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  • Nolte Notes for the week of September 7th 2010
    Seasonally the weakest part of the year, especially during mid-term elections, put on show after a weak start on more “better than expected” news, especially from the much analyzed employment report. Adjusting for the reduction in census workers, the economy showed modest job growth – more than expected – giving investors reasons to cheer and economy that may be coming out of its summer torpor. Looking a bit deeper into the various reports last week some inconsistency in the reports. For example, in the supply management reports, employment was showed as declining in the service sector (60% of the economy), while rising modestly in manufacturing. Job gains in the service sector continued to be from the government, not necessarily helpful for a sustained recovery. The unemployment rose as more workers were spurred to look for a non-existent job, yet the financial markets were excited about the still below ~150k in new jobs to keep the unemployment rate unchanged. Even accounting for the census workers, the job growth this year has been just above 90k/mo, still more than 50% below necessary job growth. Not a pretty picture.

    By the end of the week, the markets had increased by over 5% in just four trading days, although on diminished volume (again). However, by Friday the market internals: net advancing volume and number of stocks gaining were the strongest since the March ’09 bottom. Unlike 18 months ago, volume is contracting instead of expanding and rallies have been short-circuited by selling as the markets approach recent highs (around 1150 on SP500). The summer peaks (hit twice) of 1125 are more the more immediate target, that if cleared then the next two likely targets would be 1150 and 1200. The good news is investors are actually getting more bearish as the markets rise, as Investor’s Intelligence bullish percentage is at its lowest level since (drum roll) March ’09. It is too early to put all the eggs in the rally basket, however the nearly year trading range could be the rest the market needed from the March ’09 bottom and is ready to begin the second leg higher.

    Bonds have been bouncing violently over the past two weeks, from 2.7 to 2.5% on the 10-year bond as bond investors seem to be getting increasingly nervous about still lower rates ahead. Combined with the strong equity markets: bonds were sold and stocks were bought last week, plain and simple. What is interesting is the bond model remains in positive territory, indicating lower yields ahead. There are a couple of trigger points that would turn the model negative after a 25-week run of positive readings. The 30-year bond’s yield would have to rise roughly 6 basis points, a 5% decline in utility stocks and a roughly 3% correction in corporate bond prices. While those may not occur next week, a persistently higher equity market could force investors to rethink their “comfortable” bond holdings and force the above to occur.

    Most groups did better than the broad indices as is usually the case when you get more than 9 stocks up vs. one down as was the case a couple of days last week. Some notable moves into the top decile include gold, real estate and water stocks. The bottom decile saw some improvement in housing related, including retail and materials/fixtures. However outside of some modest changes over the past couple of weeks, very little has really changed. If there were one area that I could focus upon it would be healthcare, as the sector continues to fall in the rankings and every sub-sector lost ground, with not a one ranked in the top half. At some point these groups will improve, but for now the focus is on industrial and material stocks when the markets rise and when the markets decline consumer and utilities improve. While there are a few stocks that “look” good in the healthcare group, many are fundamentally strong. All that is left is for more than just one or two stocks to act well to get the entire sector going.

    The stock market is making another run at the recent highs, but still within the trading band that has defined the past year. The fervor of last week may mean the markets finally break to the upside, however better to be patient than hasty. Bonds may have put in a short-term yield low, but here too time will tell if the recent data is strong enough to force bondholders to sell and either sit in cash or convert to equities. Too early to buy long-term bonds – new purchases keep to 3-5 years.

    The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

    Disclosure: None
    Sep 07 9:55 PM | Link | Comment!
  • Starting to Pop

    A push through the 50 day moving average at 1080 and now a clearance of the 1100 level it appears that the S&P 500 index wants to place an assault on the 200 DMA at 1115 level.  With the catalyst of the Potash proposed takeover providing a reminder that big moves can come at anytime, and option expiration on tap, we may have enough fuel to ramp right up to the 1130 level by the end of the week.  

    Volume in August expiration, which are a de-facto weekly options at this point, is starting to heat up especially in the Spyder Trust (SPY) as the $110 line has now traded 60,000 calls and 45,000 puts which represents nearly two-thirds of the existing open interest.  The strike of peak open interest is the $112 call with over 175,000 contracts still open and if that line gets crossed then those short call premium will be forced to defend the positions (ie buy futures to hedge or cover) generating additional upside pressure. 

    The bond market has really been a house of pain for many this week as calls for a top or rise in rates have not only been premature but way off base.  Option activity in the usually sleepy bond related ETFs such as Barclay’s iShares (TLT) and double inverse  Proshares Ultrashort (TBT) have exploded over the past two sessions averaging 4x their daily volume.  Today it looks like people pressing some bets that interest ratesmust turn higher at some point.  Even after yesterday’s monster move which dropped yield on the 10-year down below 2.5% at one point, and shares of TBT, which move in the inverse of bond prices, down some 3.5% to a new 52-week low, there is very active call volume today—calls will increase in value as yields rise. The volume leader is the Sep. $33 call which has traded over 21,000 contracts, mostly in sub 500 contact lots and the flow being two sided with 54% occurring at the ask.   A more bullish, bet on rates rising occurred March as the $40/$46 call spread traded 5,000x in an opening purchase.   

    Omnivision (OVTI) Technology shares are off 6.2% to $20.90 and option volume is 3x the daily average. Volume leaders are the Sep $21 & $24 calls which have each traded 2,000 contracts,(largest block was 1,800 lot) in looks like a purchase of the spread.  But prior open interest is sufficient to cover and this could closing a bear spread initiated on 8/12 when stock was trading $22.40.  A report from research firm FlyOnTheWall mentioned that OVTI could bee losing some Apple (OTC:APPL) based business to Sony (SNE). OVTI reports earnings 8/26.  

    And for those that find today’s action too much to handle but need to look busy there is no shortage of dividend plays.  Some names going ex-dive tomorrow seeing huge volume of ITM calls include, HSBC,Teekay Shipping (TNK) and Maxim Integrated (MXIM).  Again, a dividend play typically involves buying an ITM call spread, excercising the lower strike in order to qualify for the pay out, and hoping the that the higher strike sold short is not assigned.  Typically less than 1% of the ITM options are allowed to “skate free” so between transaction and carrying costs, which in this case is only a few days, these dividends are usually more busy work than anything else. 

    Disclosure: Long Spy
    Aug 17 10:31 PM | Link | Comment!
  • Bond Boom
    The standout item on the board this morning is the booming rally in the bond market as yield on the 10-year note has dropped to 2.61%, the lowest level since March 2009. Could this be a blow-off or capitulation top? Not sure but I will be adding a little bearish exposure this morning on the theory that rates can only go t zero so my risk is limited.

    Related, gold is up another $10 and seems destined to make a run towards the old high at $1265 but is still facing some resistance hear at $1230. I wait on that one and see if the old high come into a play for a possible double top.

    Retail earnings will be taking the spotlight today and they present some opportunities in individual names but I’ll be cautious about pre-earnings plays and would rather be reactive and look for overdone moves that create attractive entry points.

    I expect volatility to continue drift lower for the remainder of the summer if the skew gets large enough, that is later dated options carrying big premiums over the front month, may look at selling calendar spreads as means to get short theta but long gamma. This might work well in the Spyder Trust (SPY) if the market can continue to occasional deliver 2% plus daily moves within the broader trading range.

    One name I’m eyeing for a new bullish position is Vecco Instruments (VECO). The stock looks oversold and should find support near the $31 level. I’ll be back with an expanded analysis and any specific strategy taken.

    Disclosure: long tlt
    Tags: SPY, TLT, VECO, Options, bonds
    Aug 16 11:40 AM | Link | Comment!
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