HOTS Weekly Options Commentary
Peter Stolcers
Two weeks ago I was talking about how the market might stage and expiration related rally that would fuel it to new all-time highs. The basis for that prediction was strong earnings and a large open interest of in the money calls. When that rally failed to materialize, a warning shot was fired.
A warning shot was also fired last February when the S&P 500 dropped 50 points in one day. Liquidity and credit risk were perceived problems and traders headed for the exits at the first sign of trouble. The difference between then and now is reality. This week hard numbers were attached to the losses stemming from loose lending practices. Technically, this decline has caused serious damage. The SPY penetrated the 146 support level. That represents the breakout from last April and it also represents the 200-day moving average. This juncture is a pivot point. If the market continues to trade below this level, lower prices lie ahead. If the market can recover and rally above this level a bounce and recovery could materialize.
There is new information that needs to be digested by the market and that process will take a couple of months. In the meantime, there will be bullish and bearish opportunities. It will be critical to find relative strength and weakness within the market.
I still believe that a year-end rally is in the cards. The earnings growth rate is in the high single digits at this stage of the earnings season. That is considerably ahead of expectations. Interest rates have declined and that is also bullish for the market. Oil prices backed off from their highs when forecasters lowered their expectations for hurricane season. Foreign markets are holding up relatively well and global expansion should carry us through this soft patch.
Next week the economic releases are very light and I don't feel they will drive the market. These are some of next week’s earnings announcements: NILE,HET, DRQ, TXU, TYC, ATW, CSCO, FLR, MDR, WYNN, AUY, AGU, BIG, FWLT, FLS, GES, LVS, CRM, ZUMZ, GME, SHLD, BRCD, DELL, FMD, ANN
I am expecting another volatile week. As the market tries to determine its next direction, it makes sense to lay low. Many traders are taking time off and thin trading is adding to the intraday volatility. I will follow their lead and I will be taking the week off as well. I will not be producing a new report next week, but I will update the current positions.
I’ll be clearing my head and preparing for the opportunities that lie ahead the rest of the year. If you decided to trade next week, keep your size small, stay balanced and take advantage of the high implied volatilities by selling out of the money credit spreads.
