Tuesday, June 19, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

In the last two weeks we've seen a 50 point decline and a 40 point rally in the S&P 500 futures. Earnings season has passed and the market is looking for something it can sink its teeth into. It took seven years for the market to make a new all-time high. Despite a stiff resistance level, it was able to fight-off the first speed bump – a 15% decline in the Shanghai Index. That dark cloud may have passed as traders believe that the selling can be contained to China. However, interest rates were a different story and the market cracked.

Global economic growth is putting upward pressure on interest rates. Last week England raised its rates a quarter-point and this week Switzerland followed suit. That puts upward pressure on our interest rates and the 10-year yield went above 5%. Asset allocation models kicked in and the market went through a discovery phase. Selling pressure tested the “bid” to the market and it determined the appetite for equities amidst rising interest rates. The bulls won this round and the selling never really took hold.

Higher interest rates that result from a strong economy don't conflict with a bullish market. The latest rise in interest rates resulted in and a positively sloped yield curve and that is considered bullish. Wednesday, the Fed released its Beige Book. It is published every six weeks and it is a collection of economic activity from various regions in the US. It showed rising economic activity and moderate inflation. Once the numbers were released, the market rallied more than 15 S&P 500 points. The surge was created by buying, short covering, and expiration related buy programs. Thursday the market followed through on a benign PPI number. I'm writing this report a day earlier than normal so I will take a stab at Friday's action. I believe that the CPI will be in line with expectations. It might even be a little "hot". The market will look past the number and post modest gains. Most of the expiration related fireworks have passed and the afternoon could get quiet. “Merger Monday's” have been bear slayers and the shorts will not get aggressive going into the weekend.

This week the economic numbers are very light. They will be highlighted by housing numbers, leading economic indicators and the Philly Fed. Housing starts and building permits might shed light on that sector. From my perspective the numbers can only be bullish. So much gloom and doom has been factored in to housing that I doubt a bad number will weigh on the market.

Last week LEH and GS posted solid earnings but they failed to light a fire under financial stocks. I believe this sector is a sleeping giant and it may be the source of the next rally. Here are the major companies that will announce earnings next week; BBY, DRI, KMX, FDX, GIS, CC. The electronics, auto and restaurant stocks might shed light on the strength of consumers. However, I'm more interested in FDX and GIS. FedEx’s activity will be used to measure economic growth and General Mills will provide insights on food inflation.





Solid earnings, steady interest rates at the low end of the 50-year range, global expansion, moderate inflation, full employment and reasonable P/E ratios all point to a stable market. I am firmly in the “buy the dip” camp as long as the market is above SPY 146.

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