Stocks rolled back over on Friday in part because of weaker-than-expected earnings from Amazon.com (AMZN) and others, and in part because of escalating tensions in Ukraine. At the same time, volatility has ramped up again as investors collectively decided that they may have been overpaying for growth stocks amid an economy that is improving at a slower pace than expected.
Almost half of the S&P 500 has already reported first-quarter earnings — and, as a group, the companies’ earnings per share growth is only up 0.2% from levels seen a year ago, according to FactSet data. The expectations were for a 1.4% decline, but this is not the sort of upside surprise that investors were hoping for in the backs of their minds.
This year reminds me of that classic set of “Peanuts” comic strips in which Lucy is always pulling the football away from Charlie Brown as he runs up to kick it. She promises each time not to yank the ball away, but every time Charlie Brown somehow ends up on his back anyway, with a sigh.
This year, every time the major indexes get back above par for 2014, it seems like the market gods are pulling the same trick. You thought it was going to be easier this time after Apple (AAPL) reported an earnings number that was well received and took the markets higher early on Thursday? Sorry, Charlie Brown; not this time, either.
Well. there are only so many times that this deception can be pulled before investors just walk away from the market. The threshold was not reached last week because there is still a lot of optimism about the improving economy. But my research suggests that sometime soon, perhaps in the early to mid-summer, the market gods will yank the carpet out from under our feet and not replace it.
This is not that time, however, as I do expect buyers to return early this week. We have had several semi-scary Fridays in which Ukraine tensions were blamed for a hard negative close, only to see the fears dissipate over the weekend or at least by Tuesday. There’s no reason to suspect that won’t happen again. And, in fact, the steepness and speed of Friday’s decline should set up for a pretty good rebound this week.
With that in mind, let’s grab some quick gains on the long side of the market while the time is still right. Today’s recommendation is for a May call option on the iShares Russell 2000 ETF (IWM). For those new to trading volatility via index options, the IWM is an exchange-traded fund (ETF) on the small-cap index — one that trades around 35 million shares a day on average.
Buy the IWM May $115 calls at $0.95 limit; when filled, set up to sell them at $2.45 limit. Make sure to purchase the monthly IWM option expiring on Saturday, May 17, 2014 — although some brokers may list the expiration date as Friday, May 16, 2014.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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