"The problem in defense is how far you can go without destroying from within what you are trying to defend from without." -- Dwight D. Eisenhower
Defending What's Mine (Guidance for Home-Gamers)
Today is a big day for me. After tonight's close, the Walt Disney Company (DIS - Get Report) reports its quarterly earnings, and I have a problem. This is a good problem; the kind every trader wants to have. Perhaps one or two of you have faced similar problems and fumbled over risk management after getting what you wanted from a stock. You see, DIS is my largest holding, and has been throughout this "Trump Rally". This is a name that I trade regularly, in fact I don't remember a time when I have been completely flat the name.
I made a mistake early last year. After having loaded up (getting longer) in the low $90s back in February, I misread the April breakout and doubled my position between $102 and $102.50. Still showing a net profit (at least for a while), I traded around the position as the stock meandered its way back to those prices in the low $90s by October. That's when I became truly less than diversified (a break in discipline), actually putting too many eggs in one basket. At the low, the stock was within striking distance of my $87 stop-loss order. I was that close to admitting defeat. In fact, prior to the Bob Iger conference call on the evening of Nov. 10 (Always Faithful), I was in the "danger zone".
Flash forward one quarter, and this morning my situation is still one of risk management. Only now, I am protecting the profits from what has become one of my single best trades in years, rather than minimizing losses. Know your mission. My mission, at this point, is focused upon capital preservation, while allowing for some exposure should the stock eventually hit my price target, which has been, and remains $122. How does the average guy or gal protect themselves at time like these?
1) Take a profit. I sold 35% of this position last week at $111.
2) Be prepared to take advantage of an "after hours" knee jerk. I am, and will be offering another 15% (of the original size) at $114 into the overnight session.
3) Bring in some revenue. I sold some covered calls. In this case I sold (equal in size to 20% of my original position) $112 calls expiring this Friday. For our home-gamers, when you sell, or write options contracts, you usually get the most bang for your buck on short-term expirations (that also won't leave you hanging for very long) just prior to an earnings release.
Depending on how this all shakes out, I'll move forward with anywhere between 30% to 65% equity exposure. If the stock comes in, at least I brought in some dough with the options sales. If the stock takes off, I still have some exposure, and I have rung the register on sizable gains. All are outcomes that I am okay with. I thought about selling some puts as well, but the issue is just too highly priced at this point for me to chance averaging in a purchase at levels that would also pay enough premium to interest me.
We Have a Runner
Philadelphia Fed president Patrick Harker spoke last night. Boy, did he ever. Despite full year 2016 GDP of 1.6%, despite fourth-quarter GDP of an annualized 1.9%, despite a January employment report that clearly illustrated how elastic the supply side of the labor market truly is (note to FOMC committee members, and those re-taking Economics 101: higher participation raises unemployment and puts downside pressure on wages), despite a slowing in total vehicle sales that certainly will put headline January retail sales at risk, and despite a CME website graphic that displays the probabilities for an increase in the fed funds rate at the March meeting at only a likelihood of 9% (indicating complete market unpreparedness), this guy is still supportive of three rate hikes this year (kind of OK with that, but would feel better if he said two, or spoke about withdrawing re-investment of principal). Better yet, Harker still sees March as being on the table for a rise. Never mind a February policy statement that did not seem hawkish at the least. Either Patrick Harker knows something that the rest of us do not regarding consumer level inflation (he just might), or he is way out ahead of the economy. What matters to traders now, as far as interest rates go? More so than the three Fed speakers that we'll hear from later this week?
1) Chair Yellen's twin testimonies next Tuesday, and Wednesday.
2) January CPI and retail sales data are also on Wednesday.
08:30 - Trade Balance (December): Expecting $-45.0 billion, November $-45.2 billion.
08:30 - Imports (December): November $231.1 billion.
08:30 - Exports (December): November $185.9 billion. The Trade Gap printed its second largest deficit of 2016 in November and its third largest deficit since 2012. Put another way, imports rose to their highest levels since mid-2015, while exports printed at their lowest level since June. Strong dollar? That's certainly a factor here. The gap was also relatively small during the third quarter, due to robust strength in agricultural exports due to that monster soybean crop. The marketplace generally does not react to this release, though the data will play out across markets over time.
08:55 - Redbook (Weekly): Last Week 0.2% y/y. This measure of weekly retail chain store success has been in a state of declining growth on a year-over-year basis for four weeks now, and truly on the ropes for three. This item stands in jeopardy of printing outright contraction. In that event, the retailers, already suffering as a group, could be impacted in a negative way.
10:00 - JOLTS (December): Expecting 5.55 million, November 5.52 million openings. Job openings have been running below 2016 trends for the last three months or so. To put these numbers in perspective, though, the series has been printing at its millennial highs throughout the last year. This item will not impact the marketplace upon its release, and stands more to illustrate an existing gap between skill sets desired by employers, and skill sets possessed by applicants.
15:00 - Consumer Credit (December): Expecting $20.1 billion, November $24.5 billion. November credit on the consumer levels expanded by more than expected thanks to a dramatic increase in revolving credit. Non-revolving credit, which are things that folks take out loans for, such as tuition, and automobile purchases are almost always the strength of this report. For instance, of the $16.2 billion in credit growth seen for the month of October, only $2.3 billion ended up being due to revolving credit. Basically, revolving credit is credit where they can beat you over the head repeatedly, such as credit card usage. For November, revolving credit ramped up $11 billion, which must be how folks paid for the holidays.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2312, 2299, 2293, 2282, 2272, 2265
RUT: 1383, 1375, 1371, 1364, 1354, 1348
Tuesday's Earnings Highlights (Consensus EPS Expectations)
After the Close: (BWLD) ($1.31), (GILD - Get Report) ($2.60), (MDLZ - Get Report) ($0.49), (ORLY - Get Report) ($2.54), (TTWO - Get Report) ($0.93), (TWLO - Get Report) (-$0.05), (DIS - Get Report) ($1.49), (YUMC - Get Report) , (ZG - Get Report) ($0.11).