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.

Gasoline

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Sally Limantour

Gasoline prices are on the rise with prices up another 2.46% today. Nigerian rebellions are increasing and threatens to destabilize the region’s sole source of oil. In addition we have more US refinery problems, threats to European gasoline supplies, talk of Belgium union oil workers going on strike in early May (Belgium accounts for 4% of Europe’s refining capacity) and the current stocks-to-consumption ratio at 21.0 days. This is more than 2.0 days below the seasonal average and below levels that typically follow summer’s peak demand season.

Keep this on your radar - on May 21st Iran will begin rationing gasoline domestically, and shall raise the price of gasoline to the public by 25%. This will undoubtedly get interesting as Iran sits on 10% of the world’s proven oil reserves and yet after 5/21/07 the Iranians will be allowed to only buy less than one gallon of gasoline per day. What will those people do in Tehran and other cities? We can be sure the black market for gasoline which is already a “thriving market” will become more active.

Neurochem (NRMX)

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David Miller

Keep an eye out on Neurochem (NRMX) today. The option prices have been very high on this one because it has become yet another battleground stock in the biotech sector. The company’s Alzheimer drug, Alzhemed, has been derided and praised on Wall Street, and the biotech bulls and bears have been shooting the heck out of one another for months in the name.

This morning the company announced, in quite an impressive press release, that their primary analysis of the trial had failed. They blame imbalances between the treatment arms for confounding the results. They are going to an alternate analysis, which we presume is a Cox regression analysis, that has the ability to account for and correct those imbalances.

The problem is that when a primary analysis fails, the FDA can choose to ignore any subsequent analyses. The company is careful to say in their press release that the Cox analysis was prespecified, but there can be a great deal of variation in what “prespecified” means in terms of what the FDA might accept.

Bottom line is the trial failed at the first look and it will take several weeks to get it straightened out.

Look for options players to start rolling their May positions out a strike or two and for the action in the stock to be wild. Is this the next Dendreon (DNDN)? I doubt it but we have to wait and see what the data are and hope we can get a straight story from management on exactly how “prespecified” this Cox analysis was.

Equity Index Update

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Brad Sullivan

And the Midcap 400 shall lead them. Was it not just 6 weeks ago that the market suffered from an intense bout of “forced” liquidation? Now, here we are looking at new all-time closing highs in the Midcap 400 Cash index and watching the remainder of the indices get within shouting distance of their 2007 highs. The NDX was helped by comments from the CFO of CSCO when he stated that earnings would be towards the high end of estimates during Friday afternoon. The stock immediately shot from 26 to 27 and provided the lift needed to boost the index market on a quiet Friday afternoon.

This morning the indices are called higher based on several factors. First we had strong rallies in the Asian markets and that has carried into European trading. In addition, Sallie Mae agreed to a private buyout that put a nearly 50% premium on the stock. Finally, earnings from two key banks C and WB were much better than anticipated.

Of course, we cannot forget our old friend the currency market which was given the all clear signal from the G7 over the weekend to continue the “carry” trade with abandon. Indeed, overnight the Euro/Yen continued through its respective all time high and the USD/Yen appears not too far behind. This liquidity driven currency trade has produced one of the key elements for tracing index moves both domestically and abroad. Simply put, comments out of the G7 meeting show just how sensitive the central banks of each nation are when it comes to the carry trade. Given the tremendous growth of funds using this trade over the past several years, it is easy to imagine how ugly a liquidation of this trade would end up being for the global markets. Indeed all one has to do is look at charts from last spring and a few weeks ago when hedgies were forced to liquidate positioning under “margin call, gentlemen” types of situations. Nobody wants that again, and the banks appear both coordinated and committed to ensure that the “carry” will not end the game.

This morning there is a potential early setup on the buy side. Even with are sharply higher open, players have been getting used to selling the open and getting long somewhere in the first hour for a walk the line rally. If players get caught trying this and the dealers come in on the buy side, look for significantly higher pricing in the first hour.

Finally, the final 2 hours of Friday’s session produced a significant volume increase in the SPminis and ER2 contract, when compared to their respective YTD and 5 day averages. Considering we settled on the highs of the session, this week looks potentially quite bullish.

Outlook for the US Dollar

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Sally Limantour

The dollar was at this level back in the 1978.. We have tested this area a number of times and there are two predominant perceptions right now.

The dollar will be supported down here. Going back to charts in the 1970’s there have been 4 times we have tested this level and bounced – 1978, 88, 92 and 05.

Here is the logic:

Foreigners currently own roughly half of our Treasuries and securities and are Buying over a trillion dollars worth every year. It is in their best interest to not let the dollar fall much further.

The other idea is that many other countries have interest rates that are higher than the US and their currencies are more attractive.. Britain, Germany, Australia and others are all higher and their ministers of finance are talking more about concerns over inflation and raising rates to control it. The US, however is still hinting at lowering rates in the future to offset a weak housing market.

So this is the dilemma and we have to watch this closely as it will have repercussions for many markets.

While I hold CD’s denominated in different currencies ( as a way to be short the dollar), I am eyeing a potential short term trade of going long the dollar. On Friday morning, looking at the Market Profile chart we had a high level of trade occur at 81850 and I went long. It took off and I aggressively moved my stop up and captured a good part of the move and am now flat.
(see Market Profile chart – look at 4/13 and see where the horizontal line is longest at 81850. It then gapped up and traded crazy before settling at 81950.) This technical set up together with the chatter getting loud on dollar bashing while talking up the Euro (German exporters calling for 1.4000 in the euro) made me get a bit contrary in the morning).

Options may be the way to play this as a way to get long with a good risk/reward strategy. I am still bearish the dollar in the big picture, but it may be overdone and the first perception mentioned may move the market higher.

The following charts are:


1. Long term chart of US Dollar

2. 30 minute chart of US Dollar

3. Market Profile of US Dollar

Timer Digest Change of Market Bias: Going Neutral Tonight

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Fari Hamzei

About 6pm PDT today, I informed Jim Schmidt of Timer Digest, by email, that I have elected to change my market timing bias from LONG to NEUTRAL.

We have prepared a video to explain the reasons behind this change. Due to size limitations imposed by our video distributor, Revver.com, it is in eight parts.

Video Part 1


Video Part 2


Video Part 3


Video Part 4


Video Part 5


Video Part 6


Video Part 7


Video Part 8

NYSE and NASDAQ Markets

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Tim Ord

The NYSE Market:
Below is the NYSE McClellan Summation index and the McClellan Oscillator dating back for three years. The NYSE market becomes overbought when the Summation index reaches above +3500. The Summation index has been in the +3500 range since last October which implies the NYSE has been overbought since last October. Tops form on the NYSE when the NYSE makes higher highs and the Summation index makes lower highs. Recently the NYSE just tested its previous high of late February and the McClellan Summation index is making a lower high for the third time. The next time the NYSE Summation index turns down it will mark the top in the NYSE.





The NASDAQ-100 market:
A similar bearish setup occurred for the NDX. However, we believe a top is in for this index. There is a gap on the NDX near the 1808 level and that level is being tested on much lighter volume and triggering a bearish signal. Therefore is unlikely NDX will rally through the gap level which implies the February high will be the top. The same bearish scenario is present with the NDX McClellan Summation index as with the NYSE McClellan Summation index. The NDX made higher highs as the Summation index made lower highs. After the second lower high turned down on Summation index as the NDX made higher highs produced the sell signal. This sell signal was triggered near the February high. Strongest part of the decline may come when the Summation index turns down the next time.

Timer Digest Commentary -- My 2 Cents

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Fari Hamzei

A very wise woman once told us at a Southern California Technical Analysis meeting: "Trust Your Indicators" (keep that in mind as you read further here).

Well -- Tax Selling started early this week with the FED minutes showing the concerns for future core inflation is on the minds of Board of Gov. of FRB.

I would add this, if the rally we have witnessed from Mid-March was based on a FED rate cut assumption, then with today's release of FED Minutes, further wash out is a given.

Brace yourself and get rid of your least desirable stocks. Keep in mind, the daily and weekly trends are still up.


Editors' Note: This was filed with Timer Digest on April 11th, half an hour before the cash market closed.

Equity Index Update

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Brad Sullivan

The index markets continued to trade in a narrow range with a sustaining bid underneath the current pricing zones. Activity was light as volume flows are running at a -30% clip in some of the indices versus their respective YTD averages. This afternoon will bring the release of the Minutes from the last FOMC meeting and should spark some bit of trading activity. In addition Dr. Bernanke will speak in Washington and Richmond Fed President Lacker will speak on the economy in Charlotte. Given the lack of movement, I have included 5 charts today, 4 of which are focused on the MA % differentials since the start of 2007. The other chart continues to show the strong correlation between the YEN and SP.

Bond Market

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Sally Limantour

Friday’s non farm payrolls number was a bit of a shock and has dashed any hopes of a rate cut in the near future. Revisions of the past two months were strong and the unemployment rate fell to 4.4% matching a low back in May 2001. Interesting too was the strong leap in construction employment in an industry that has negative headlines on a daily basis. Remember that February’s number was quite negative and the 56,000 new jobs created in March construction is most likely an adjustment. The important thing is the trend and the direction for the past three months in construction employment is still down.

As of April 3rd the COT report showed the spec and fund combined net short position of
126,351 bond contracts. We have to assume this position is larger as the market is a full point lower now and it will be important to see the COT report this Tuesday. The 109 level I have been looking for in the Treasury bond futures (USM7) is close at hand and although the COT reflects a large short position amongst the spec community, bond prices can still go lower before a good bounce. In fact, many times I have seen bond prices move an additional 3-4 points even with an extreme COT position.

Talk of interest rate cuts will now be on the back burner as the Fed will remain on hold. Inflation is ticking up and having just returned from the Bahamas where I attended the Natural Resource Summit of the Americas, I am still convinced we are in a major bull market in commodities and this sector will outperform. It is both a supply and demand issue in many of the raw materials and we should see opportunities ahead in the base metals, precious metals, molybdenum (try saying that word three times fast) uranium, energy, alternative energy, water supplies and food. This is a theme I will continue to cover and focus on both in futures and the natural resource stocks.

Looking ahead in bond land this is a slow data driven week with the biggest news coming on Wednesday as the FOMC releases the minutes from March 21. Following this we have Chicago Fed Moskow speak about the US economy, then Thursday’s chain store sales and Friday’s report of the PPI, the Uni. of Michigan Consumer Sentiment and the international trade numbers for February. It is not inconceivable for the 30 year Treasury bonds to trade back to long term support at 108.00.