Saturday, October 13, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week a stable Employment Report was released and the market surged higher. Despite mixed earnings announcements and soft economic releases, the market was able to add to those gains throughout the week until Thursday afternoon. "Hawkish comments" from one of the Fed Officials spooked the market, creating an intraday reversal. Chinese stocks were hit hard along with other stocks that have recently posted big gains.

Friday morning, the “all clear” sign was given. Chinese stocks held firm overnight and the PPI and retail sales numbers came in better than expected. The market was able to bounce and it closed above the highs made a week ago.

The economic releases this week are: industrial production, CPI, housing starts, LEI and Philly Fed.

I believe the earnings guidance, not the economic news will drive prices during the next few weeks. They are forward looking as opposed to the hindsight provided by economic releases. If GE and MCD are any indication, the earnings should come in at or above expectations. Both posted solid results.

Next week we will get an onslaught of earnings releases. I expect most companies to meet estimates and the current projected growth rate year-over-year is flat (0%). I believe that threshold will be cleared easily. The wild card is the earnings guidance that corporations will provide. If future weakness becomes a theme, the market will decline. If the earnings and guidance are consistent with the market's expectations, the market will continue to push higher.
These are some of the companies that are announcing this week: C, ETN, DNA, JBHT, JNJ, USB, WFC, INTC, STX, YHOO, ABT, MO, CIT, KO, ITW, JPM, UTX, ALL, EBAY, ILMN, ME, SYK, BAC, BGG, NUE, PH, PFE, RS, STJ, UNH, AMD, CREE, GILD, GOOG, IBM, ISRG, SNDK, TPX, VFC, MMM, CAT, HOG, HON, SLB.




We are only two weeks away from a seasonally bullish period. The earnings releases have been decent, we have not had many earnings warnings and the economic releases have been positive. As long as Americans have jobs, they will continue to spend and pay their debts. Add the Fed's half point interest rate cut to that equation and you can see why I am bullish. As long as the SPY is above 150, we will trade from the long side.

Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

Friday, October 12, 2007

Equity Index Update (Special Edition)

Equity Index Update (Special Edition)SocialTwist Tell-a-Friend
Brad Sullivan

The index markets suffered through a sharp decline in the afternoon trade after a JP Morgan analyst cut revenue estimates for the Chinese Internet company BIDU (Baidu.com). The stock plunged from 358 per share to 303. Other staples of the momentum side also slid as GOOG dropped from a new all-time high of 641 to 622 on the close…AAPL fell sharply as did DRYS. The NQ market participants were clearly caught off guard as the index cratered from 2210 to 2160 in 30 minutes of trading…the subsequent bounce proved short lived and another round of selling pushed the index to the session lows of 2146 a solid -2% drop for the afternoon from high to low.



The interesting aspect of the decline was the second wave of selling. It was during this wave that the broader market came along for the ride on the downside…GS gave back its entire session from Tuesday’s FOMC minutes rally and the stock settled at 229. The examples of this type of price action were found everywhere by the close and one has to wonder if a confluence of forces that have been the underpinning of this rally (global growth, commodity boom, no inflation…so on so on) is being rethought. Certainly, a one day reversal should not cause a top in this long running bull market…and for the bears hoping that we have finally turned the cards over to the “sell” side of the ledger I would advise caution. There needs to be more technical work done on the downside in order to generate a price ceiling of significance. In the short run, it would appear that a rally back to yesterday’s highs would be a stretch. So…where does that leave us?

From a day trading perspective, much of the move was accomplished (at least in terms of velocity and price discovery) in yesterday’s swoon. The SPZ went BELOW the September Employment Report session low (1558.25) and some mild sell stops pushed the index to session lows of 1556.25. However, this low was still HIGHER than the GAP left from that very Employment report (1552.25). The subsequent short covering bounce into the close pushed the index towards 1565 – that close is on slightly lower on the week and does not represent the low close of the week as that was accomplished on Monday at 1562.75. In fact, only the NQ and ER2 contracts closed at new weekly lows. Essentially, this boils down to patience and a little bit of reality. Yes the markets are overextended and the fact that a revenue downgrade of a Chinese Internet company could put so much pressure on the marketplace proves that point. However, to make the leap from the trade in BIDU to an overall slowing of the China Story may be a bit of a stretch. In my opinion, we witnessed a rare news event that led to a bit of a buyers strike. Whether or not that continues today will be fascinating, particularly as we head into earnings season. My advice is to lay low and look for a few opportunities, particularly early, for selling rallies. Psychologically the market took a hit and some of that should carry into today.

Random Comments

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Fil Zucchi

I will refrain from too many comments on the nasty reversal we saw yesterday, since there are far smarter technical eyes in this community than me. Rather, a few thoughts on specific names and areas:

  • Keep a close eye on the Baltic Dry Index (BDI) and its proxies, companies like Paragon Shipping (PRGN), Quintana Marine (QMAR), and Dryships (DRYS). In my view they reflect better than anything else the true state of the world tangible economy; and in hindsight I believe they will be seen as the telltale sign of coming runaway inflation. Since July the Index has gone parabolic, with dry bulk shipping rates going through the roof, and there’s anecdotal evidence that the flipping game that spread from stocks, to homes, to commercial real estate, has now infected the “vessels” asset class. Yesterday’s break in these stocks arrived after several days of vertical moves on massive volume. If the BDI follows the stocks breaks, you can kick one more leg from under the broader market.

  • Chatting with folks very close to distressed-debt vulture funds, the consensus is that the weaker of the major homebuilders, Tousa Inc. (TOA), Standard Pacific (SPF), Beazer Homes (BZH), and perhaps even Hovnanian (HOV), would be better off filing for bankruptcy sooner than later; the theory being that there is no way out for them anyway, and at least right now they have enough assets left to effectively reorganize, and the economy is not in recession (yet). If they wait until things really turn ugly fresh capital will be much more expensive.

  • With respect to the last point however, one daunting question is how many multiples of the bonds’ face values are the outstanding CDS against such debts? And where is that time bomb hidden?

  • Corporate bond watchers and equity players are having a heated debate as to whether the recovery in the debt markets of the last couple weeks will set off another wave of M&A, LBO’s, and buybacks. We are already seeing the buybacks, and strategic M&A. In my humble opinion, and based on anecdotal conversations with folks at major PE groups, LBO’s are done and they are not coming back (corporates traders disagree). Debt fueled buybacks have been as consistently successful as flipping a coin: just look at Intel (INTC), Dean Foods (DF), Amgen (AMGN), St. Jude Medical (STJ), not to mention a bunch of the homebuilders. That leaves strategic M&A, where premiums are not likely to be nearly as fat as they were in LBO’s.

  • The last time the Dollar Index (DXY) touched current levels it reversed and shot higher within two weeks. This is week two since the break of the 79 level and any semblance of a bounce is still AWOL. I may end up eating my words (wouldn’t be the first . . . or tenth time), but in my opinion the greenback has at most two more weeks to mount a rally or the next move down will start getting tagged as a “currency crisis”. Of course with M3 ramping at 14% in September and gold and oil going relentlessly higher one could argue that the currency crisis is already here.

  • On a slightly more cheery note, if one has to be long something, I continue to think that small regional banks with little mortgage exposure should benefit from the steepening yield-curve. The RKH Holder is a lazy way to play this. Also, not a day goes by that I don’t find an article concerning the lack of bandwidth in the metro networks and at the switching nodes. Away from the ne’er do wells – Alcatel-Lucent (ALU), Nortel (NT), Tellabs (TLAB) – I think there are tremendous opportunities, especially in software rich companies. Favorites include Ciena (CIEN), Infinera (INFN), F5 Networks (FFIV), Akamai (AKAM), and Limelight Networks (LLNW); once the cable guys finally decide how to avoid getting run over by the Bells FTTP deployments, and they start formulating their capital spending (which is inevitably coming), other viable names will be Ceragon Networks (CRNT), Arris (ARRS), Harmonic (HLIT) and BigBand Networks (BBND).

    And always know where the “emergency exit” is!!

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