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April 18, 2022
Land Of Confusion
As I was spending time this weekend with family, a common question, or debate, kept running through the house. If unemployment numbers are low and companies are offering higher wages to attract customers, why is the market down?
Well, of course I told my family they should have been reading this newsletter to keep up, because we’ve been talking about all the reasons for weeks. I’m no economist, but my experience in trading has taught me quite a bit about supply and demand.
The Fed, or really whoever you want to blame for this, has been running the economy on all cylinders since the pandemic. We threw every play in the playbook to fight off shutdowns, layoffs, and one crisis after another. Add a global supply chain that is impacted by everything from war to covid, yes, there are still covid concerns, and that is driven demand for goods and services to high levels. The demand for goods creates a demand for employees, which creates a job market frenzy that is driving wages higher.
Higher wages lead to higher product prices and eventually consumers say enough is enough and won’t pay and that’s when the dominos come crashing down. Are we there yet? No, but that doesn’t mean we should ignore warning signs, which is why we post an economic dashboard every Friday. Did you see it?
But earnings will be the real market catalyst this week.
MARKETS
The markets were closed on Friday and at the time of this writing, the DOW futures are already off by 0.5% and the Nasdaq is off by 1%.
Expect a volatile week ahead with earnings. I was talking to John Hutchinson this past week and asked him specifically what he’s watching out for in the earnings releases.
He said to play close attention for mentions of margin compression, reduced forward outlooks, rising costs, etc.
For example, when JPMorgan issued earnings last week, they mentioned they added to their loan-loss reserve in anticipation of higher loan losses due to a higher probability of downside risks such as inflation and the war in Ukraine. Planning for loan-loss isn’t exactly the most bullish catalyst out there.
TRADE IDEA
Looking back at last week and one-month relative performance charts, Energy, Basic Materials, and Consumer Defensive sectors are still pegged at the top.
Here is a stock that is showing some potential within the Consumer Defensive sector.
Tyson Foods, Inc. (TSN) (weekly chart)
Assuming the Consumer Defensive sector continues to be near the top of the sector strength list, Tyson Foods is set up to continue the uptrend and cross over $100/share in the next month or so.
Watch out for earnings on May 9th. I can’t stress that enough. Watch out for earnings!
TSN doesn’t offer weekly options, but the May 20th $90 put option is currently going for $1.55, or $155 on a $9545 investment in 33 days. TSN also offers an annual dividend of 1.93% should you want to add this to your bullpen of stocks to track.
TRADING EDUCATION
Some of you may have seen the Perpetual Income Engine, or maybe have heard about the wheel strategy. We’ll get into details about this strategy this week, but in its broadest terms you identify a stock that you want to trade and then sell puts until you are put shares and then sell calls until you get the shares are called away and then you do it again, over and over again.
Step 1: Identify a stock you want to trade that has options.
Step 2: Sell a put lower than the current price (we’ll get into the details of strike prices and expiration later this week).
Step 3: At the date of expiration, identify if the current price is above or below the put that you sold.
Step 3a: If above, sell another put. Go back to step 1.
Step 3b: If the price finished below your strike, you now own 100 shares (per contract) at the price of your sold put. Continue to step 4.
Step 4: You now own 100 shares, so you can sell a covered call. You’ve collected the put premium already to lower your cost basis, and now you can collect premium for selling the covered call, and you can collect any premium if the stock rises above your covered call price. Repeat step 4 until you’re called out and then return to step 1.
The wheel strategy has gained popularity lately because you can collect cash with puts, as well as gain capital appreciation and premium when selling the covered calls.
Did you know you can supercharge the wheel strategy? Dave Durham from Triple Play Income shows you how you can add a third component to the strategy, which helps the portfolio, regardless of if the stock goes up or down. Just last week Dave pulled in $356 of premium on AbbVie, a $162 stock. That’s over 2% in a week and that’s only one of the stocks that Dave trades each week.
If you want to know more information about the Triple Play Income service, make sure you reach out to us this week. Dave has plans for more premium collection you won’t want to miss.
Jeff
Editor, Wealthy Investor Society