Wreckage in Retail Sector Raises Yellow Flag for Fed
In just the past week, the bond futures market was pricing in a 70% chance of a Fed rate hike at the upcoming December Federal Open Market Committee (FOMC) meeting. That was before the bottom fell out again in the oil sector, China PMI came in down for the 44th straight month and the retail space was hit with a wrecking ball after Macy’s and Nordstrom gave bearish outlooks for the holiday shopping season. The sudden turn of events in the popular consumer discretionary sector, even in light of a better-than-expected University of Michigan Sentiment reading of 93.1 versus a 92.0 forecast, makes this investing landscape a real head scratcher.
The recent sharp pullback for stocks also was fueled by no fewer than six Fed officials speaking at public events in various forms of Fed speak. This illustrated that, as a body, they are not all on the same page. If the commodity markets and the equity markets don’t respond before the Fed officials gather next month, then they once again may delay raising rates for fear of elevating market volatility. One month of surprisingly strong employment data does not make for a trend. However, investors had raised their outlook for higher interest rates in light of the crumbling commodity markets.
The mixing bowl of data and sentiment lays out a good case for staying invested in equity income where central banks will avoid upsetting the apple cart, also known as the stock market, while knowing full well that any meaningful move up in rates furthers the rally in the dollar. That in turn creates enormous foreign exchange (forex) headwinds for multinational companies and profits in the third-quarter earnings season. This backdrop argues well for stocks of companies that are growing revenues from domestic sales, where the strength in the dollar is not a threat but rather a benefit when purchasing inputs from overseas suppliers. This is the new normal sweet spot for growth heading into 2016.
Within our new covered-call service called Quick Income Trader, I focus on positioning these kinds of companies whose businesses are centered in various pockets of strength within the U.S. economy. Recent rotation shows fund flows clearly moving into big-cap technology where the majority of sales from U.S. customers are focused on cloud computing, information technology (IT) and payroll services. Video game and mobile entertainment companies are meeting surging demand from the smartphone market. Domestic airlines are enjoying huge benefits from pervasively low jet fuel prices and higher passenger occupancy rates. The same can be said for America’s fuel refiners, seeing wider spreads from cheap oil and rising demand for gasoline. So in a herky-jerky market, there is plenty to profit from.
And I don’t mind making a big deal about the profit potential of a well-honed buy/write call option strategy that brings in monthly cash payments to an investor’s account simply from selling volatility back to the market in the form of covered calls. At a time when the market is in a very well-defined trading range where the Dow and S&P are once again negative for the year, the case for selling option premium on short-term rallies, like the one that just occurred in October, is very compelling. That way investment capital is hard at work all the time, not just when the market trends higher.
Not only does a covered-call strategy provide for an excellent stream of double-digit percentage income, it provides a natural hedge against getting smacked around in/by sharp market corrections, such as what has occurred during the past two weeks. Instead of allowing the market to frustrate from one failed breakout to the next, making the most of what the market has to offer is how smart money operates when a prolonged trading range looks like it will persist. An eighth-grader can get up to speed on how to sell covered calls on stocks in no time. It’s that easy and once put to work, it becomes a welcome source of steady returns in a not-so-steady market.
Just go to www.bryanperryinvesting.com to get started and help ensure your growth capital is being all it can be to your annual portfolio returns.
In case you missed it, I encourage you to read my e-letter column from last week about how selling covered calls can generate a handsome profit. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
