Firstly, the snapshot of the major indexes…
DJIA: 11,842.36 down 0.33 points
S&P 500: 1,318.00 up 0.07 points
Nasdaq: 2,385.74 down 20.35 points
In spite of today's action doing absolutely nothing to inspire confidence in banking sector – you need only look at the action in the XLF today – we decided to go hunting, believing that certainly, somewhere out there, a solid bank existed (even if its stock had been taken out for a beating of late).
Well the search took us across the Atlantic to Ireland. Oh sure, Ireland has its share of problems right now, but Bank of Ireland reported a 5% increase in underlying profits for the year to March 31st – IN SPITE OF doubling its bad debt charge due to the slowdown in the Irish property market.
In spite of its relative outperformance in its peer group, its 12.5% dividend yield and the fact that it's trading well below 50% of its average 10-year book value, the stock keeps going lower!
One of the big questions is whether the dividend is safe. According to Ireland's leading full-service broker (you could say the Goldman Sachs of Ireland), Davy, the dividend is rock solid and should not be in any jeopardy. Indeed management is implying the greater likelihood is that dividend growth will be flat this year. For emphasis, note their focus is not on cutting the dividend, it is on not increasing the dividend!
At $38 per share, and a dividend of almost $5 per share that is considered safe, the time window is diminishing before the value players start to differentiate between what appears to be a broken stock, but not a broken company.
On the whole, we decided against publishing a Trade Alert this week because uncertainty reached peak levels. For the bears, the danger is being whipsawed by a quick reversal. Just look at the period past the March lows to see how rapidly the indexes moved up for for evidence of how dangerous it can be to go short at the end of a long downtrend. Yet for the bulls, the danger of John Maynard Keynes line coming into effect is high – "the market can stay irrational longer than you can stay solvent".
At this time, we're quite happy keeping our heavy cash pile safe for now. While most of January to May has been profitable, June has been a different story! And we're weathering a dark storm! Having been around more storms than we can remember in the past, the good news is they do tend to pass just when the outlook is gloomiest! Thankfully, we're in some longer term plays on GE and the XLF. For those new to stormy weathers, it is sometimes best to baton down the hatches(hedging & cash) and to grit your teeth (stay objective) through the rocky undulations. They do pass. It just never feels like they will at the time!
For those that do like to jump in despite the gloom and doom, RIG offers some nice bull put premiums at this stage. For emphasis, we will be stepping aside for now. Nevertheless, some stocks do survive the tough times – like SPWR last week! The bull put we highlighted on SPWR expired worthless in spite of the craziness late last week!
Optionator has been keeping an eye out for capitulation. Evidence might come in the form of a super-spike. No, not the Goldman Sachs super-spike in oil – the super spike in the SKF (UltraShort Financial ProShares). Today, they rose $6.64 (+4.95%) to finish at $140.67!
Ever since the 20-day EMA and 50-day SMA crossed, the ProShares have gone straight up as financial shares have plummeted. The ultra short ProShares has been on a parabolic run over the past 6 weeks. In January and March, super spikes appeared followed by sharp reversals. All that's needed on this run is a spike outside the Bollinger Bands. Volume is also very heavy. The RSI is also encroaching on the 70 level. Furthermore, the MACD is hitting some old levels of resistance.
Another big spike up would more than likely align with capitulation. And that will be the day we plan on closing the short calls we have on the XLF!
Have a fantastic Tuesday!
Optionsage @ Stock and Option Trades
