Saturday, May 12, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

The market is seeking a catalyst. 10 days ago the S&P 500 was at this same level. In that time we have seen a decent round of earnings and they have exceeded expectations. With most of the numbers "in", the earnings growth rate is over 6%. That should be enough to sustain the uptrend. As I mentioned last week, I expected choppy trading and a negative reaction to the Fed’s unchanged rhetoric. The initial bullish reaction was reversed Thursday and the market also took issue with the weak retail sales numbers. Over 80% of the retailers missed their sales numbers. Friday, we got a bit of inflation relief from the PPI. The core inflation rate increased a modest .7%. In the grand scheme of things, the market is just chopping around looking for a piece of news that it can sink its teeth into. One day the economic releases show strength; the next day they show weakness. Another day the releases show rising inflation and the next day they show a decline. Now that the earnings season has ended, the market will place greater weight on the week to week economic releases. These knee-jerk reactions will mean little and the market will zigzag until it has something substantial to digest.

Per normal there is a chance that we will wake up Monday morning and read about a new merger. M&A will kick start the week and given the recent rally, the path of least resistance is up. The market is also likely to benefit from bullish option expiration activity. It's easy at this juncture to get lulled into thinking that the market can only go higher.

This is a time to be cautious. The market is "sleepwalking" its way higher. Thursday we saw the dramatic affect that one negative piece of information can have on prices. It will take two or three consecutive pieces of information to topple this market. We will use a series of lower closes and a technical breakdown as our guide. In today's chart you can see that minor support held Friday. The uptrend from March is also still intact. The steeper and shorter term the trend line, the easier it is to violate. I don't give this trend line as much credence as I do the horizontal support levels at SPY 148 and SPY 146. This week I have a very unique stock to add. I went fishing and once I reeled in the catch, I liked what I saw.

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