The Market Stumbles, a Little
After a rough week, the market is right back in business. Just when stocks appeared on the cusp of a deeper selloff, the S&P 500 started off this week with the best session since June.
The stated reason for last week’s weakness was interest rate fears. The benchmark 10-year Treasury rate rose to over 1.6% from about 1.1% at the beginning of February. They said interest rates are rising too quickly and the higher rates could change the allocation toward stocks. I don’t buy it.
There always has to be some official and technical sounding reason when stocks prices fall. It’s never just because stocks were getting too expensive and investors pulled back. In this case, interest rates were the scapegoat. But rates are still quite low by historical standards. The pre-pandemic average was between 2% and 3%. Are investors really going to avoid stocks if they can get 3% from a bond instead of 2.6%?
Cows moo. Dogs bark. And interest rates rise when the economy booms. Higher rates are to be expected as the full recovery that is already priced into the market comes to fruition. Of course, interest rates could be a problem if they rise high enough. But recent levels are still well within the realm of what should be expected.
Was this a lame excuse for the pullback in stocks that has been overdue? We’ll see. There could be more weakness in the days and weeks ahead. The recent pace can’t continue for long. And the market never corrects the pacing by simply slowing down.
But the main event continues to be the resurgence of the previously downtrodden real economy stocks. Energy and financial stocks continue to be the best performing market sectors on the S&P 500 by far. In the past month alone, the energy sector is up 25% and the financial sector is up 15%.
Cyclical stocks have driven the market higher and taken up all the energy. Most other sectors are just kind of floating along. We seized the opportunity by writing call in Valero Energy (VLO) and Chevron (CVX) to capture the recent surge. Other positions are sort of holding their own right now while paying dividends.
Trades this month
February 10th
Sell VLO March 26 60 call at $6.50 or better
February 19th
BGS February 19 $27.50 call at $2.40 - Expired
B&G Foods (BGS) stock – Called
Sold CVX April 1 $95.50 call at $4.30 or better
February 24th
Purchased NextEra Energy stock (NEE) - $73.76
Stock Portfolio Recap
Chevron Corp. (CVX) Yield 5.2%
This timing on this stock has been excellent. CVX is up 20% since being added to the portfolio just before Christmas. Energy has been on fire. It is on the cusp of a full recovery and rebounding oil and gas demand and profits. Oil price have soared from under 40 per barrel in November to the pre-pandemic levels of over 60.
CVX is near a breakout. It just slightly eclipsed the post-pandemic high of over 100, set at the end of May. It may break out toward the pre-pandemic price of around 120 per share, or it could pull back in the near term. But we are set up to get a great income and total return regardless of whether the stock breaks out or pulls back. HOLD
Digital Realty Trust, Inc. (DLR) Yield 3.2
This data center REIT still can’t get out of its own way. It was one of the best performers on the market in the pandemic as the volume of data to be serviced exploded during the lockdowns. But the market has shunned this pandemic beneficiary as open-up stocks became all the rage after the vaccine announcement. But the main story is still intact. The growing number of connected devices and demand for technology infrastructure is rising steeply. The recent weakness in the stock is a great buying opportunity. BUY
NextEra Energy Inc, (NEE) Yield 2.0%
This combination regulated and alternative energy utility was just added to the portfolio after being highlighted in the February issue last week. Investors love the combination of reliable and defensive earnings combined with a higher level of growth from alternative energy and NEE has blown away both the utility sector returns as well as the overall market for every measurable period over the last ten years.
Normally a relentless upside juggernaut, the stock had a rare pullback last month as investors dissed utilities amidst a cyclical stock bender. The stock has already started to move higher. This is a rare opportunity to buy into this stock at a cheaper level than normal. All the things that made this stock so great in the past still exist, and the stock should resume its usual behavior. BUY
Valero Energy (VLO) Yield 5.1%
This high leverage play on a full recovery has been loving the recent environment. Refiners are notoriously cyclical and profits should rebound in a huge way as demand for gasoline and diesel comes roaring back in a full economic recovery. VLO is up 40% just since the beginning of February and over 100% since the end of October. The stock will likely need to take a breather at some point. But the prospects for the rest of this year still look great and the stock is still a long way from the pre-pandemic prices. BUY
Existing Call Trades
VLO March 26 $60 call at $6.50 or better
The stock ran away. VLO is up 40% in the last month. The calls targeted at $6.50 or better are now selling at $16.70 per call. Even after the stock does pull back and consolidate after this surge, it is still unlikely to fall from the current 78 per share all the way below the 60 strike price. But the portfolio position will still provide a return of 27.4% since being added to the portfolio if shares are called at expiration.
Of course, if you own the stock but have not yet written calls, there is still a great opportunity after a huge run higher in the shares. The same March 26th expiration with a $70 strike price is currently selling at 8.55 and the 75 strike price is selling at 5.60.
CVX April 1 $95.50 call at $4.30 or better
CVX has moved a lot higher as well. But it is still in a range where the stock could trade below the strike price by expiration, currently 102 per share with a 95.5 strike price. The same calls are now priced at 6.58 and are still a worthwhile opportunity if you haven’t sold them already. An even better opportunity is to write the calls with a 100 strike price near the current price of 5.48.