Still a Choppy Market
We just had a week that I believe is indicative of this market over the next month or so. There seems to be too much headline risk for stocks to make a substantial move higher.
Last week, the market sold off on the President’s Covid diagnosis. Then it rebounded as he is apparently recovering. This week, the market sold off on news that the stimulus deal fell through. Now, it’s rebounding on news that there still might be some smaller targeted stimulus.
The market seems to want to trend higher again after the near 10% selloff in September. And there is some good news. Third quarter GDP is expected to be spectacular, reflecting a resilient economy that is quickly recovering from the recession. But the ascent keeps getting interrupted by disturbing headlines that are likely to continue at least until Election Day, and maybe beyond.
It still not a great market for call premiums, as fewer investors are willing to bet on higher prices in the months ahead while staring ahead to this uncertain election. That said, there are still certain special opportunities. The writing of the call last week on Visa (V) is a good example. Certain stocks break the mold as investors are willing to bet on a higher price in isolated cases.
But things can change quickly. Headline risk cuts both ways. There is also a possibility of positive headlines. For example, a Covid vaccine could be approved. Earnings could be better than expected. Great call writing opportunities could emerge at any time. And I will be on the lookout.
That said, the greatest likelihood at this point is choppy waters ahead for the market over the next month or so, but with much better days ahead beyond the election and pandemic.
Stock Portfolio Recap
AbbVie Inc. (ABBV) Yield 5.5%
The stock stabilized somewhat over the last week, although it did sell off with the overall market yesterday. I’m still watching it closely and further deterioration in the price will prompt a lowering of the rating. But the stock is still dirt cheap with a great dividend. And I love the fundamental story. This stock should definitely be a longer term winner from here and could reignite its uptrend in the near term. The health care sector has been generally sluggish ahead of the election. But it could be one of the big early winners in the aftermath. BUY
Altria (MO) Yield 8.7%
The cigarette maker stock seems to have resumed its uptrend after pulling back with the overall market in September. It seems to slowly trend higher until the market notices it, and then it pulls back. But the massive yield is safe and the company should continue to slowly grow earnings in the quarters ahead. The longer term is still in question but the stock should be at least a solid income play in the quarters ahead. I will also look for the opportunity to write another call. BUY
Brookfield Infrastructure Partners (BIP) Yield 4.1%
This infrastructure partnership seems to trend slowly ever-higher regardless of what happens in the market. The stock has been rising for a long time but the relative performance has changed. It had been underperforming the rapidly rising market. But now its slow slog higher is besting the choppy market. It is likely that the stock will be called away a week from Friday at options expiration, but we’ll see. HOLD
Enterprise Product Partners (EPD) Yield 10.9%
This is a company with a very resilient business and a high and safe yield. But the market could care less right now. Anything to do with energy is out of favor with the market and will likely remain so until the other side of this election and pandemic. But you get a double-digit return just waiting and will likely be rewarded with more over time. It could also get a boost from third quarter earnings, which will be announced at the end of this month. BUY
Starbucks (SBUX) Yield 2.0%
This coffeehouse stock has a business that has been remarkably resilient during the pandemic and will surely boom again as lockdown restrictions ease. It pulled back with the market but has been on the rise again recently. The price has moved almost a dollar beyond the strike price for the options that expire on October 16th. But the market is still choppy with a lot of headline risk. We’ll see what happens over the next ten days. Either way, you’ll get a great return. BUY
Valero Energy (VLO) Yield 9.3%
The market just hates this refiner stock right now. It pulled back last week to a point where it has some technical support, near the March lows. The recovery that the market has been anticipating will surely lift the fortunes of this refiner in the quarters ahead. And the stock can move quite fast. Third quarter earnings, which will be announced in two weeks, could be a catalyst for VLO. With the ugly quarter behind, investors will be looking ahead to much better earnings in the quarters ahead. BUY
Visa (V) Yield 0.60%
Visa is one of the very best large company stocks on the market to own. Payment processing is a sweet business as the world moves decidedly toward more cashless transactions. This is a stock that returned over 1000% over the past ten years. The calls were written last week with a strike price just below the then current price. The stock is hovering right around the 200 strike price range now. Performance will depend on the market in the next couple of months and considering the headline risks, things could be quite choppy between now and mid November. The calls were priced for limited upside, but with an eye toward getting a decent income return even in a forbidding market. BUY
Existing call Trades
Sell SBUX October 16 $87.50 call at $3.30
Although the stock price has moved above the strike price, the current call premium is priced at just $2.0, well below the targeted price. That is because of the erosion of time value. The stock is currently less than a dollar about the strike price and could easily pull back in the next ten days if the overall market struggles. We’ll see. This could come down to the wire. Either way, you’ll get a solid return.
Sell BIP October 16 $45 call at $1.95 or higher
The calls are currently selling just above the targeted price. The stock, currently at 48, is well in the money on calls that expire in 10 days. Although anything can happen in the market in that time frame, this stock is not very volatile. It is highly likely that the stock will be called away at expiration. But you will still get a double-digit return in a relatively short time even if that happens.
V Nov 20 $200 call at $10.00 or higher
The stock had been trending above the strike price all week until yesterday. Now it is just slightly above 200 and the calls are below the targeted price. The behavior of the stock will depend on the market. And there is a lot that can mess with the market between now and after the election.