On the Securities Action of Tuesday, February 3, 2015 “BIG RALLY AT BROAD & WALL!”

On the Securities Action of Tuesday, February 3, 2015

“BIG RALLY AT BROAD & WALL!”

BIG RALLY ON WALL STREET! Tuesday saw a continuation of a broad based rally across the board on The Big Board. Volatility, as measured by the VIX imploded and was -10.81% to 17.33. The S&P500 finished up + 1.44% or +29.18 points to 2,050.03, the DJIA was up +1.76% or +305.36 points to 17,666.40.  The S&PMidCap400 rose +1.85%  or +26.75 points to 1,473.94.  In fixed income, Treasuries were down while high yield sovereigns and BB-rated high yield corporate debt rallied, while CCC rated declined.  The major U.S. stock indices are now within striking distance (about -1.7 to -2.4 percent) off their all time highs, which I think they will soon plow through by three to four percent, before taking a few steps back, before making another advance higher.  I continue to remain bullish, and I believe energy shares and crude oil will trade upwards, which I believe will result in higher shares across the board, lifting all major U.S. Stock Indices.

Feb. 3, 2015, Major U.S. Stock Indices

Select Quotes of Interest, Feb. 3, 2015

[http://finance.yahoo.com/futures] Click here for an energy prices update.  Tuesday saw USO an etf of West Texas Intermediate rise by +5.37% to 19.62.  This is the third day of gains, and USO is now +20.37% off of rock bottom.  I believe oil will go higher, over the short run and long run; It settled around 52 per barrel on Tuesday.

In the Fixed income markets, ZROZ traded lower, down -3.81% to 133.37, TLT traded down by -2.12% to 134.57, IEF traded lower by -0.84% to 109.30, TIP was down -0.46% to 115.02. EMB was up +0.54% to 112.09, PCY was up +0.38% to 29.00, HYG was up +0.57% to 90.72, JNK was up +0.49% to 39.03, and QLTC traded lower by -0.98% to 48.70. The 30 year Treasury yield settled at 2.37%, the 10 year Treasury yield settled at 1.79% [data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield]. I continue to believe, and will reiterate, that if oil can stabilize in a trading range, or start to appreciate, that there will be some major opportunities in the energy sector in equities, and in their high yield fixed income; Also I continue to believe that when oil stabilizes (or begins to appreciate) that there will be some major opportunities in high yield fixed income funds, such as the ones listed above, EMB, PCY, HYG, JNK, and QLTC.

The US Dollar traded lower versus the Ruble and the Euro on Tuesday; the Euro gained approximately +1.30%, as measured by the etf FXE. I continue to believe the Rouble and the Euro are still too high, and will further deteriorate, making the dollar stronger. The U.S. Dollar can now be exchanged for a Euro at a cost of approximately $1.1479, and also can now be exchanged for 65.0995 Rubles, which is three Roubles and change less than yesterday.  [http://finance.yahoo.com/currency-investing]  Go here for an update on all major cross rates.

I believe the catalysts for today’s stock market gains were predominately higher oil and energy prices, as well as Greece sovereign debt pessimism mitigating.  I believe that oil shares and crude oil itself will trade flat to up, and that all major stock indices will trade higher.  I also believe that oil could prove to be very volatile; so perhaps an option strategy called an at-the-money straddle could be lucrative when choosing expirations about two weeks away.  Another strategy that may be lucrative on higher oil prices would be a married put trade, on e.g. the etfs XLE and/or USO, or on individual energy related shares, such as XOM, BP, CVX, BPT, COP, or RIG, etc.

Economic data releases on Tuesday were strong across the board; auto and truck sales reached the highest level going back several years.  Total vehicle sales came in 100,000 units greater than consensus estimates; 16.7 million units were sold. Wednesday the 4th will see MBA Mortgage Index, ADP Employment Change, ISM Services, and Crude Inventories economic data releases.

In notable eps reports releases I had speculated yesterday that CMG would be amusing, as would WYNN.  Both eps reports were released after the market close on Tuesday the 3rd. I had said that CMG may move by ±51.00 on Wednesday, during the full trading day after it reports eps. Fasten your seat belts, because it’s down STRONGLY in afterhours! I had suggested that perhaps a long bull call ratio back spread with net credit characteristics may be lucrative; Especially if also combined with a long bear put ratio back spread with net credit characteristics on CMG, placed today just a minute or two before the close (3:00PM Central Time) on February 3rd could prove to be lucrative.  Looks like that estimate and projection is going to materialize. I had suggested also that WYNN could perhaps move by ±7.70;  Looks like that’s going to materialize also. It will be amusing to see what happens Wednesday.  

Wednesday, after the close GMCR (which closed at 126.09 per share on Tuesday) reports eps; consensus estimates are for 89 cents per share. GMCR looks to me like it might move by about ±11.50 per share after reporting eps.  I continue to believe that long bull call ratio back spreads with net credit characteristics, initiated simultaneously with long bear put ratio back spreads with net credit characteristics (initiated just minutes before the closing bell) could prove to be a very lucrative trading strategy, when focused on “HYPE(!!!) stocks” (like GMCR, and many others) just prior to their eps releases.  Happy earnings speculation!

I will reiterate that I’m currently bullish on the major U.S. stock indices, because I believe that higher crude oil will lead the energy sector shares higher, dragging everything up with it.  This theme will potentially materialize over the next few weeks, if not becoming more of a longer term theme, for the next year, if not longer.  I also believe that the geopolitical risks involving Greece’s sovereign debt and interest payments will be resolved, and that Russia may stop sabre rattling soon.  This will bring about higher prices for stocks, and for all major U.S. stock indices, which could reach new all time highs soon.  I also think that investors may begin selling longer duration and longer maturity fixed income of all kinds, and with the proceeds they may purchase stocks, resulting in higher yields on fixed income, and also higher stock prices.  Interestingly, I believe that the higher credit quality fixed income may sell off more than the lower credit quality fixed income.  I would base this upon the unprecedented sovereign yields worldwide and in the USA.  High yield fixed income yields are not at all time lows, but e.g. Treasury yields are at nearly all time lows.  To me this means that Treasuries at the long end, may suffer greater losses on a percentage basis versus their high yield counterparts.  For 2015 I am most bullish on equities within the Financials, REITs, and “Big Tobacco” sectors;  In fixed income I like high yield e.g. EMB, PCY, JNK, HYG, and QLTC.  I’d likely trade deep in the money calls on stock indices, combined with high allocations to high yield fixed income.  I’d use longer dated expirations for the long deep in the money index calls. I like index calls because they have IRS 1256 contract status for preferential tax rates, versus etf options, which do not have IRS 1256 contract status.  I’d occasionally write calls against the long calls, writing front week (or two weeks out to expiration) expirations (repeatedly at my discretion- where I believe we may be at a peak… I’d sell ATM calls or slightly out of the money (by one to two percent) calls against the long calls), adjusting the trade into a long diagonal bull call debit spread.  This is “my two cents” on the markets, and investing, and eps speculation as of late.  Happy trading!

By Andrew G. Bernhardt