Tech Earnings On Tap - Priced For Perfection?

Tech stocks continue to appreciate regardless of any ebb and flow in the COVID-19 backdrop or the prospect of rising interest rates. Albeit there was a minor sell-off in late February as a function of rising interest rates that has been quickly erased. Tech underpins the stay-at-home economy and the so-called back-to-normal economy. And now more than ever, technology serves as an integral part of every slice of the economy. These stocks have remained strong despite the massive rotation into value stocks throughout 2021. Considering many of these names have appreciated since their February lows and breaking through their 52-week highs, these large-cap tech companies are priced for perfection heading into earnings. Stocks such as Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and the broader index Powershares (QQQ) have appreciated double digits over a two-week period as we head into earnings.

The Value Rotation and Roaring Tech

The market has witnessed a massive sea change as the large-scale vaccination efforts in the US is coming to fruition. The Dow Jones, S&P 500, and Nasdaq have rallied to all-time highs while recovery and value names have recaptured more of their lost market capitalization due to COVID-19. Meanwhile, many technology stocks that powered the market higher in the initial stages of this post-COVID-19 rally have stalled out early in 2021 to now rip higher as well. Once the value rotation began, many high-quality technology names fell from their highs and have traded sideways since their highs back in September. Now tech participation has been a major driver to propel the markets even higher and to even more lofty levels. Continue reading "Tech Earnings On Tap - Priced For Perfection?"

Rolling Trades: Removing The Negative Connotation

Rolling option trades has a negative perception in the options world. The act of rolling an options trade does not deserve the negative connotation it has garnered over the years. Rolling can serve as a valuable tool in a comprehensive options strategy. Inevitably, when trading options, an option’s strike will be challenged, and when this occurs, one may need to act to circumvent a potential loss. These potential losing trades can be managed effectively to avoid losses altogether via rolling. Given the right set of circumstances, trades can be rolled by closing out the pending trade for a debit and subsequently opening a new trade with a later date and further out-of-the-money strikes for an overall credit.

Options provide a statistical edge to the option seller’s advantage. When the option strike is challenged, this statistical edge is negated and must be reset by rolling a trade to reestablish this edge and subsequent advantage. Rolling out to a later date and further out-of-the-money strikes allows more time for the trade to work through the unexpected price excursion. Options trading enables traders to define risk, leverage a minimal amount of capital, and maximize return on investment. Options trading can create smooth and consistent portfolio appreciation without predicting which way the market will move. Options enable one to generate consistent and durable monthly income in a high probability manner in both bear and bull market scenarios, and rolling is part and parcel to this overall options-based approach. Rolling trades seldomly occurs, and over the past 12 months, only 7 trades were rolled while only 3 of those 7 were required (e.g., the strike remained breached at expiration).

Rolling Trades
Figure 1 – Overall rolled option metrics from May 2020 – April 9th, 2021, including rolled trades available via a Trade notification Service
Continue reading "Rolling Trades: Removing The Negative Connotation"

Stock Market: What Happens When Rates Rise?

The broader indices have been in a blistering bull market for a year straight, only accelerating from November 2020 into April 2021. The rally has been largely uninterrupted, with minor blips in September and October of 2020 before reaching new all-time highs after new all-time highs by mid-April. The initial rally was narrowly focused on technology and the stay-at-home economy stocks. With the improving vaccine prospects, November saw a sea change with broad market participation with value stocks breaking out with huge moves to the upside. To boot, Washington's massive stimulus is being priced into the markets via fiscal and monetary stimulus. All three major indices (S&P 500, Nasdaq, and Dow Jones) are at all-time highs and continue to break into uncharted territory in what seems like a daily basis.

Stocks are overbought and at extreme valuations, as measured by any historical metric (P/E ratio, Shiller P/E ratio, Buffet Indicator, Put/Call Ratio, and percentage of stocks above their 200-day moving average) or technical metric (Bollinger Bands and Relative Strength Index - RSI). Valuations are stretched across the board, with the major averages at all-time highs and far above pre-pandemic levels. A rise in rates due to inflation could be lurking in the shadows of this frothy market.

If/When Inflation Hits

If the Consumer Price Index (CPI) continues to push higher, The Federal Reserve may be compelled to entertain the idea of raising rates finally. Although interest rate risk disproportionally impacts fixed-income investments such as bonds and annuities, stocks will undoubtedly be impacted as well. This is especially true for highly leveraged companies such as tech and super-charged growth companies. Even the prospect of higher rates hit the Nasdaq in March for a sharp decline, albeit that decline was quickly erased. This is a case in point of how quickly the markets can turn negative with the hint of rising rates which may be exacerbated in an already frothy market. Continue reading "Stock Market: What Happens When Rates Rise?"

Options: Annualizing Pandemic Lows

Annualizing the pandemic with an agile options-based approach has demonstrated superior returns while mitigating risk. Over the past 12 months, generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing return on capital has been the core of this options-based strategy. Options enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options allow one to generate consistent monthly income in a high probability manner in all market scenarios. Over the past 12 months (April 2020 – March 2021), 249 trades were placed and closed. A win rate of 98% was achieved with an average ROI per winning trade of 8.0% and an overall premium capture of 85% while outperforming the S&P 500. An options-based portfolio's performance demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk. The options-based approach circumvented September 2020, October 2020, and January 2021 sell-offs while outperforming the S&P 500 over the post-pandemic bull run, posting returns of 55.0% and 53.7%, respectively (Figures 1, 2, and 3).

Options
Figure 1 – Overall options-based performance compared to the S&P 500 from April 2020 – March 2021 via a Trade Notification Service
Continue reading "Options: Annualizing Pandemic Lows"

Disney - A Discounted Reopening Play

As the economy is on the fast track to reopening with a robust vaccine rollout, Disney (DIS) is set to benefit across the board. Disney’s Parks are set to reopen in stages starting in April, with its Disneyland and California Adventure theme parks slated for April 30th. The theme parks reopening will be a major catalyst for Disney as the company annualizes the COIVD-19 pandemic that shuttered all its properties worldwide. The company has been posting phenomenal streaming numbers that have negated the COVID-19 impact on its theme parks. This streaming-specific narrative will change as the theme park revenue comes back online and flows into the company’s earnings. Disney is a compelling reopening play now that the stock is double digits off its highs. Disney is a buy for long-term investors as its legacy business segments get back on track in the latter part of 2021 in conjunction with its wildly successful streaming initiatives.

Theme Parks and Streaming Synergies

Disney (DIS) expects its Disney+ streaming platform will have up to 260 million subscribers by 2040. The company continues to exceed all expectations in the streaming space accelerated by the stay-at-home COVID-19 environment. Despite the COVID-19 headwinds, Disney’s streaming initiatives have been major growth catalysts for the company. Disney+’ growth in its subscriber base has shifted the conversation from COVID-19 impact on its theme parks to a durable and sustainable recurring revenue model. Continue reading "Disney - A Discounted Reopening Play"