Monday, April 30, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

In last week's commentary I mentioned that the market would be influenced by earnings releases more than by economic data. Currently, 50% of the S&P 500 companies have reported. The earnings growth rate for this quarter stands at about 6% which is significantly higher than the forecasted 3.5%. The market responded by making new multi-year highs and even tech stocks participated. Cyclical stocks led the way and it’s apparent that the US economy is lagging the rest of the world. Companies that generate substantial revenues overseas fared the best. They benefited in two ways, they sold their products and services in growing economies and they realized windfall profits when they converted those revenues into US dollars.
The dollar has continued its plunge and it is close to making a new 30 year low. Friday the GDP came in weaker than expected and it showed a 1.3% growth rate in the first quarter when 1.7% was expected. This was the weakest rate of expansion in four years. To make matters worse the GDP Price Index increased 4%, the most in 16 years. Normally, this would raise stagflation worries and the market would have a huge negative reaction. In this bullish environment the market is able to shrug off all negative news.

From an interest rate perspective, Friday's news will not have a material impact on the Fed’s policy. The weaker economic activity would justify easing, while the "hot" inflation number would justify a rate hike. These two conditions offset each other and rates will remain unchanged. Next week the big number to watch will be Friday's Unemployment Report. A rise in the unemployment rate and wage inflation could spark a sell-off. I still believe that earnings will be the focal point and here are a few stocks that will announce earnings:

We have positions in a few of the stocks and I believe the earnings will be positive. As long as the earnings keep beating estimates and the growth rate is above 6%, I believe the market will continue to rally. The SPY needs to stay above 143 during the next few weeks for me to justify a bullish bias.

In the chart this week you can see how the market has broken out to new highs. The decline in February was a mere head fake. At the time, I had to play the percentages and trade as if there would be another leg down. With where the positions marked Friday, we are almost back to even and that maneuver simply cost us some momentum. The good news is that I’ve modified the service so that it can be more adaptive and effective.
Relative to last week, this week’s releases will be subdued. There don't seem to be as many market movers. Many traders will have the old adage, "sell in May and go away" in the back of their minds. It is possible that we will get a pullback that will test the breakout. If that price level holds, it will present a buying opportunity.

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