in each sector changes as the the world changes, I never put all my eggs in one basket.

Market Today: It was another weak day, a muted start to September, but up again slightly. I was surprised that my best option trades were in a stock I don’t own yet, calls on BioNTech (BNTX). I am going to be put shares next week. Since I now trade as a level 5 option trader (too years to get here) I can write uncovered calls. I would never, ever sell an uncovered call unless I am positive I’ll be put. And I am, unless BNTX jumps up another 20% in the next week which it has never done. For most of my option trades I rely on things not moving more than 20%. This is why my strike prices for selling calls are at a value at least 20% greater than what I paid and I sell puts for strike prices generally 20% below where the stocks currently trade. It is statistically safe but a 20% correction could catch me out and force me to borrow (i.e. use margin - most trading firms will advance you cash, for a fee, based on the cash value of your portfolio). This is why cash reserves are important. I hate to have to use margin for anything. (Note: Trading companies give people too much leeway here - please do not use margin to trade. It’s a sucker move.)

Stocks should fit the investor

While I write a lot about the market overall, many people ask me for specifics about particular stocks. Sorry, but promoting a particular stock is not likely to happen on this site, that’s Reddit’s niche. This blog is intended to help people manage their money and understand the stock market overall, its mechanics, its rhythms, what influences it, etc. That said, I think it is helpful to talk about types of stocks. I don’t mean A shares versus B shares of a particular stock or even ETFs versus mutual funds, I am referring to the characteristics of a stock.

Everyone should enter the stock market with a clear view of what they want to get out of the market, besides making money that is. Depending on the individual you may want your stocks to generate income immediately or you may want to buy stocks to fund a toddler’s college fund. You may be the type who panics about losing money, or you may be gambler looking for the big payout that will give you bragging rights. No matter what you want to get out of the market, there are stocks that will fit your requirements. At least they will on the days you buy them.

I am conservative in my investment style. This is largely because I am older and want to preserve and safely grow my capital. In the event of a major downturn in the market, say one brought on due to an extended recession, I may have to wait a year or two for the market to rebound. Given my age, I may not have that time. Because of this I tend to buy well established stocks that pay a good dividend and then supplement the income they generate by writing calls against my positions.

I have a friend, a little older, who focuses on tech stocks and growth stocks in general. She pays no attention to dividends. She wants appreciation. She has had a great ride these past few years. Her portfolio has grown in step with the NASDAQ, which is well ahead of the S&P index. She is disciplined and trims regularly but she is shaken every time the NASDAQ drops suddenly. She is willing to take more risk than I am.

I get jealous of her returns, but I know I would not be comfortable owning her portfolio. Different people/different requirements/different stocks.

You need to consider what your requirements are and then decide what stocks fit that need. Not every stock in your portfolio has to be a prefect fit. Despite my conservative nature, I do occasionally buy speculative or growthy stocks. For example, I have a charging station stock, a shares of a new AI company, and another company that makes the composite used to make wind turbines. These, however, are less than 2% of my portfolio. My friend, on the other hand, is learning to use options and is supplementing her income. It is always good when investing to stretch out of your comfort zone and try new strategies once in a while. Keeps things from getting stale. Just limit what you do to a small slice of your portfolio to test the waters. Just remember, be prepared to let a stock go.

Market Today: Market stalled a little today, but nothing major. Ended August up. The ZM call I wrote yesterday insulated me somewhat against the 16% drop in that occurred after earnings. It gave me a one of my more profitable option trading days. Mind you, I will be put ZM, at a loss, but I am confident I can write calls against it until I can get out profitably. I have already made a great deal on ZM puts and calls, so I am almost whole anyway. I also prepped for a possible September downturn by writing calls against the majority of my holdings and selling some losers that were up today. I may be wrong about a pull back, but being prepared is a good feeling.

Thinking about protection

The market is heading towards its seventh straight month of gains. Last year was an incredible year (mind you that was in part because we fell off a cliff at the end of 2019 and then snapped back in January and February) However, if you look over the last 5 years we have averaged a solid 10% return on the market. As of today, all three indices are up over 14%, with the Nasdaq up over 18%. The returns are great, and most of us traders are feeling pretty good about where we are. Which of course is why I am thinking about how to protect myself given that a 10%, or greater, slide is very likely. Maybe not tomorrow or the next day, but I feel like it has to come before the end of the year. This is despite the fact the economy is strong, corporate earnings have been great and the Fed is only just thinking about beginning to tap the breaks. After over 15 years of trading, I know something will happen to spook the market and it will drop. So what to do about it?

First, you should never sell into a downturn unless the entire financial system is about to collapse (see 2008). Given that situation is significantly less likely given the controls that been imposed on our banking system since then: Do Not Sell. The market has a tendency to come back, sometimes exceedingly fast, and if you sell you will not get back it at the price you sold at. Mind you, I am assuming that you do not have money you need to live on in the market - which is why I harp having a separate saving account. Without it, riding out a downturn may require you to sell things at a loss which is not good.

So how to protect yourself? First, you need to learn to take gains as you go, so you do not have huge gains in any single stock. Once I am done filling a stock position I want to have, I immediately think about when sell. Of course, each stock is unique. Some you may plan on holding forever because they pay a great dividend you depend on for income, others you may buy specifically because you want to trade them. As a rule, I always sell a third of any stock if it goes up more than 20% within the year I bought it. Yes, I have to pay the tax man, but I still make over 10% which is greater than the average annual market return (the don’t get greedy rule) A great return. The next third of the shares I sell when I reach a 30% return. The remainder I generally keep and just let ride, depending on the stock’s purpose in my portfolio and its momentum (a discussion for another day). Sometimes I end up using options to buy back the shares I have sold, but I generally set the option strike price at a level that gets me back in at what I originally paid. I frequently don’t get the chance to get back it, but I collect option premiums so I live with it.

So if you are worried about a correction, how do you protect the gains that have not reached the 20% threshold? This is where stop orders and options can come in handy. Let’s talk about stop orders first. Stop orders are orders that are triggered when a stock moves past a specific price point. Beyond that price point, stop orders are converted into market orders. You can put stop orders in for free on any stocks you own, but be careful. A stock can drop for any number of reasons, like a bit of bad press, and you may find your stop ordered was triggered, your stock was sold, and then it rebounded even higher. This can happen with volatile stocks like Moderna (MRNA). I only use stop orders on stocks where my remaining gains are in excess of 50% or more, and then I use trailing stop orders. These are stop orders where you set a percentage rather than a price where you will trigger a sale of your stock, usually at a 5% or 10% drop from the high point where it was trading that day. Obviously if your stock continues to rise, the price where your stop order is triggered rises with it. It lets you capture future gains in the stock.

I use stop orders very cautiously. I only have about two stop orders on the over 40 stocks I own. Volatility is the part of the market and I have had stop orders triggered only to regret selling when the stock rebounds and continues to shoot up. Mind you, as I only use stop orders on stocks where I have big gains, I usually console myself with that gain. But it is frustrating to see it continue to go up. There are other reasons I use for stop orders (stop losses they should be called) but I will save that discussion for another day.

My preferred way to protect stocks is using options. The simplest way is to buy a put option. Purchasing a put contract allows you to sell your stock to the seller at the strike price you have both agreed on. You will pay for the option, but you will have peace of mind that you will protect your profit on a particular stock in the event of a large downturn. Premiums for put options vary tremendously depending on the strike price and duration or the contract. You may want to save buying put options for those stocks where you have the biggest gains. You can frequently buy puts that cost less than 1% of the current stock price, particularly when market volatility is low, so it can be inexpensive to buy that peace of mind. If you do buy puts, go long duration (say three months at least) so you do not have to constantly check them. Plain old stop orders expire, so if you go that route you have keep them current.

Another way I use options to protect myself, is to sell calls. Selling calls helps in two ways. First, if I set the call strike price at a level that equates to a 20% gain, it forces me to sell, i.e, trim my gains, as I go along. Second, I write calls on almost all my positions, closing them when they are profitable to make a little extra money on my positions. If there is large sudden downturn, I can buy these call contracts back for far less than I sold them. This profit helps offset the sting of losses on my positions. Since I rarely if ever sell into a downturn, having these calls in place helps.

Market Today: Quiet day, slightly new highs for Nasdaq and S&P but the Dow faltered a little. Earnings season will finish up this week. Earnings create volatility so I usually make more on my options during earning season. My focus today was on Zoom (ZM), a stock I do not own yet but soon will due to a put I wrote over a month ago. I can write calls on it as it is very likely I will be put. (Some thing beginners should not do unless they own the stock). The company reported earnings today and it fell over 11% in after hours trading. It will make my call very profitable in the morning, and I am hopeful it will recover throughout the day as both earnings and revenue beat expectations. I will take a loss on ZM when I am put, but the money I have writing options on it will more than offset the loss and I will continue to write calls on it.

Fed Theater

As there were no further attacks in Afghanistan, the market’s attention on Friday turned to the Federal Reserve meeting in Jackson Hole. Many people are confused as to why the Fed matters so much to the market. There are two reasons. First the Fed controls, in large part, the degree of monetary liquidity in the market. i.e. how much money is available to lend, invest, trade, etc. Second, it’s dictates interest rates in the market as the ‘Feds Fund Rate” (the interest rate depository institutions like banks charge each other for overnight loans of funds) is the benchmark most financial institutions use in setting their own interest rates. A decrease in liquidity or an increase in interest rates will have a chilling effect on the market. Higher interest means it cost more to borrow (think mortgages and other big ticket items like farm equipment) and as a result people have less to spend and it slows a consumer economy like ours. Higher interest rates also tend to hit the stock prices of tech companies harder as analysts, who frequently use a valuation method called discounted cash flow to value tech companies, have to use the higher interest rate in their formulas. This interest rates sits in the denominator of the formula, so the bigger the number the lower the valuation the calculation spits out. Tech companies end up looking less valuable and their stock prices fall.

But lower liquidity and higher interest rates are not all bad. Less liquidity generally means less stupid money funding companies selling little more than promises. Higher interest rates help older people depending on interest for income in retirement. In my lifetime, I remember my first mortgage was at 8%, and I thought I had gotten a great rate. We expected returns on our investments would be an easy 8-10% (interest on savings accounts and bonds), which encouraged us to save. It was easy to imagine accumulating enough savings to live comfortably in retirement. Now, with savings accounts generally paying less than 2%, no one can expect to retire unless you have saved millions. Social security is not intended to cover all your expenses in retirement so investing in the stock market, which is riskier, has become essential for retirees. The choice for older people, is to delay retirement indefinitely while scrambling to find relatively safer market investments. A rise in interest rates could mean a major shift in the anxiety older Americans feel about retirement.

The Fed clearly understands it role in balancing these competing forces. Unfortunately, it has not always been great at telegraphing its position. In 2013 the Fed suddenly announced a major policy change. It was not well communicated. It announced it was going to reduce the quantitative easing that it had put in place to deal with the 2008 financial crisis. Pundits made it sound like the world might end and the stock market quickly dropped 5.6%. This drop is what people call the taper tantrum, but mind you a drop of 5.6% does not even qualify as a correction (10%). And you rarely hear that the stock market then rose 18% for the remainder of the year.

This current Fed is offering a master class in communication. The day before the Jerome Powell’s speech (he is the Fed chair), other members of the committee came out on camera to say they are ready to start easing, now. The market started sobering up and began to sag. Next day, Powell made his speech saying that they would not be starting easing immediately but were now looking at it. Market rallied as it appears tapering was not imminent. This constant Fed speak is prepping the market admirably. Given all the back and forth talk and all the opposing opinions taking up on-air discussion, by the time easing actually starts, it will probably be a sigh of relief that we have quit talking about it and are actually doing it. I don’t see how a taper tantrum is likely as the market seems to have been told it is coming in a thousand ways. Most people view tapering (decreasing the amount of money released into the market and eventually increasing interest rates) as a statement on the improving health of the American economy. An economy with higher interest rates is a strong economy. So for me, bring on the tapering, and give me a some safe investments with solid 6% returns!

Market Today: The market recovered from Thursday’s nervousness over Afghanistan and the Fed tapering talk (three Fed speakers all sounded like it was imminent). The rally meant I could close a lot of puts. Given MRNA was down, I wrote two sets of puts, closing one before the day ended, hoping the other will close on Monday. Normally Friday afternoons the market lags and I can use the last 30 minutes to write a puts for Monday. Today it was up into the close, so I only wrote a few small ones, and wrote calls for my retirement account holdings. (I only write calls in our IRAs, I save put writing for my investment account). There have been 10 inter-day highs in the stock market so far in August. This is almost unheard of. August, September and October are historically volatile months, and over the years there have been a lot of corrections (10% drop), and some crashes (20% drop) in these months. I am being cautious and have about 20% of my investment account in cash so I can buy if the bottom falls out. I have a shopping list ready.

Black swans

A black swan event in an unpredictable or unforeseen crisis that causes extreme consequences. The possibility of such an event is a major market risk. Today’s attack in Afghanistan was potentially such an event. I say potentially because in a bygone era, the death of so many people, our servicemen in particular, would have raised alarm bells and the market would have sold off significantly. Today, there was less than a 1% drop, and it was not clear how much of that may simply be due to worry over Jackson Hole and Powell’s speech tomorrow morning as regards tapering. It seems like the market, like so many of us, have almost become indifferent to tragedy and violence. It is almost sad to see the market reaction be so muted. On September 11th, 2008 the market (when it opened) was down over 20%. Given today was only the first day, it may drop more, depending on how Biden reacts to the crisis. Just an example of how political, as well as economic, events can have a significant impact on the stock market.

A true black swan event is generally a buying opportunity, hard as it can be to wade into the market when there is so much uncertainty. It is a matter of faith and trust that things will get eventually get better. The market has almost always generously rewarded people that can look beyond the event itself. Just letting you know so if this gets worse, you may want to think about buying.

Market Today: It was a slow day as the market opened down. I did have a Salesforce (CRM) put that I closed profitably. They reported earnings after the market closed last night so I wrote a put before they reported. When they stock popped on good earnings news, the premium for the put dropped and I made money. I write a lot of earnings specific puts during earning season. However, I only do this when I am pretty sure it will be a good report. I also thought Coty would have good report, but I generally only gamble on one or two stocks before earnings (Coty popped even more so I might have done even better). To see who is reporting earning on any give day, check out https://www.nasdaq.com/market-activity/earnings. Given the market sold off in the afternoon on the Afghan news, I only did about half the trades I did yesterday and in the afternoon closed mostly calls rather than puts. Waiting to see whether the down swing continues tomorrow.