Sunday, May 6, 2007

HOTS Weekly Options Commentary

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Pete Stolcers

Last week started off on a sour note. Many of the overseas markets were closed Monday and Tuesday and we did not have their strength to forge a path higher. Monday was a quiet day and the market drifted lower. Tuesday, the bears tried to get something going but by midday the market reversed and closed on a high note. The next three days all had positive price action and the S&P 500 made another multi-year high. It’s now within striking distance of an all-time high and that can be seen in this week's chart.

On the economic front, there were a number of releases that collectively had little impact on the market. Productivity was up, unit labor costs were down and average hourly earnings came in lighter than expected. A higher than expected ISM number offset a slight increase in the unemployment rate. Next week's economic highlights include the FOMC meeting on Wednesday and the PPI on Friday. I expect the Fed to stand pat and for the rhetoric to remain unchanged. The Fed has confirmation that the economy is slowing and that inflation is rising. Both conditions are offsetting (from an interest rate perspective) and a monetary policy change cannot be justified at this time. The PPI is likely to error on the high side; however, the market should the able to shoulder that news as it has in recent months. In conclusion, ignore the “noise” created by the economic releases.

Earnings, M&A and share buybacks are propelling this market. Last week, cyclical stocks with international revenues posted very strong earnings. The biggest merger news came Friday when rumors circulated about a potential Microsoft/Yahoo marriage. The market placed greater importance on that event than it did on the weak unemployment number. This week we will see the last big round of earnings announcements and here is a sampling of the companies that are about to release their results:

There are a number of stocks that I like in the above list; however, these companies don't pack the punch needed to have a major market impact. All things considered, the market needs to take a break and I believe that choppy trading lies ahead this week. Most of the earnings are out, we don’t have end-of-the-month or option expiration influences and the economic news is relatively quiet. Many traders will have their golf clubs packed in the trunk in case the activity slows down. This might sound like a joke, but it really happens. Traders would rather golf than force a bad trade in quiet markets. Chances are a deal or two might get the week started, but then everything will calm down ahead of the FOMC. Once that passes, things are likely to settle down again. This week I want to look at two pharmaceutical stocks.

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