The divergences that have colored the stock market lately continued on Wednesday. The reading on the April Producer Price Index (PPI) report came in at 0.6%, well ahead of the 0.02% forecast by economists. The blame for the higher-than-expected reading will be placed on higher food prices, which were up 2.7% for the month — a large jump. Now, if wage inflation can make a comeback, the bump in the price of beef and milk won’t feel so bad.
This continues to send the message that the economy is gradually improving despite the overseas turmoil and lingering concerns about the impact of a long winter. Consumer sentiment is firming up, again, despite the lower reading for April. I’ve been saying for some time that the data have been and will continue to be uneven for a while, as many different forces remain at work, and they will not all be in coordination with a normal economic recovery.
Spending at big-box stores may not be as robust, but folks are upping their spending at restaurants and on travel, showing more of a preference for the casual pleasures of life over material things. Hotel and airline stocks have been some of the best-performing stocks for months but, again, much of the stock market is not on the same page.
Take the bond market for instance. Instead of seeing a big selloff in Treasuries after the PPI report, buyers have stepping in aggressively and have taken the 10-Year yield down to an eyebrow-raising 2.54%. CNBC pundits are attempting to shed some visibility as to why this is happening, as it seems highly counterintuitive. The simple explanation is that European sovereign debt is paying less than 2.0%, and that has ultra-safe money flocking to U.S. Treasuries. I’m assuming there is massive institutional arbitrage at work here.
The net reaction is that the major stock averages are confused, ending down across the board, even after the Dow Jones and S&P 500 set new highs Wednesday.
Crude is still on the rise while natural gas continues to hold well off its highs. Gold was also higher and the dollar index (DXY) held steady. Again, lots of divergences are keeping investors off balance, while the larger global macroeconomic picture remains as a glass that is half full.
The most bullish picture is appearing in the emerging markets, which have reversed smartly higher after being left for dead just two months ago. Below is a one-year chart of the collective emerging stock markets, which only helps to refute the naysayers who have been talking down the health of those young economies in Asia, Latin America, Eastern Europe and Africa.
I’d like to chalk up Wednesday’s negative tape to a normal bout in which the stock market is looking for excuses to do some backing and filling after enjoying a nice run higher to major technical resistance. This second knock on the door of S&P 1,900 was met with some genuine pushback, but I believe it will ultimately give way to the bulls, with the next threshold sitting up at 1,950.
In the meantime, short-term covered calls remain a preferred strategy of mine. I’ve uncovered an ideal opportunity in T-Mobile U.S. (TMUS), the wireless provider of smartphone and data services. The stock is breaking out to the upside on a very strong quarter fueled by rapidly expanding membership numbers, thanks to its aggressive pricing strategy for bundled data.
Traders and Wall Street are warming up to this name quickly, as it offers a fresh alternative to AT&T (T) and Verizon (VZ) as a pure play on wireless communications that is taking market share.
For every 100 shares of T-Mobile U.S. (TMUS) you own or purchase, use a limit order to “sell to open” 1 TMUS June $33 call at $1.50 or more per contract, good till canceled. TMUS is currently above the strike price, so see if you can pick up shares below the $33 level, but don’t let a few cents stand in your way of opening the trade.
The option symbol is TMUS140621C00033000. Note that there are several expirations at the $33 strike; make sure you are selling to open the regular monthly option that expires on June 21.
A purchase of 500 shares generates $750 in cash from the sale of five calls – a pretty nice payday for about a month’s time, as the expectation is that TMUS shares will be called away from us at June expiration, and we’ll get to keep the $750 we earn upfront.
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