Wednesday was another mixed session for the stock market, even amid optimism surrounding the housing market. The S&P 500 traded indecisively during the first 30 minutes of Wednesday’s session, but then got a kick start around 10 a.m. ET with the release of a stronger-than-expected new home sales report for January. The report showed that new home sales rose 9.6% to a seasonally adjusted annual rate of 468,000 versus the consensus estimate of 400,000, marking the highest level of new home sales (measured as contracts signed, not actual closing like existing home sales) since July of 2008.
The knee-jerk response to the encouraging report pushed the S&P up through the 1,850 level, which provided technical resistance soon after the start of trading. Once again, though, the benchmark index hit some turbulence above that level.
That interference was owed in large part to the continued underperformance of the financial sector, which is acting as an influential drag on the broader market. The rally in bonds that has been effectively lowering yields is pinching the net interest margins that drive banks’ profitability.
Note that the financial sector has gained just 2.0% versus a 3.5% jump for the S&P 500 during the month of February. That laggard showing warrants keeping a close eye on the sector, given the important role that financials play in feeding economic growth and influencing stock market sentiment. Without strong participation from the financials, breakout efforts will be looked at as questionable in terms of their sustainability.
At the moment, the stock market continues to toe a line of optimism that economic and earnings growth prospects are going to ramp up in coming quarters with the backing of pent-up demand and a conscientious Federal Reserve that won’t unnecessarily tighten the screws of monetary policy. As an important aside, Fed Chair Janet Yellen is going to testify before the Senate Banking Committee Thursday morning.
By and large, the stock market sees Yellen as a friend, not a foe, when it comes to the price action that has fueled buy-the-dip efforts in February. Her testimony on Thursday, therefore, could be the convincing near-term breakout point for the stock market, which has had some difficulty finding its way so far in 2014.
The market’s love affair with Ben Bernanke and now Janet Yellen is pretty obvious and is one reason we’re seeing stocks firm up in front of Yellen’s testimony. If she says all the right things, then the technical headwinds that have kept the S&P from closing at a new all-time high will likely pass and invite further upside. By how much is up for question, but the next technical target for the S&P is 1,880.
This environment remains ideal for short-term covered calls that offer an opportunity to profit from upswings but that also insulate any immediate pullbacks. By using short-term covered calls, you can create your own “perpetual cash machine.” Conservative strategies pay off big!
So, let me give you a live recommendation you can act on today in virtually any trading account. This trade is designed to get you a safe 8.5% return in the next three weeks.
One of the white-hot sectors that emerged from 2013 was the fiber optic component and equipment sector, which sells to the major telecoms like Verizon (VZ), AT&T (T) and overseas networks. There has been a new wave of capital spending from these companies as demand for Internet traffic and the bundling of phone and television services is overwhelming the current infrastructure.
Finisar (FNSR) provides optical subsystems and components for data communication and telecom applications in the United States and internationally, including in Malaysia and in China. The company’s optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in building communication networks, including the switches, routers, and servers used in wire-line networks.
An initial selloff related to bum earnings from Cisco (CSCO) was short-lived, and the stock is showing good resilience going into its earnings report March 6. The company has a history of positive earnings surprises, and estimates have stayed steady at 44 cents per share for months.
To smartly position yourself to capture the short-term jump in FNSR, I recommend a short-term covered call.
For every 100 shares of FNSR you own or purchase at market, place a limit order to sell to open the FNSR Mar. $25 calls at $0.65 or more per contract, good till canceled. These orders should be filled immediately based upon Wednesday’s closing price.
The goal here is to collect a premium of $65 or more for every option contract that you sell against your FNSR shares and for FNSR to trade above the $25 call option strike at expiration on March 22.
If that happens, a buyer will pay you the agreed-upon $25 price for the shares that you bought today for roughly $23.75, plus you get to keep the $65-plus from each option contract. That works out to a sale price of $25.65 for a net return of 8% in a little over three weeks.
And what happens if FNSR isn’t trading above the $25 strike price at expiration? We still get to keep the $65 options premium for each contract we wrote and our shares. I’ll then recommend writing another round of calls against the shares for April to keep collecting income until our shares are called away. Either way, it’s a win/win.
The simplicity of short-term covered calls is what gave my Cash Machine Trader members an 8.22% return in Micron Technology (MU) in just five weeks and an 7.32% return in Boston Scientific (BX) in about six weeks with little effort or risk.
And I’ve just released a new list of recommendations to get Cash Machine Traders multiple payouts for steady income like that on March 22.
You can join us today to start collecting a steady stream of non-stop trading income. Discover how to build your own “perpetual cash machine,” with conservative trading strategies that are easy to use…consistently successful…and remarkably repeatable, month after month, year after year. Get the full story here.