Here Comes a Wave of Market Moving Data

by: Philip Davis

Starting Tuesday we can expect a wave of market-moving data. At 8.30 a.m. it’s the PPI and Retail Sales. The keynote speech given by Steve Jobs at MacWorld will be Tuesday also.

On Wednesday, we will see CPI and Core CPI as well as Industrial Production, Capacity Utilization and the Fed’s Beige Book. The overwhelming sentiment is favoring an early Fed cut and we don’t believe the Fed can get ahead of the all-important CPI and PPI reports. So let’s remain especially vigilant on Thursday and Friday of this week.

Options expiration already causes havoc with stock prices as stocks are pushed up or down to avoid or force assignments (well theoretically that doesn’t happen but we know in practice it does! Just take a look at the pinning action on Google (NASDAQ:GOOG) 2 out of every 3 options expiration periods for evidence).

By announcing during these two days, the Fed will have its greatest impact on stock prices and investor psychology. Many are suggesting the Fed is behind the curve, but remember the Fed has never failed to placate the market no matter what the comments and this is their chance to save the markets again so it will be surprising if we don’t see a half point cut. If it happens this week, many of those commentators will be eating humble pie!

As we can see from the chart below, the NASDAQ is still hovering around its August lows but had a strong gain today. The gains today were largely attributed to IBM’s (NYSE:IBM) pre-announcement. It seemed a little strange that IBM felt compelled to pre-announce ahead of its earnings report, but it was particularly interesting to note how the stock failed to gather steam throughout the day despite the rest of the market moving incrementally higher all the way through the day. In fact, IBM opened quite strongly at $105.01 and rallied to $105.59 but closed lower at $102.93. That action produced a black candle on the chart below which tells us that conviction in the bullish move was muted. It also makes us question the thesis that IBM was the catalyst that moved the entire market higher today. Perched on support levels, it’s impossible to tell whether the bottom has been hit but we are missing ingredients that are usually needed such as capitulation selling and convincing high-volume bullish rallies.

Nevertheless, IBM had a great quarter led by its overseas business. This would lead most to view Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT), both of whom have large overseas businesses. Intel has been hurt the most due to recent ’semi’ downgrades. INTC was trading at $27.50 just two weeks ago and until today it was trading near $22.00! That was a 25% haircut in no time flat! Monday, INTC finished higher by $1.09 to end the day at $23.08. The speed of the decline was such that it is very dangerous to get bullish on this stock now. The 60% margins that the street typically looks for from INTC are undoubtedly high and getting ahead of its earnings report is a gambler’s game. It’s much easier to game stocks after earnings when a direction is clear. For example, IBM has now proven that its prowess in growing in a global economy. As a result, some longer term bullish positions might be appropriate. Our preference, however, is not to commit much new capital until this week’s data has been digested.

The (NYSE:NYX) continued its strong move from last week, which enabled us close our positions on the Advanced Calendar Straddle we issued just over a week ago. We will be watching this stock very carefully to see if the $85 level can be maintained, which would result in the bull put we also have on NYX expiring worthless. We expect volatility this week so the only price that would cause us surprise is if NYX remained at $85.

From the chart below you can see that Ceradyne (CRDN) has become trapped between contracting Bollinger Bands. In the past, a big move soon followed such contractions and we would be surprised to see the stock remain stagnant for much longer given that so many stocks will be reporting earnings in the next few weeks. Ceradyne itself will be reporting at a later stage, so even if the current wave of data doesn’t move the stock, we expect earnings will be the catalyst to future volatility and have already positioned ourselves for such a move.

With fears of recession mounting, it’s important to consider companies that will still thrive during the hard times. (NYSE:UNH) is one of those companies. It has pulled back to its 50-day MA today. For those interested in picking up some stock, why not consider instead a January short put at strike 55 for $0.55. If the stock finds support at $55, the short put contract will expire worthless. However, if the stock fails that support level, you will be picking up UNH for $55 minus the $0.55 you get to keep from the short put, equivalent to $54.45, which is approximately $1 cheaper than where the stock currenly resides. This is ONLY a play that would entice those interested in purchasing UNH stock and with the capital to do so.

We wish you a wonderful week ahead!