Weekly Market Assessment
You don’t get hurt by things that you don’t own that go up. It’s what you do own that kills you- Peter lynch, a legendary investors who ran the Fidelity Magellan Fund from 1977 to 1990, during which time the fund\'s assets grew from $20 million to $14 billion said this. Now, what must it feel like if you hold stocks that go down that you don't even own? You may ask, how is this possible? Its a six letter word that has gotten me and many other investors/traders in trouble, its called buying on margin! Buying on margin is borrowing money from a broker to purchase stock, it gives you more leverage to purchase more stock then you usually would be able to afford, It can work great, however the dreaded margin call from your broker is always around the corner coming to collect if things go wrong. So I turn back to the beginning quote and a recent article I found on CNBC that is titled, Investors pile on record debt to buy stocks at record highs. This article explains the amount of debt investors are using to buy stocks, even when we are reaching new highs. Is this a warning sign or just more evidence that we are entering a secular bull market? The saying goes buy low and sell high, but the truth is that most retail investors buy high and sell low, and looking at this article about margin levels may give another insight to retail investors entering the market. "Margin levels, or the amount borrowed to purchase securities, climbed to a new record of $401 billion in September". The last time we were at these levels was in July 2007, months before the top was put in the market and the great recession ensued, crazy? This of course raises concerns as to what stocks are being bought on margin? They are the high beta, momentum stocks that keep rising even though their P/E (Price to Earnings) ratios are insanely high with a valuation that has no bearing to reality! So what happens when you have high levels of margin when a market enters a correction, you get panic selling that destroys accounts that hold stocks that they don't own!
Through the Looking Glass: My Perspective on Stocks Reactions to Market Conditions
Retail Sales and Consumer Confidence: Retail sales- Gives insight to the total receipts from retailer stores. A negative report should bring down PSUN ($2.75) and DSW ($84.90). Consumer Confidence- This should take a small hit do to the government shut down and people being laid off for a short period. If this is not already factored in then stocks such as WHR($146) and BBY ($43.35) will be affected.
Last week I mentioned the Jobs report and what should have little impact on the market, it was released with only 144K jobs created, which was below consenus. The market took this a positive news as investors believed that the Fed would continue with its accommodative monetary policies.
From the Trading Floor to the Option Pit: A quick look at whats on the trading desk
Netflix (NFLX)- After reporting earnings that beat on EPS and revenue, NFLX jumped over 12% in after hours and the following morning. Just a few hours into tradiing the following morning there begain a sell off on huge volume. Rumor was that Icahn was dumping shares. I sold a 345/350 vertical "CALL" spread on this and collected the entire premium for a 3 day gain of 36% on my options. Sure enough after the close, Icahn disclosed through a 13D filing that he had sold 50% of his NFLX hoildings.
Amazon (AMZN)- Reported on friday with a beat as usual on revenues but still has not turned a profit. I sold the weekly $365/370 vertical "CALL" spread in the morning as AMZN jumped over $30 on its earning release. Collected entire premium sold for a 1 day gain on my option for 33%
Nuance Communication (NUAN)- provides voice and language solutions for businesses and consumers worldwide. I have increased my long position in NUAN to reduce my cost basis.