Saturday, July 21, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Two weeks ago the market staged a convincing rally to new all-time highs. The buying continued right in the close Friday and it looked like the table was set for an awesome option expiration week. Throughout the course of this last week the market had some large intraday swings but it was unable to add to the breakout. Going into the week I expected solid earnings from financial stocks to spark that sector and fuel the market.

Merrill Lynch and State Street Bank both posted big numbers that handily beat expectations. To my surprise, both stocks sold off even though their exposure to subprime lending is limited. Clearly, higher interest rates are the larger concern. They have the potential to impact consumer spending, corporate financing, and private equity deals. Without the help of the financial sector, a sustained rally is unlikely. These stocks comprise 20% of the S&P 500. Tuesday, Bear Stearns dropped the second shoe on subprime lending woes when it announced its hedge funds in that area were going belly up. The magnitude of this problem has yet to be identified. In the second day of his testimony before Congress, the Fed Chairman said that subprime lending issues will get worse before they get better. Years ago, home buyers opted for 3-year and 5-year ARMS and those adjustable rate mortgages are just starting to kick in. As long as the unemployment level stays below 5%, I believe homeowners will be able to adjust their spending patterns and avoid catastrophe.

In the chart you can see the QQQQ/SPY overlay. Tech stocks have been strong relative to the SPY. They broke out and they have continued to make advances while the SPY has stalled. Tech stocks are still 50% below their peak from 2000 and they have lagged the rest of the market. I have not bought in to the recent tech rally because guidance has not been raised. Only 13 stocks account for the recent NASDAQ 100 rally and the move lacks depth. Last week, two tech leaders (Intel and Google) failed to meet expectations. Cyclical stocks were even more disappointing. They released solid earnings and in many cases beat expectations, yet the stocks sold off after the news. Friday, Caterpillar announced earnings and missed expectations. This overall price action tells me that stocks in general are “fully priced”. Unless we get an extraordinary round of earnings next week, I fear that the market might be putting in a temporary top.





I don’t believe that the economic numbers next week will drive prices. On deck we have new home sales, durable goods, GDP and consumer sentiment. Interest rates will stay put for the rest of the year and that places greater importance on earnings.

I can’t possibly name all the companies that are announcing this week, but here is a list of some that I’m interested in: ACI, ALTR, AXP, CNI, RE, HAL, LNCR, MRK, NFLX, TXN, STLD, AKS, AMZN, T, BTU, BP, BNI, CDWC, DD, LLY, ENR, LM, LMT, NOC, PCAR, PNRA, PEP, PCP, SII, UPS, VRTX, AKAM, AAPL, CL, DADE, FFIV, FMC, FCX, GD, OSG, SLAB, TSCO, ZBRA, ZMH, WLP, MMM, AET, AMGN, BZH, BWA, BDK, BG, CLF, CRS, F, KLAC, NTGR, ODP, POT, SI, SPAR, DOW, WEN, WDC, BHI, CVX, IR, LZ, SEPR.

As I look at the list, I can’t visualize where the strength is going to come from. Energy, mining and heavy equipment are all priced for performance. The tech stocks on the list have performed well and they are trading at lofty P/E ratios. The chemical stocks have the potential to outperform and they are just showing signs of strength. Unfortunately, they won’t be able to carry the market. I’m expecting a choppy week of earnings and the market will do well just to hold its current level. If it falters and it falls below SPY150, it could retest the relative lows we made in June. I would be suspicious of any rally that does not include financials stocks.

Monday, July 16, 2007

Takeover Mania, Uncle Ben and Earnings Season

Takeover Mania, Uncle Ben and Earnings SeasonSocialTwist Tell-a-Friend
Sally Limantour

Another strong week on Wall Street and the focus continues to be on takeover activity and stock buyback news. Vodaphone is considering a $160 bn takeover bid for Verizon which would rival AOL’s takeover of Time Warner and Vodaphone’s earlier acquisition of Mannesmann.
The FT this morning is quoting Stephen Jen, Morgan Stanley’s currency strategist on major emerging market economies. He is saying that while cheap credit may be drying up the emerging market economies are flush with cash and their growing interest in establishing sovereign wealth funds could well drive equity and other capital markets around the world to new heights. ”Major emerging market economies currently have a collective $1,500bn worth of excess reserves, - defining “excess” as official foreign reserves exceeding the amount needed for liquidity purposes, based on their “conservative rule-of-thumb”. http://ftalphaville.ft.com/

Dr. Bernanke is to appear before the House and the Senate this week. Those appearances which occur Wednesday before the Senate and Thursday before the House will dominate the discussions for the week. The market will be listening for any mention of inflation concerns as well as thoughts on the economy and housing.

The news is of better-than-expected earnings reports thus far, and 2nd quarter reporting is in full swing. Expectations for further upbeat earnings will support the market, but at what point does high energy prices, weak consumer spending, subprime problems and higher interest rates come into the picture? I am still looking at mid August for this market to correct, but blow off phases can be much longer and stronger than we can imagine.

Commodity prices are strong lead by the metals and crude oil. The gold ETF (GLD) rose 60% over the past two years while stocks such as Barrick has risen 30% and Newmont +14%. Perhaps it is time for the gold mining stocks to play catch-up. Attention will be paid to future earnings from gold mining operations.

Energy is on a tear as I pointed out the spreads weeks ago were starting to show the tightness. The market is showing demand is so strong that crude oil is not being moved into storage, but brought to market. That is bullish and should keep prices firm.

Good Trading to All

Sunday, July 15, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Monday, the market tried to resume the prior week’s holiday rally. It struggled to add to the gains and by Tuesday morning and it looked like the market had added a third lower high to the technical pattern. If you had connected the tops from each rally you would have seen a downward sloping resistance line. Sears and Home Depot provided a dismal glimpse of retail sales and Moody’s announced that they were about to downgrade sub-prime lenders. Tuesday morning’s decline was exacerbated by a prepared speech that was delivered by the Fed Chairman. By late afternoon, the market was in one of its typical “no-bid” slides. The S&P 500 closed 20 points lower. After sleeping on it, traders realized that the Moody’s news was already “baked in” and that Ben Bernanke did not shed any new light during his speech. Wednesday, the market started off on a nervous note and it rallied strong right into the close. Thursday, the market jumped higher after retail sales beat dismal expectations. Legitimate buying and short covering fueled the market to its largest one day gain in years. Friday, GE posted better-than-expected earnings and the market was able to make new all-time highs.

As I’ve been saying, no matter how ugly this market looks, it has the potential to annihilate short sellers at a moment’s notice. In this week’s chart you can see the strong trend and the temporary consolidation phase we went through the last two months. The big picture looks as bullish as ever. The trend lines are in place and there are multiple breakouts to suggest a continued move. If you simply viewed a daily chart, the market looked like it was ready to rollover. Over the last few weeks I have also pointed out that the volatility has increased. That is normally a precursor to a big breakout. That’s exactly what we got this week and I believe we will see continued strength next week.







From an economic standpoint there are a few big releases (PPI, Capacity Utilization, CPI, Housing Starts, LEI, Philly Fed.), but all eyes will be on the inflation numbers. The Government’s definition of inflation is different from mine. I feel that prices are moving higher in many areas (healthcare, college tuition, gasoline, travel), but those increases are not reflected in their calculations. As long as the market feels that inflation is contained, that’s all that really matters. The market has actually been able to rally off of the last couple of PPI and CPI numbers. I expect the same this week. In fact, I believe that all of the economic releases during the next two weeks will take a back seat to earnings. Earnings and interest rates drive the market and right now interest rates don’t look like they’re going anywhere.

Next week we will get a huge round of earnings releases. Here are some of the stocks that are on deck: ETN, GWW, REDF, AMD, FCX, MER, MOT, NFLX, PCAR, INTC, JNJ, MAN, WFC, YHOO, ABT, JPM, PJC, AOS, UTX, MO, EBAY, PFE, TER, TEX, ALL, JNPR, ME, DHR, HOG, HSY, HON, POOL, RS, TXT, VFC, BAC, BAX, CY, GOOG, IGT, ISRG, MSFT, NUE, BRCM, COF, SNDK, STX, SYK, BIDU, CAT, C, SLB. There are some great plays and some traps that lie ahead.

Strangely, the market is taking comfort in higher oil prices believing that it confirms robust global expansion. Liquidity is creating a supply/demand imbalance in equities. Flush with cash, corporations and private equity firms are aggressively buying shares and they are taking the shares out of circulation. Meanwhile, new funds continue to flow into the market. The macro conditions are in place for a continued rally and as good as things might seem in the U.S., we are the weakest link internationally.

I believe the market rally is legitimate and that earnings and option expiration will overpower any potential weakness in the economic releases. The market has rallied to a point where option related buy programs will be prevalent next week.

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