After the markets closed on Thursday Jan 9, I indicated that it would most likely be the jobs numbers that would be the catalyst for stocks to move one way or another. That may still be the case. The jobs numbers showed a disturbing trend of the participation rate now standing at just 62.8% of Americans. That is the worst participation rate in 35 years and shows just how many people have at present, given up looking for work. Because of this, the unemployment rate actually dropped despite creating just 74,000 jobs in December. I am not an economist and I am sure there will be lots of talk about why the numbers ended the way they did. Everything from the poor holiday season for retailers to the cold weather can be the scapegoat. In the end though investors remain worried whether the lower unemployment rate will be enough to see the Fed taper another 10 billion out of the Quantitative Easing program. That has stocks stuck.
What Investors Should Consider
The most important part of investing is weighing the risk of capital in use against possible capital loss due to unforeseen events like a market decline. Even a non-advance but not a serious decline can damage a portfolio.
Instead I choose to focus on a few things. In 2013, the economy added 2.19 million non-farm jobs. That was actually just slightly less than one percent below 2012 employment growth. Overall though, 2013 marked the fourth year of gains in employment. That said the economy in general is down about 1.17 million jobs which have evaporated since the start of 2008.
Jobs Are In The Right Direction
Overall though job growth continues to be in the right direction. The problem is job growth is slow but it is still positive as it plods on month after month.
November Upgrade
One of the events from Friday’s jobs numbers that caught my attention immediately was the jobs revision. The seasonally adjusted total non-farm jobs creation figure for November 2013 was revised to 241,000 from 203,000. At 250,000 jobs a month, the economy is normally humming along. In other words, if December is an anomaly and the jobs numbers start coming in at numbers at or above 240,000, the Fed will probably taper earlier and faster. With the economy now short 1.17 million jobs from before the recession, if 240,000 new jobs are created monthly this winter and spring, the economy will have recovered those missing jobs numbers by summer. Little was mentioned about the November numbers but I found the revision something to watch for and to be aware of. By this summer the economy could have recovered all the lost jobs from what has been the worst recession since the 1930’s.
Weekly Initial Unemployment Insurance Claims
At the same time the Weekly Initial Unemployment Insurance Claims continue to stay below the 350,000 level which according to the market timing system which relies on the weekly claims indicates no serious collapse or crashes lie ahead. This also means that if there is an unforeseen event which plunges the market, it would be a trading opportunity. You can read the entire article on that market timing system method through this link.
Consider That 2013 Was Unique
For investors perhaps it would be wise to consider that the gains of 2013 will be difficult to repeat. Instead as we enter into 2014, we are perhaps going to see a far more normal market. If indeed this is a sideways market with a bias up, we will most likely see normal corrections. Last year we saw no correction even as deep as 15%. It was easy to make profits in 2013. This year though could be far different.
Making 2014 A Profitable Year
As investors we want to stay invested but look to strategies that will bring in profit and income AND if the markets should in fact actually do well, we can look forward to even better gains, all because we are still invested. At the same time though we want to be using strategies that should the market have some serious corrections this year, we are still protecting our capital from losses.
To do that I believe in 2014 we need to set a goal of 12 percent annual return. This is my usual goal which I set every January. I have not had a year since the late 1970’s where I have not earned at least 12 percent. But to do that requires a bit more thinking and a realization that in 2013 investors made exceptional returns in what was a very easy market environment. To keep 2014 profitable will mean being a bit smarter and using more cautious strategies.
Think 12 Percent Return
12 percent is actually a terrific return especially if there are few losses and capital placed at risk is not lost. If the market this year returns anywhere from 5 to 6 percent, then earning 12 percent should be easy to reach. If the market returns at least 8 to 10 percent, then I should be able to earn better than 12 percent. 2013 was unique in that there were hardly any losses and almost every trade worked well. That’s because the market was rising constantly.
Time To Rethink Investing Strategies for 2014
This year stocks could return to normal gains. That means we will see corrections, individual stocks that move up and others that plunge. Overall then we may very well see a normal mature to aging bull market for 2014.
To that end, this series of article which is primarily designed for FullyInformed Members looks at some aspects of investing that investors need to be thinking about.
Trade Ideas and Alerts Will Change in 2014
This year when I am posting trade ideas for both members and non-members, as well as trade alerts for trades I have entered, I will also be discussing the strategy behind the trade, exit points, valuations where I would add more to the positions and areas where I would be careful. I will be doing more analysis which is what I usually do with all my trades but I hope through the analysis I will be able to show investors the decision-making process I go through both before I start the trade, when I enter the trade, when the trade is adjusted and when I exit the trade. Through these changes I hope investors will contemplate looking into their own trades as well.
Canadian Stocks, Options and Bonds Content
I have been busy for much of the past month and past weeks building an additional website that will focus solely on Canadian stocks, ETFs and bonds. The Canadian economy is quite different from the US Economy. The Toronto Stock Exchange is far smaller and there are fewer quality stocks to be trading. As well we have a unique heavy financial and commodity laden stock market. Even trading options against Canadian stocks and ETFs does not compare to the US marketplaces and requires different methods and styles to be successful. I therefore will be focusing the Canadian portfolios, Canadian trade ideas, Canadian trade alerts and all Canadian economic information to its own website. In this way the entire website will be devoted to trading and profiting from Canadian assets. I am excited to be putting a spotlight on Canadian Financial content and I hope many fellow Canadian investors will join me as we delve into trading Canadian assets in what could end up being a whipsaw market for 2014. I will post when the site is finished shortly.
Consider Stock Selection As A Prime Criteria in 2014
The first few days of 2014 have not seen the rising stock patterns that were expected. Instead we are seeing stocks gyrate with investors staying nervous.
This is much closer to a more normal stock investing environment than 2013 was. In 2013 most stocks rose with the market. 2014 may see that change entirely back to more normal trading patterns.
Focus On Perservation of Capital
In this kind of market I stay invested but I consider the stocks being selected to trade against because in a normal stock market, perservation of capital is always the prime focus. The return being made is always secondary.
My principal investment method is selling put options against large cap stocks. This is because options are a wasting asset. That means they lose value over time. When I sell an option, if the stock goes nowhere or trends away from my option, then the value of that option erodes until by the time of expiry it is worth nothing. This is why I rarely buy options unless all the indicators are stacked in my favor. I do not enjoy buying an option and watching the value erode as expiry draws near.
Therefore, when it comes to a normal year, I have always found that staying away from junior and spec stocks and staying with big cap stocks earns very good profits. Not only can I earn my 12 percent annual return, but I also end the year with all my capital intact and that is as important as making a gain.
Where To Start for 2014
To start into a normal year which 2014 is beginning to look like, I create my stock list of those names I will be following throughout the year. I then go through that list to see which of the big cap stocks have held up well over the past couple of weeks and trade against those who have not sold off but have stayed within a normal trading range or have moved higher.
I then place the other stocks on my list to the side and check them each day for opportunities. However if one of the stocks breaks a trading pattern and begins to break support levels without attempting to recover, I move that stock aside and check it weekly. If each week it shows little promise of recovery, I retire it from my list. There are hundreds of high quality companies to be choosing from. There is little point in trying to predict when a stock may recover. In a normal trading year, stocks must trade within ranges that can be watched, easily defined and traded against. Those stocks that fail have to be eliminated.
Aflac Stock
Take Aflac Stock for example. On Friday Jan 10, following the stock selling off the day before, I took the opportunity to sell 5 naked puts at $62.50 put strike for .87 cents for Feb 22 expiry. I did this at the open on Jan 10, after checking my list to previous night and spotting Aflac stock pushing against the Lower Bollinger Band. The Jan 10 trade works out to 1.3% return.
I already have some positions in Aflac Stock as FullyInformed Members know, but the key is to look at big cap stocks and:
- pick those out of the money put strikes that afford some protection
- pick at or below support levels
- if you determine you do not want to own the stock even for a short period of time, sell the lower strikes for less return
- pick put strikes that give the stock room to roam a bit
- pick strikes that allow an easy rescue strategy to avoid assignment or
- if you take assignment, an easy method such as covered calls to get out of the trade with your capital intact.
In my case I can see that there is a lot of support in Aflac Stock at $65. At $60 there is also support and that support is actually stronger than at $65. This is why I sold the $62.50. It is below support at $65.00 but will also benefit from support at $60.
Should the stock fall to below $62.50 I can either roll down to $60 which is again support or roll out a few more months to see if the stock recovers back above $62.50 and to allow myself to earn some extra income. Then if the stock continues to fall I can reassess and once again decide whether to roll down, roll out or accept shares, pick up the dividend and sell covered calls to try to get exercised out of the stock.
Stocks May Not Perform Well in 2014
In a normal year such as 2014 seems to be heading toward, I have very little interest in holding stocks for anything more than very short durations. In 2014 we may find that most stocks trend up and down and end up pretty well where they started the year. That is not the kind of year I want to own stocks in.
Think About Protecting Positions
As 2014 certainly does appear to be a much more normal investing year, think about the protection of your trade FIRST and then if the protection seems like a good idea, then place the trade. If the protection is not at the level you would like, then consider a different trade.
Caterpillar Stock
Consider the pattern of the stock you are selling puts or even trading options against. It is the pattern that often dictates the best strategy to employ. For example since the summer I have repeatedly sold the $82.50 put strike in Caterpillar Stock. Looking at the chart below you can see why. The stock continually fell back to support around $83, languished there, many times would drop just below support and then be pushed back up. This made for terrific returns all of last year. That is a perfect trading pattern for selling puts and for the odd Bollinger Bands Strategy Trade where I pick up stock that meets the criteria of the Bollinger Bands Strategy Trade and then sell it as it rises.
FullyInformed Members can read the full outline of the Bollinger Bands Strategy Trade through this link.
FullyInformed Members
As the rest of this article delves deeper into a variety of strategies for use in 2014, it is designed for FullyInformed Members. Members can login directly through this link or Members can sign in to the full site here. Non-members can join here or read about the benefits of membership.