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  • Slump & Jump
    There was a notable development in a shift in the pattern of the response to earnings reports from simply ‘sell the news” to sell the news and then buy the stock right back up to the report levels. This post earnings “slump and then jump” occurred in IBM, Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG) and all may now offer short entry points as the gaps are filled.

    The overall price action has been pretty positive over the past week with the S&P 500 both a pushing through both the 50-day moving average and the psychological 1100 level. A reclaiming of the 200-day moving average at 1120 would begin to form the right shoulder of an inverted H&S pattern that could be the base for a new leg up towards the 1200 level.

    But with fear still lingering in the wings as evidenced by the relatively elevated level of the VX and the skew of its futures, and markets increasingly dominated by a variety of program trading, the resumption of a steady trend higher might be hard to come by during the slow summer months. I will be looking at an iron condor in the Spyder Trust (NYSEARCA:SPY) on the premise that the market will remain between 1050 and 1130 for the next few weeks.

    I will also be looking to establish some bearish positions off the slump and jump patterns described above. I will likely be using credit call spreads as the strategy as I think it will be case in which upside will be limited rather than an imminent sharp decline.

    Given that I am looking at adding some trading shorts in individual names I will likely look at using the weekly options in SPY to get some upward exposure to hedge against a sharp rally in case money starts flowing in.

    Disclosure: None
    Tags: IBM, AMZN, GOOG, SPY, Options
    Jul 26 2:54 PM | Link | Comment!
  • Nolte Notes for the week of July 26th 2010
    Fed Chief Ben Bernanke when it came to whether the Fed was going to be able to provide additional “help” to keep the economic expansion going. Given the large decline once he began speaking, investors figured the Fed was out of bullets. Hoping for another “quantitative easing” to help alleviate all that ails the economy, investors reacted to his testimony indicating that Fed members were still very concerned about not only the lack of improvement in the US economy, but the implications for a slowing international environment. Specifically, Bernanke said that he believes that right now the outlook remains “unusually uncertain.” Little more could be said about housing, from a very poor showing by homebuilders to modestly better data on existing home sales (likely boosted by the ending of government support). Better data from Europe and continued “better than expected” earnings were enough to push markets higher on the week and after a poor last week, you have to ask yourself – do you feel lucky?

    The better than expected earnings and good economic data from Europe (ours remains merely OK) put investors in a happy mood and pushed the averages above their mid-July peak, effectively breaking the stair step pattern discussed last week. As much as I would like to get excited about the markets, a move above the 1120 area would set the stage for a rally toward 1200, while a stall at 1120 could set up another round of backing and filling toward the lower end of the recent range (roughly 1050). There is a bit of good news for seeing a continuation to the rally, as many of our longer-term indicators have turned higher from low levels. Different than the daily net number of advancing stocks, I also look at the net number on a weekly basis and that is at a new high (the daily not yet), indicating that with all the daily volatility, on a week to week basis more stocks are rising than falling. The bits of good news doesn’t mean straight up or for that matter that stocks will behave better, but it is possible to see a more positive bias over the next few weeks.

    Yields hit their low for the week just after Fed Chief Bernanke indicated that the economy remained unusually uncertain (as opposed to usually certain?), however by the end of the week declined a bit as the equity markets took center stage. The big question from the testimony to Congress was whether the Fed could do anything more to spur economic activity. While Bernanke indicated that there was, many believe they are at the end of their rope – and all that is left is hope. At the end of the day, interest rates are not likely to be rising anytime soon, as overall economic growth will be muted for quite some time – until the debt overhang can be cleared and economic activity can return to “normal”. Unfortunately that is likely to be a few years rather than a few months or quarters away.

    The market move of last week put not only the utility averages near the top but too the telecom sector, both of which had been trolling the bottom of the pile since the markets put in their “big” bottom in ’09. Also of note was the moving down of the SP500 group over the past few weeks relative to all the groups, which means that the rally is encompassing much more than the largest stocks. Finally, before getting to the underlying sectors, it should be noted that along with the SP500 moving above (just barely) the average of the past 200 days, so did small cap, emerging markets and REITs, an indication that just maybe the corrective move from the April highs has run its course. While the basic material sector was clearly the star of the week, moving up over 8%, with many of the sub-sectors jumping more than 10%. Word that Europe’s industrial picture may not be so bleak spurred the group and if “sustainable” gets reintroduced to investor’s lexicon, the sector could once again lead stocks higher. Finally, the group that everyone loves to hate – housing – remains near the bottom and showing little overall strength. Housing weakness has also hurt the home repair retail stocks, as Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) have dramatically under performed the market since the April highs.

    The equity outlook may have brightened some given the strong week, however another hurdle needs to be cleared at roughly 1120 on the SP500. We may step gingerly back into equities as the week unwinds, unless trading once again gets ugly. Given the now weaker dollar, international may once again prove profitable. Bond investors should be buying 7-10 year maturities for income as well as some appreciation as rates may not yet have bottomed.

    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
    Jul 26 2:50 PM | Link | Comment!
  • Nolte Notes for the week of July 19th 2010

    The summer vacation is off to a great start, all the bags are stowed and it has been a smooth ride so far, then – seemingly out of nowhere a tire blows out. You know it is going to take the better part of the entire week just to settle back down!! The equity markets were on cruise control, up over 5% for the month and six/seven trading days in a row, then Friday’s fall of over 250 points that ruined the weekend mood. The question facing investors now is whether Friday’s decline was just a correction of the recent gains or the beginning of something more sinister. The economic data was decent, with jobless claims falling to their lowest level in nearly two years (but that may be clouded by the lack of the usual auto shutdowns). Inflation remains under wraps (fears of deflation?) and capacity expanded modestly. The big news of the week was earnings, where corporations were beating estimates regularly (sounds like Lake Wobegon – where everyone is above average). However the financial sector failed to inspire, including the Goldman Sachs settlement with the SEC. Housing data is on deck for the week and may help answer the summer drive (economic recovery) question: Are we there yet?

    There are a few characteristics of the markets that are beginning to give investors some pause. First is the recent dynamic of lower highs and lower lows in the SP500. Essentially a stair step lower that began with the April peak and first stopped with the “flash crash”. Thursday’s peak (1096) could mark the fourth peak that cannot be surpassed in subsequent trading days. The downside “target” of roughly 1010 in the SP500 is the most recent lower low that needs to hold in order to break the pattern. I have griped about volume as well or more accurately, the lack of volume. However, since June first, volume so far this summer has exceeded that of the past three summers, so the “summer lull” is less in evidence this year than in the recent past. One thing to note about the volume so far, adding to the concern about the stair step pattern: volume has been regularly expanding when the markets decline and contracting when the markets advance. The positive volume pattern ended in April/May and has followed the markets stair step pattern lower ever since.

    Bond investors remain a happy lot, as 10 year yields once again crossed below 3% as the equity markets sold off. With near deflationary reports on prices reported last week and a still moribund housing market, Fed officials have been maintaining their “low rates for the foreseeable future” stance on interest rates whenever they have had the opportunity to discuss when they may actually raise rates. What is striking with this recession/recovery period is the still very poor economic data so far after the onset of recession. Officially, we are into the third year – at which point we should be seeing a more improved employment and corporate environment. If we look REALLY close, we can see some improvement, however it is not enough to get the Fed to move rates from near zero.

    Overall market valuations may not have hit final bottom, but there are plenty of individual stocks that are beginning to show up as inexpensive and could provide solid total returns over the coming years – no matter the investment environment. One behemoth is IBM, due to report earnings this week. Today’s price is nearly the same as 10 years ago, although earnings have more than doubled and dividends have increased fourfold. Johnson & Johnson has similar statistics, with a current price to earnings below the average of the past 15 years. The financial markets are beginning to do their job of discounting stocks to attractive levels that can provide good long-term performance, while maintaining enough volatility and concern over the short-term that keep investors away. When looking at the industry group rankings, the best performing sector is now utilities, a group highlighted a few weeks ago as one place investors are “hiding” from market volatility. The last time utilities were at or near the top, they held on for nearly two years (during 2007-’08). Whether to recent climb of this group to the top of the pile is foreshadowing additional problems with the markets remains to be seen; but for now, investors are happy to be in the least volatile portion of the markets.

    Earnings and housing will be the focus for the week. Friday’s thud may cloud trading early on Monday, but so far there have been few things to cheer and equity investors are taking more money off the table. Bond investors are doing the limbo – how low can they go? Given the backdrop so far, we expect lower still – until we get solid and stronger economic data. For now, I’ll keep some powder dry and wait for better prices.

    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
    Tags: IBM, JNJ
    Jul 19 4:37 PM | Link | Comment!
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