Showing posts with label Peter Stolcers. Show all posts
Showing posts with label Peter Stolcers. Show all posts

Monday, May 21, 2007

HOTS Weekly Options Commentary

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Pete Stolcers

Last week we had the choppy price action and the bullish bias that I forecasted for the week of option expiration. The economic numbers had little impact on the market. Tuesday was a classic example. The CPI came in lighter than expected and the initial rally was reversed by the end of the day. The real impetus for the week came from option related buy programs. Next week the economic numbers are fairly light and I don't believe the Durable Goods number or the GDP will have a big impact.






The earnings releases will also be fairly light. They are predominantly retail companies. Based on the recent retail sales numbers, the expectation for "light" numbers is already built-in. The overall guidance from these companies might indicate the strength of the consumer. Those companies that miss their number are likely to blame it on the weather and high gasoline prices. Here are some of the companies that will announce:

AZO, BJ, LOW, SNDA, ADI, MDT, GME, MW, ANF, DKS, TGT, GYMB, ZUMZ, MYL, ARO, LTD

The interest rate and earnings front will be relatively quiet so let’s take a look at some of the other market influences. Energy is the hottest market sector. Unrest in Nigeria is driving oil prices higher. Currently that country is our third largest source of oil. The market is oblivious to higher commodity costs and the inflation indicators seem to be keeping a lid on those concerns. M&A continues to keep a strong bid in this market. The shorts are running scared and it has been almost impossible to make money on bearish trades. In the chart you can see that the SPY is close to an all-time high. The market has a parabolic feel to it and it has rallied 22% in less than a year. In the chart you can also see that interest rates contributed to a lengthier decline in 2006. During that period the market wanted the Fed to stop raising rates. That finally happened in August. This year, the rates are stable and the market recovered very quickly. The market is so strong that it erased the losses and made new multiyear highs in the course of a month. This type of setup can lead to a "melt up" and a sharp decline. If that happens there will be plenty of money to be made on the upside, but you'd better be quick to pull the trigger once the peak is established. I have a couple of stocks this week that I believe will rally with the market and hold up well if it declines.

Saturday, May 12, 2007

HOTS Weekly Options Commentary

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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.



Sunday, May 6, 2007

HOTS Weekly Options Commentary

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Pete Stolcers

Last week started off on a sour note. Many of the overseas markets were closed Monday and Tuesday and we did not have their strength to forge a path higher. Monday was a quiet day and the market drifted lower. Tuesday, the bears tried to get something going but by midday the market reversed and closed on a high note. The next three days all had positive price action and the S&P 500 made another multi-year high. It’s now within striking distance of an all-time high and that can be seen in this week's chart.


On the economic front, there were a number of releases that collectively had little impact on the market. Productivity was up, unit labor costs were down and average hourly earnings came in lighter than expected. A higher than expected ISM number offset a slight increase in the unemployment rate. Next week's economic highlights include the FOMC meeting on Wednesday and the PPI on Friday. I expect the Fed to stand pat and for the rhetoric to remain unchanged. The Fed has confirmation that the economy is slowing and that inflation is rising. Both conditions are offsetting (from an interest rate perspective) and a monetary policy change cannot be justified at this time. The PPI is likely to error on the high side; however, the market should the able to shoulder that news as it has in recent months. In conclusion, ignore the “noise” created by the economic releases.

Earnings, M&A and share buybacks are propelling this market. Last week, cyclical stocks with international revenues posted very strong earnings. The biggest merger news came Friday when rumors circulated about a potential Microsoft/Yahoo marriage. The market placed greater importance on that event than it did on the weak unemployment number. This week we will see the last big round of earnings announcements and here is a sampling of the companies that are about to release their results:
AMT, NILE, WYNN, FLR, MDR, MCK. MLM, MVL, HSIC, TYC, CSCO, ERTS, PCLN, ENER, LEAP, FWLT, LM, TM, ONXX, TXU, FLS, TK, WFMI, KG, LAMR, PDX, PDE, NVDA, AIG, GG.

There are a number of stocks that I like in the above list; however, these companies don't pack the punch needed to have a major market impact. All things considered, the market needs to take a break and I believe that choppy trading lies ahead this week. Most of the earnings are out, we don’t have end-of-the-month or option expiration influences and the economic news is relatively quiet. Many traders will have their golf clubs packed in the trunk in case the activity slows down. This might sound like a joke, but it really happens. Traders would rather golf than force a bad trade in quiet markets. Chances are a deal or two might get the week started, but then everything will calm down ahead of the FOMC. Once that passes, things are likely to settle down again. This week I want to look at two pharmaceutical stocks.

Monday, April 30, 2007

HOTS Weekly Options Commentary

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Peter Stolcers

In last week's commentary I mentioned that the market would be influenced by earnings releases more than by economic data. Currently, 50% of the S&P 500 companies have reported. The earnings growth rate for this quarter stands at about 6% which is significantly higher than the forecasted 3.5%. The market responded by making new multi-year highs and even tech stocks participated. Cyclical stocks led the way and it’s apparent that the US economy is lagging the rest of the world. Companies that generate substantial revenues overseas fared the best. They benefited in two ways, they sold their products and services in growing economies and they realized windfall profits when they converted those revenues into US dollars.
The dollar has continued its plunge and it is close to making a new 30 year low. Friday the GDP came in weaker than expected and it showed a 1.3% growth rate in the first quarter when 1.7% was expected. This was the weakest rate of expansion in four years. To make matters worse the GDP Price Index increased 4%, the most in 16 years. Normally, this would raise stagflation worries and the market would have a huge negative reaction. In this bullish environment the market is able to shrug off all negative news.

From an interest rate perspective, Friday's news will not have a material impact on the Fed’s policy. The weaker economic activity would justify easing, while the "hot" inflation number would justify a rate hike. These two conditions offset each other and rates will remain unchanged. Next week the big number to watch will be Friday's Unemployment Report. A rise in the unemployment rate and wage inflation could spark a sell-off. I still believe that earnings will be the focal point and here are a few stocks that will announce earnings:
HUM, RSH, VZ, TSN, ZBRA, APC, MTW, XRAY, VRTX, ADM, MHS, RAIL, MRO, NVT, PG, MET, OII, GRMN, MA, SPW, RIG, TRW, AGN, DVN, NVEC, PRU, TRN, SNY, CELG, OSK, TRMB, WLT, RIO, QLGC, SBUX, EK, WY.

We have positions in a few of the stocks and I believe the earnings will be positive. As long as the earnings keep beating estimates and the growth rate is above 6%, I believe the market will continue to rally. The SPY needs to stay above 143 during the next few weeks for me to justify a bullish bias.

In the chart this week you can see how the market has broken out to new highs. The decline in February was a mere head fake. At the time, I had to play the percentages and trade as if there would be another leg down. With where the positions marked Friday, we are almost back to even and that maneuver simply cost us some momentum. The good news is that I’ve modified the service so that it can be more adaptive and effective.
Relative to last week, this week’s releases will be subdued. There don't seem to be as many market movers. Many traders will have the old adage, "sell in May and go away" in the back of their minds. It is possible that we will get a pullback that will test the breakout. If that price level holds, it will present a buying opportunity.

Wednesday, March 28, 2007

HOTS Mid-Week Options Commentary

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Peter Stolcers


I've been pretty vocal about how the market has discounted every shred of bad news. Even now, as the evidence mounts, the "spin doctors" are looking for a silver lining. Normally, the Fed Chairman has a positive influence on the market. That might still happen today, however, I heard concerns about a slowing economy and elevated fears of inflation. Productivity has slowed and resource utilization is very high. If companies absorb higher costs, the profit margins will be impacted. If they pass on higher costs, the consumer will experience higher rates of inflation. Neither outcome is desirable. I can't wait to hear the first positive twist on these developments. Chairman Bernanke is always very hedged in his statements and there were comments about full employment and a "resilient consumer". He also stated that the recent $2 spike in oil was not factored into his statements and it needs to be. In other words, sustained oil prices above this level could cause them to move rates higher. Gasoline inventories are low and there has been a draw on crude. Driving season is upon us and with the unrest in the Middle East; prices are not coming down anytime soon. The market spiked when it broke above SPY 141 and part of that rally was short covering. As you can see in the chart, we are not able to hold the gains. It is likely that we will test SPY 141 today and we may see a sharp decline. The market has been able to string 3 negative days together and that could be very damaging for the bulls. The bears would prefer to have a steady decline because it is sustainable. The large "air pockets" and snap back rallies are more noise than anything else. If we close below SPY 141 and there continue to be consecutive declining days, get short. The option implied volatilities are on the rise, but they are not expensive. I will buy in my put credit spreads and I will buy puts on weak stocks if that happens. I believe the bears will be able to drive the market lower today.


Monday, March 26, 2007

HOTS Weekly Options Commentary

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Peter Stolcers

The interim commentary last Wednesday explained much of what transpired and the last two days of trading was subdued after the snap back rally. The big drop that we saw in February was caused by uncertainty and now traders feel they have been able to quantify those risks. The 9% drop in the Chinese market was profit taking and now it is back to all-time highs. The sub-prime loan crisis is "contained" and the extent of the losses has been calculated. Inflation is on the rise, but the Fed removed references to tightening. Apparently, this was just a giant hiccup and there is nothing to worry about.

I'm fairly skeptical on all of the points. Chinese investors are bidding stocks up while their government is tightening credit. They are known to be huge gamblers, the valuations are stretched and they have yet to experience a major market decline. The sub-prime loan defaults might be known, but there are a large number of Alt-A loans (Liar Loans) that convert from low fixed rates to ARMS in the next month. Inflation is on the rise and I believe that the Fed changed its rhetoric because it has concerns about economic growth.

I don't like to bring up the "S" word (stagflation) but it needs to be considered. Next week Durable Goods, GDP, Core PCE and the Chicago PMI will help us gauge inflation and the strength of the economy. The only earnings release of interest next week is TIF on Monday. I expect to see the market challenge the old highs, but I doubt it will breakout in the next two months. For it to make new multi-year highs (with follow through) we need to gauge the next quarter's earnings and we need a slowdown in inflation. Lower oil prices would be a great start. As I've stated, I'm market neutral at this level and I won't get bullish until time has passed and the recent decline can truly be considered a hiccup.

The VIX almost dropped to historical lows Wednesday and I'm surprised that the market discounted risk so quickly. The IVs picked up a bit Thursday and it might signify hedging. Contrarians are jumping on the extreme put/call ratios and they are saying that this indicates excessive bearishness by option traders. I don't see it that way. Bearish retail put buying would result in higher, not lower IVs. There is much more option selling taking place than buying. Margin debt is still at the levels seen in March of 2000 and I believe the retail trader is as bullish as ever. Incidentally, the put/call ratios were very high back then too. They have been right so far and I congratulate them.
We are long oil, gold and retail and short tech and newspapers. The chart this week identifies some key levels for the SPY.

Wednesday, March 21, 2007

Options Update

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Peter Stolcers

Ever watched a horror movie where the victim knocks out the villain only to see him come back to life? You just want them to strike the fatal blow while they have the upper hand. That’s how I feel right now. The bears had the bulls on the run, but a flesh wound was all they could muster. If there were a good old fashion correction, I have a list of stocks I’d like to buy at lower levels. I believe there are deep seeded issues that need to be resolved and I will not turn bullish until a few things happen.

First, I would like to see the SPY 141 level hold for at least a month. Second, I would like to gauge the impact of so called Liar Loans (aka “Alt-A” loans) as they convert from fixed to ARMs in the next month. Third, I want to see corporate earnings growth rates stabilize. Earnings are growing, but at a slower rate. The market drop that we have seen the last two weeks seems to be nothing more than a warning shot. I have included some arrows in the chart that help to explain my rationale. The big down day is very visible and to the right of it you can see the first arrow. The market made an intraday low and snapped back before the close. The next arrow is actually quite constructive. The market makes a new relative low and it closes near the low of the day. However, if you look at the next trading day (3rd arrow) you will see a snap back rally. The fourth arrow shows a big intraday drop and another snap back rally by the close. My conclusion is that the bears simply can’t destroy the “bid” to the market. Since the last decline, the bulls have regained their confidence and they know that a push above SPY 141 will create buying pressure.

To add fuel to that fire, most of the other markets are on the rebound as well, and the Chinese market is back to all-time highs. If this market decline were the real deal, we would have seen a number of down days in a row, and there would have been lower relative lows and lower relative highs. This head fake has cost me money, but my psyche is intact. I know that a clear perspective will help me identify the next opportunity and I’ll make my money back. As for today, I’m not expecting anything new from the Fed. The market has the momentum it needs to move higher and a non-event will be spun in favor of the bulls. I’m prepared to sell my puts and go to cash for a while if that scenario plays out. It will be “dead till the Fed” and you should take your lead from the SPY 141 level.

Monday, March 19, 2007

HOTS Weekly Options Commentary

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Peter Stolcers

Last week I did not see the activity on Tuesday's sell off or on Wednesday's rally back to tell me that the lows are in. A "V" bottom will be formed when there is fear and volume on the way down and confidence and volume on the way up. The bears want each market rally to find resistance a little sooner than the time before. Eventually, the market will drift lower and test support. When it fails to bounce after a decline and we get 2-3 consecutive days of selling, fear will set in. We have not seen that yet and bullish speculators have not been scared out - yet. The bid to the market continues to surprise me. Thursday we saw the market rally after a "hot" PPI number. Friday morning we woke up to global market weakness and it looked like we might open lower. The CPI came in "hot" and it exceeded estimates by .1%. Then, consumer confidence fell to its lowest level in 2 years. The market dismissed both economic indicators and staged an early quad-witch rally.

During the week, Norway and Switzerland were added to the list of countries that have recently raised interest rates. If our interest rates remain unchanged (as opposed to going higher), this puts downward pressure on the dollar. Recently, the market has been declining when the dollar falls.

Single digit earnings growth is expected this quarter and the market lacks a catalyst to drive stock prices higher. I feel that the price action is getting heavy and that the market has shouldered all of the bad news it can take. If you look at the chart you can see the SPY 141 resistance level. The longer the market stays below that level, the more significant that resistance becomes. Also note the blue dotted lines in the chart. You can see that the market made a lower low on the second wave of selling and the bounce was weaker. Sellers were more aggressive this time around and they started hitting bids before the market could make another assault on SPY 141. The message is pretty clear to me.

The housing market is weak and with inflation on the rise, the Fed will not be in a position to help out by lowering rates. The slump will have to cycle through the economy on its own. If you're wondering how important housing is to the economy, here is an interesting statistic. From 2001 - 2006, 50% of US job growth came from this industry. That includes lending, sales and construction. Sub-prime may be a small part of the total picture, but there is a ripple affect. There are many more marginal homeowners with adjustable rate mortgages that will convert from a low 3-year fixed rate to an ARM in the next year. This is certain to affect consumption. The economic releases are very light next week and they are highlighted by more housing data.

Monday, March 12, 2007

HOTS Weekly Options Commentary

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Peter Stolcers

The character of the market has changed in the last two weeks. From September through most of February, we experienced a nice, tight upward trending channel. Option premiums dropped to historically low levels and the public borrowed on margin to buy into the global growth story. Along the way, we heard the words “soft landing” over and over again.

Out of nowhere, we hit an “air pocket” and the bid to the market was gone. After establishing a low Monday, the market rallied the rest of the week and formed a “V” bottom. The initial drop tells me that there was a legitimate concern with the Yen-Carry trade. Most of the large brokerage firms that clear hedge fund trades also engage in proprietary trading and they know the risk exposure. On the retail side of the equation, the public was reassured to stay the course. Paper losses were mitigated last week and now retail traders are hoping for another rally to make them whole. I believe a warning shot has been fired and the market will retest the lows from Monday.

The “air pocket” I spoke of is caused by fear and it suggests that liquidity is drying up. A few weeks ago, China raised its reserve requirements. Two weeks ago, Japan raised interest rates and last week the ECB raised interest rates. Domestically, lenders are tightening credit policies after seeing the defaults in the sub-prime sector.

I see two problems. First, traders are over-leveraged. The run-up in emerging markets, the Yen-Carry trade, the premiums being paid in private equity deals and the debit margin carried by retail traders are examples of excess speculation. Secondly, the market lacks a catalyst. Earnings guidance indicates a single-digit growth rate for next quarter and the Fed is not going to ease. A few weeks ago, the path of least resistance was up and that was all the market needed to move higher.

There are three events that will drive the market this week: quadruple witching, earnings from Goldman Sachs, and the CPI/PPI. SPY 141 is a critical level because a number of technical indicators are converging on that point. Some traders will view it as a pivot point to switch from short to long. Last week’s bounce represented a Fibonacci retracement. The rally brought the SPY right to its 100-day moving average and to a horizontal support/resistance level. A close above SPY 141will put me into the “neutral camp” and a pullback will confirm my short-term bearish bias. At this juncture, we have to take our lead from the price action. In very short order, the market will tell us how to position ourselves.

Wednesday, March 7, 2007

HOTS Mid-Week Options Commentary

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Peter Stolcers

The market bounced from an oversold condition yesterday and the retail public was reassured that all is well. SPY 140.50 represents horizontal resistance and SPY 141 is the 100-day MA, both should provide a temporary "lid". If the bulls can't add to yesterday's gains and make a new intraday high after noon CDT, I feel the bears will try to push the market lower into the close. Higher oil prices and the Beige Book (11:00 am PST release) could provide headwinds.

Editor's note:
This note was emailed to our HOTS Subscribers at 8:00 pst.

Saturday, March 3, 2007

HOTS Weekly Options Commentary

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Peter Stoclers

Earnings are good, the economy is strong, employment is full, the P/E ratios are in-line… The stocks that looked good a week ago still look good and they are cheaper. What could possibly cause the market to go down? In a word – fear.

When traders are over-extended, they can’t take the heat when the market starts to fall. That is a classic shakeout. Most people think… well I’m in it for the long haul and I’ll just ride it out. That mentality works for the first 10% move. By the next 10%, they are nervous and they are out. A big decline with a “V” bottom becomes a mere blip on the radar screen of a 10-year chart. However, seasoned traders look at those blips and remember the blood that was spilled.

Such was the case in 1998. I had grown one of the largest option order desks in the country and I had thousands of option traders using our services. The economy was strong, the earnings were good, interest rates were in line and the internet was creating a buzz. Out of nowhere, we had a big rally to new highs and a sharp reversal. Sound familiar? Everyone looked at the fundamentals and took comfort knowing that everything was still intact. It seemed that a hedge fund had lost some money. Initially, everyone thought… so what, it’s one hedge fund. The stock I liked yesterday is the same today, except it is 5% cheaper. Two brilliant men created the hedge fund in question and it was called Long-Term Capital Management. They were both founders of the modern day Black-Scholes option-pricing model (Robert Merton and Myron Scholes). They had a very “conservative” arbitrage model and brokerage firms felt very comfortable letting them leverage the positions. In 1998 one of the wheels came off when Russia defaulted on their debt and the whole house of cards came crashing down. The ensuing sell off in 1998 was huge and the SPY fell 25% in two months.



Prior to the hedge fund collapse the market had been on a steady four-year climb. You could throw anything at it and it wouldn’t go down. Mind you, the SPY was still 25% below the 2000 high and it had a long way to go.

Fast forward to 2007.

The Yen-Carry trade borrows cheap money by selling low yield Japanese debt. It then uses the proceeds to buy other assets with higher yields. Last month, Japan raised interest rates. Consequently, the loan is still cheap, but getting more expensive. On the other side of the trade, the higher yielding assets that are denominated in other currencies started to take heat. As the trade unwinds, the first traders to hit the exit sell their higher yielding assets. With every trader that unwinds the trade, those assets get cheaper and the squeeze is on. This trade has been leveraged at a ratio of 15:1 and as the asset prices drop, liquidation is force to cover margins. Currently, there are more hedge funds than ever.

Did you realize that retail margin debits as a percentage of the account balances are at the levels seen in the year 2000? Your fellow trader is leveraged up to his eyeballs and I sense a shakeout. This is a time to be balanced and to keep a portfolio of longs and shorts. If you are over-exposed on the long side, reduce your risk exposure.

After the dust settled in 1998, there was a great buying opportunity and the SPY went from 95 to 140 in less than a year. The take away is that the market was a good buy in 1998 at 125. However, if you were an option trader, you blew through your capital and you never got a chance to participate.

Now let’s talk about us. This was a brutal week. We got into our new options trades on Tuesday and we were stopped out within a day or two. Our existing longs that were making progress also stopped out for losses. In the spirit of the report, this is not supposed to be an in and out service with continual adjustments. I felt that I needed to let the stops and targets work as they were designed to. My biggest error was not being persistent in having a hedged position on at all times. In the four months since inception I have always had at least 2 or 3 short positions on. During the rallies, one by one we were getting picked off and the hedges were costing us money. Even worse, once we were stopped out, we no longer had protection.

This was the largest drop since 9/11 and the Weekly Report did not suffer a big draw down. I hate giving back profits, but these events happen and they can’t be predicted. In the long run, it will set us up with some great trading opportunities on both sides of the market and the profits can come quickly. We are very liquid and we will be trading form a position of strength. Before the market gets better, it will get worse.

In the next week or two, we are going to be looking for longer-term entry points. We are going to distance ourselves from the market and we will keep our powder relatively dry. As the market compresses and the lows are established and tested, I will start layering buy stop orders so that when the market rebounds, our orders will be executed on the way up. I still feel that the earnings are good, interest rates are relatively low, employment is robust and inflation is in check. This is also the third year of a Presidential term and that has historically been very bullish. If I had to pick support levels, I would say SPY 132.50 and then SPY 125. The missing piece of the puzzle is the leverage used by the hedge funds. We don’t know that answer, but the brokerage firms that clear their business do. Come to think of it, those same firms have proprietary trading operations. I’m sure there is a “China Wall” between those divisions and that information is never shared – not. They know the “panic levels” and someone will get hurt. We’ll let the charts be out guide.

Friday, February 23, 2007

HOTS Weekly Options Commentary

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Peter Stolcers
February 23, 2007

The market was virtually unchanged last week. It is in a two-steps-forward/one-step-backwards mode. Over 90% of the S&P 500 companies have reported earnings and they have been positive. The earnings growth rate is just under 10% and the guidance has been good. The inflation numbers were released last week and the CPI came in a little “hotter” than expected. Humphrey-Hawkins and the FOMC meeting two weeks ago left interest rate sentiment “status-quo”. The market is flat and it lacks a catalyst. One could argue that we keep making new highs and the market is moving, however, the moves are relatively small and they lack follow through. The economic releases next week (Durable Goods, GDP) have recently produced minor reactions. From a technical perspective, you have to buy the dips and sell the rallies to make money. Next week, end-of-the-month buying should support prices. The easy money in this market has been made and the market will settle into its normal choppy mode until a material piece of news generates a breakout or a breakdown. We will continue to look for bullish opportunities since all of the major support levels are intact and the trend is still up. In this week’s chart you can see those support levels are converging at SPY 141.

Saturday, February 10, 2007

HOTS Weekly Options Commentary

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Peter Stolcers
February 10, 2007

Last week there were only a few economic releases. Productivity rose 3% and unit labor costs were only up 1.7%. Workers are being paid more to produce much more and those statistics could be used to defend concerns over wage inflation. The Senate passed the minimum wage proposal by a landslide last week and the impact of rising hourly wages will be debated in future months. Fed official William Poole stated that economic growth is sustainable and inflation is largely in check. His comments set the stage for Chairman Ben Bernanke who will deliver the Fed's formal economic forecast to Congress when he testifies on Fed Monetary Policy next week(better known as Humphrey-Hawkins Report delivered semi-annually). That testimony will be the economic highlight next week, but there are a number of key reports including: retail sales, industrial production, housing starts and PPI.

Mid-day Friday, sellers came in and drove an otherwise flat market - lower. Earlier in the week, HSBC (the world’s 3rd largest bank) commented that it would take a much larger than expected write-off on non-prime loans. The initial response was contained, but as additional comments came in from other lenders and homebuilders, it was apparent the trough to the housing cycle is far from over. The financials and housing stocks were hit hard. Then, Micron Technologies (MU) warned of lower DRAM and NAND prices and the tech stocks joined the decline. From a technical perspective, the chart shows the long-term strength of the market. We will respect Friday’s price action and acknowledge that a 2%-3% retracement is overdue. However, we will place greater importance on the long-term trend.

In this week’s HOTS Report, we will position ourselves on the bullish side of the market while keeping our distance. The implied volatilities are still near historic lows and the VIX was only up marginally on Friday. We will sell put credit spreads on two stocks that have relative strength and well-defined support levels. One is a major financial institution that just announced an enormous buy-back and the other is one of the fastest growing gold producers in the world. We will also scale into a call position on a stock that has strong momentum and just broke out. Profits are on the rise as it caters to the rich, generating half of its revenue from Asia. If the market pulls back, we will add to the position. If the market rallies Monday, we’ll be satisfied with what we have.

Sunday, February 4, 2007

HOTS Weekly Options Commentary

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Peter Stolcers
February 4, 2007

Overall, the economy seems likely to expand at a moderate pace over coming quarters… some tentative signs of stabilization have appeared in the housing market… readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time… however, the high level of resource utilization has the potential to sustain inflation pressures." These were the Fed’s comments. Last week, a 3.5% GDP growth rate was much stronger than the 2% recorded in the third quarter, and it handily beat the 3% expected by economists. The jobs number on Friday was in line and average hourly earnings increased by less than expected. These economic highlights pushed the Dow Industrial and Dow Transport averages to new historic highs. Monday, the ISM is released and it is the biggest number in a “light” week. On the earnings front, the news was good last week and cyclical stocks rallied on strong numbers. New earnings releases are starting to tail off and here are a few highlights for next week: HUM, ISE, DVN, AET, BRCM, WLT, and PNRA. From a technical standpoint, the SPY made a new multi-year high and it is grinding higher. Tech stocks are not participating, but that can change quickly. A strong economy and solid earnings will keep a bid to this market. It may not run higher, but at very least, it will maintain this level until something changes.



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