Stocks Set to Test Resistance

March 7, 2010

U.S. stocks made significant strides last week with all major indices closing substantially above short-term support levels. Responding enthusiastically to increased consumer borrowing and better than expected unemployment numbers the Dow Jones Industrial Average added 122 points on Friday, pushing through 10,500 for the first time since January 20. The S&P 500 added 15 points to close at 1,138, solidly above its 1,100 resistance, and the NASDAQ gained 34 points ,ending just below its 52-week high of 2327.

Accordingly, the week saw the S&P 500 Volatility Index plunge. The VIX has dropped from 20.02 on February 20 to its current reading of 17.69, near its January low of 17. Analysts at Schaeffer Research state “The plunge in volatility has come, of course, on a rally in the SPX, setting up a potential retest of the January highs in the 1,150-1,160 region. The 1,150 level marked highs in early 2002 and 2004, while 1,160 is the site of the SPX’s 160-month moving average, which marked the bear market lows in 2002-2003. Should the SPX rally above 1,150-1,160, the 1,200 century mark would be the next major level for the SPX to overcome, as this is the site of the 80-month moving average and a major support level in July 2008. The 80-month moving average acted as a support after the terrorist attacks in September 2001, and a close below this trendline in May 2002 was a major sell signal.”

They go on to say that with “the VIX declining in 17 of the past 18 days, and SPX chart resistance overhead, there is good reason, from a mean-reversion perspective, for the market to take a breather. But, keep in mind that if you are playing the mean-reversion game, there are periods when the market’s momentum can run the shorts over. This can be powerful for the bulls, as a combination of short covering and investors eventually jumping off the sidelines can provide a powerful one-two punch in keeping the momentum intact.”

They conclude that the current environment continues to favor the bulls, noting that the current rally has come without an increase in bullish sentiment, which “represents potential future buying power, a necessary ingredient to push the market above the chart resistance that lingers just above.”

The performance of our managed portfolios reflects the enthusiasm of the market with our hedged account closing at $1,579,912 and the unhedged account continues to shine, ending at 1,797,588.

 

As usual, you can get more information about our trading strategy at http://optionsprofitzone.com.

Good Trading to All,
Michael

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Historic Moment Despite Lagging Economy

February 28, 2010

The U.S. Hockey team relinquished gold to Canada today but its silver medal, the 37th medal of the Vancouver Games for the United States, made history by breaking the record for total medals won by one nation at the winter games. This is also the first Winter Olympics in 78 years in which the United States earned more medals than any other participant.

The performance also boosted funding expectations for the U.S. Olympic Commitee who had been facing continued fallout from the lagging U.S. economy. With a minimum of 10 years until another U.S. hosted Olympics, the implications of this year’s surprising medal windfall are significant. The USOC announced the signing of a new sponsor deal during the Games with the global energy company BP, while current sponsors including Visa launched campaigns in response to various athletes’ successes.

The optimism seemed to spill over into the U.S. stock markets as, contrary to historical trends, January’s dismal performance was followed by gold medal execution in February. Considering the backdrop of unsettling economic news including European debt worries, interest rate concerns and discouraging growth indicators, the Dow Jones Industrial’s 307 point gain displayed the resilience of an Olympic champion.

With the Olympic fever behind us, the bulls could certainly use some favorable economic headlines to give traders reason to buy. Though there could be increased volatility in the days to come as the major markets bump against upward resistence levels, the technical indicators suggest more reward than risk at this point. Additionally, historical data reveals that the month of March favors the bulls, producing the third-highest returns in the past five years and the second-highest returns in the last ten years.

Our managed accounts continue to produce gold medal returns with our hedged portfolio closing Friday at $1,526,383 and the unhedged account closing at $1,702,821.

Again, we’d like to congratulate the entire U.S. Olympic team for a record-setting performance and a job well done.

Michael
http://optionsprofitzone.com

U.S. Equity Markets Go For Gold

February 18, 2010

After last weeks test of downside support, U.S. equity markets are keeping pace with our Olympic competitors in Vancouver with strong showings in the first sessions of a shortened holiday week. Stocks shot higher right out of the gate on Tuesday, with the Dow closing with a triple digit gain of 169 points. Wednesday, the S&P made a run at overhead resistance and today has broken through 1,100, its approximate 80-day moving average. Stronger than expected data  from the Philadelphia Fed regarding regional business conditions have overshadowed a weak first quarter outlook from Wal-Mart and the Labor Department’s pre-market report that initial jobless claims rose by 31,000, to 473,000 in the week ended Feb. 13. This was on top of an upwardly revised 442,000, in the prior week. Economists had expected claims to dip to 430,000.

Like Shaun White in the snowboarding half-pipe, the market’s continue to defy gravity, ignoring the reality of a slowing recovery. Though several economic indicators are making a positive showing, business leaders report that the numbers do not reflect what they are seeing on the ground. But, for now, the technical indicators point to gold medal performance for equities, with a target of 10,750 for the Dow. Another reversal below 10,000, however, would mean a test of the 9000 level.

Our managed portfolios continue to reach the podium with our hedged account gaining almost $50,000 with a Feb. 12 close of $1,465,264. The winner continues to be our unhedged account which gained over $112,000 with a close of $1,626,264.

We want to congratulate the U.S. Olympic team for its championship performance so far in the Vancouver games and wish them continued success in the days to come.

Michael
http://optionsprofitzone.com

The Dow Dives Below 10,000

February 8, 2010

It appeared that February was going to buck the downtrend that began in January when the first two days of the month produced impressive gains that left the Dow Jones Industrial Average almost 300 points above the emotional 10,0000 level. But Obama’s vow on Wednesday to crack down on big banks initiated a sell-off that continued into Thursday which culminated in a decline of 268 points, closing at 10,002. New banking proposals including the prohibition of commercial banks from engaging in proprietary trading  combined with weak unemployment numbers and European sovereign debt problems increased the fear of investors leading to a reversal of the weeks early gains. The drubbing spilled over into Friday’s trading sinking more than 165 points before a last-minute rally leaving the Dow up 10 points.

Today’s session failed to sustain the bullish rally with the Dow closing below 10,000 for the first time since November 9, 2009 at 9908, a decline of over 100 points. The S&P 500 also turned down with a close at 1056 but held support near 1050. Weekend news that Fed Chairman Bernanke will begin to layout his blueprint for tightening credit heightened the fears of traders adding fuel to the decline. Many analysts agree that if the 1050 support is breached in the next few days, we may be headed substantially lower. The American Association of Individual Investors weekly survey showed that less than 30% of those surveyed describe themselves as bullish on the market. This is the first time since November 2009 that the percentage of bulls fell below 30%. The percentage that describe themselves as bearish rose to 43%, also the highest since November 2009.

Sentiment levels of this nature can often become buying opportunities. This can signal that most of the selling pressure has dissipated. Therefore, it may be too early to sell long positions. However, in this environment, it is prudent to hedge your long positions by selling calls or buying puts. If the S&P penetrates 1040, consider going to cash.

This week’s earnings will include reports from Coca-Cola (KO), Walt Disney (DIS), Pulte Homes (PHM), Auto Nation (AN), Baidu (BIDU), and Pepsi (PEP).

Our managed portfolios have held up well in the face of the dive below 10,000. We are still showing annualized returns of over 50%.

You can learn more about our winning strategy of selling puts and calls by going to http://optionsprofitzone.com.

Drop by and see us,
Michael

Standing at the Crossroads

January 31, 2010

The major stock U.S. stock markets may have reached a crossroads after the Dow Jones Industrial Average posted another 1% decline last week, following its 4.1% downturn the previous week. The 3.5% loss for the month of January was the worst performance for the blue-chip index since February 2009 resulting in downside penetration of its 20-week moving average. My friends at Schaffer’s Investment Research revealed that the technical backdrop has weakened considerably noting that the S&P 500 Index has broken below its 80-day moving average for the first time since the March 2009 bottom. Additionally, “the SPX was pushed back violently after a few attempts to overcome its important 160-month moving average, which is situated in the 1,150 area and acted as support at the 2002-2003 market bottom. At present, the SPX has retreated about 6.5% from the peak highs observed a couple weeks ago. ”

Good news including Ford’s announcement of its first full-year profit since 2005, higher consumer confidence, and Apple’s new Ipad was not enough to offset higher than expected unemployment numbers, concern about slower growth in China and economic woes in Greece. January’s poor showing may not bode well for the rest of the year. Historical data seems to indicate that January sets the tone for the next 12 months. It will be interesting to see if the Dow can hold above the emotional 10,000 support level. If not, we could soon test the primary support at 9,000.

Marc Faber, famed contrarian investment analyst known as Dr. Doom, has recommended pulling your money out of stocks right now, predicting that the S&P 500 could fall as much as 20% to 920. He believes that stocks are expensive due to the absence of a meaningful economic recovery. ” With unemployment staying at a relatively high level and with the revenue being weak, I don’t think corporate profits will be that great in 2010,” Faber said. “Basically, the profits have been boosted by aggressive cost-cutting. The revenue side of corporations is weak.” Faber advised investors to buy U.S. stocks on March 9, 2009 when the S&P reached its lowest level since 1996.

The coming week’s calendar is busy right out of the gate starting with Monday’s economic data, which will include December’s personal income and spending, December’s construction spending and the January Institute for Supply Management manufacturing index. The day will also see earnings releases from Exxon (XOM). January’s auto sales and December’s pending home sales are due on Tuesday, along with earnings from BP plc (BP), United Parcel Services (UPS), Whirlpool (WHR), and News Corp (NWS). Wednesday will bring the January ADP employment report, the ISM services index, and weekly crude inventories. It will also be a big day for earnings with Comcast Corp. (CMCSA), Pfizer Inc. (PFE), Time Warner Inc. (TWX), Broadcom Corp. (BRCM), Cisco Systems Inc. (CSCO), Visa Inc. (V), and YUM! Brands Inc. (YUM) reporting. The fourth-quarter productivity report, and December’s factory orders are scheduled for Thursday with earnings reports from  Burger King Holdings Inc. (BKC), The Clorox Co. (CLX), Kellogg Co. (K), MasterCard Inc. (MA), and Sony Corp. (SNE). We’ll end the week with more corporate earnings and January’s unemployment rate, nonfarm payrolls, and December’s consumer credit report due on Friday.

The numbers for our managed portfolios are still being calculated, though I’m sure in light of the market’s performance we will have lost some ground. I expect that our hedged portfolio fared the best, as it should in the environment we are experiencing. I’ll post them when they are available. In the meantime, keep your eye on the volatility index (VIX) for clues as to the market’s conviction.

To quote Cream’s 1970’s rock standard…”I’m standing at the crossroads, believe I’m sinking down.”

Michael

A Perfect Storm

January 25, 2010

“Earning reports failed to provide much lift, the Chinese are threatening to tighten lending policies, jobless and housing figures disappointed, and the banking sector is worried about President Obama’s financial reforms.” This quote from a Schaeffer’s Investment Research commentary sums up the conditions for last week’s perfect storm that left in its wake the worst week in nearly a year for the Dow Jones Industrial Average, effectively wiping out 2010’s gains.

After positive gains on Monday and Tuesday, the markets were slammed on Wednesday due to renewed economic concerns highlighted by China’s bank regulator, who repeatedly requested that several banks stop issuing loans. His actions suggested that the global credit markets are rapidly tightening which could be the first sign of a reversal of the recent economic optimism. IBM’s forecast for slower earnings growth in 2010 and bearish reports from American Express and Google added to the rising swell of concern. Capping off the wave of discontent was Obama’s announcement of his intent to limit investment activities permitted by banks in what some see as a return to Glass-Steagall style regulation. This caused investors to flee financial stocks, leading the markets into a deeper decline.

By the end of the week, the Dow was down 4.1%, the S&P had shed 3.9% and the NASDAQ had lost 3.6%. A correction should have been seen on the horizon due to the fact that the major indexes had approached major resistence levels in previous weeks. The Dow may be headed for a test of support at 10,000, with downside penetration suggesting a target of 9000. A recovery above 10,500 would indicate a resumption of the primary advance. Respecting support of 1080 on the S&P would be a bullish indicator for the short-term trend of the general market. Recent patterns would suggest positive gains on Monday but negative economic news combined with poor earnings reports could cause the markets to take on more water and sinking to lower levels.

Monday, traders will be looking to reports from Apple (AAPL) who is expected to report earnings of $2.08 per share, above last year’s profit of $1.78. Reports show that despite its solid fundamental history, option traders are betting heavily against Apple. However, it’s common shares were up over $5 at this writing. As corporate earnings take to the high seas this week, Texas Instruments (TXN), DuPont (DD), Verizon (VZ), Johnson & Johnson (JNJ), Yahoo (YHOO), 3M (MMM), Amazon (AMZN), and Microsoft (MSFT) are among the many companies expected to report.

Monday and Tuesday, December’s existing home sales and January’s consumer confidence index will be released. The Fed’s decision on U.S. monetary policy will be announced on Wednesday, along with December’s new home sales and weekly petroleum supplies. Friday ends the week with advance fourth-quarter gross domestic product (GDP), the January Chicago purchasing managers’ index (PMI), and the January University of Michigan consumer sentiment index.

Our managed portfolios have lost some ground due to the market declines, but are still showing tremendous returns on an annual basis. We ended the week at $1,420,209 and $1,548,488, respectively.

Happy Trading,
Michael

Dow Hits 15 Month High

January 13, 2010

Stocks recovered nicely from Tuesday’s negative response to lower than expected earnings from Alcoa and Chevron’s warning of expected shortfalls with a 53 point climb to a new 15 month high. After a mid-morning sell-off the blue chip index turned sharply after investors considered the testimony of several top banking executives on Capital Hill which included the CEO’s of Goldman Sachs and JP Morgan. The Dowe topped the 10,700 market since September 2008. Merk led the pack after an upgrade by Credit Suisse who moved its target price from $35 to $47 per share. The S&P followed with a gain of 9.5 points to close at 1145 within reach of its 1157 resistence while the NASDAQ broke above its 10-day moving average closing at  2307. All eyes are on Intel’s earnings report on Thursday for clues as to the strength of the economic recovery.  A positive Intel number may be just what the Bulls need to move this market through near term resistence.

Crude oil dropped for the third consecutive day reversing a month-long uptrend after stockpiles of crude and gasoline grew by more than analysts predicted suggesting that consumer demand remains weak. Gold moved higher in response to a weaker dollar to close at $1136.80 per ounce, a gain of $7.40.

As promised, I am posting Friday’s closing values for our managed portfolios which came in at $1,452,645 and $1,602,701 for our hedged and unhedged portfolios.  This represented a gain of $12,448 and 24,659, respectively.

For more info go to http://optionsprofitzone.com.

Michael

The Bulls Have It

January 10, 2010

Stocks celebrated the New Year by posting a 1.5% gain on its first day of trading before settling in for the rest of the week, ending Friday only 35 points higher than the Monday close. The Dow Jones Industrial Average finished the week at 10,618, well over the 10,500 resistence level which was penetrated on December 14 with the S&P settling above its resistence of around 1120 with a close of 1144. Encouraging words from the Fed and Treasury regarding keeping interest rates low offered traders reason to remain optimistic which led to Monday’s impressive move which broke through muti-month highs. Even Friday’s disappointing December unemployment number couldn’t hold back the charging bulls. Potential resistance for the S&P 500 is at 1,157.80 with major resistance at 1300. The first sign of resistence for the Dow Jones Industrials is at 11,000.

The Financial sector looks to improve in 2010 after rallying 6% for the week pushing through stiff resistance. Technology stocks continue to dominate Wall Street evidenced by the Nasdaq soaring 2.1% for the week. The Internet sector remains one of the strongest with the Internet HOLDRS Trust (HHH) gaining more than 69% during the past 52 weeks.

Fourth quarter earnings will take the stage in the coming week with Alcoa (AA) reporting on Monday. Additional earnings from KB Home (KBH), Intel (INTC), and J P Morgan will be reported throughout the week. Economic news will include December retail sales on Thursday with Friday reporting the December CPI, capacity utilization and industrial production, the Empire State manufacturing index and Michigan’s consumer sentiment index.

The data from our managed portfolios was not available when I penned this commentary. I will post it when I get it.

In the meantime, Happy trading.

Michael

Optimists, (Sub)Prime, and the Lost Decade

January 3, 2010

Optimism about the economy’s recovery propelled U.S. stocks to close the year with their best annual gain since 2003. For 2009, the Dow Jones industrial average climbed 18.8 percent, the S&P 500 gained 23.5 percent and the Nasdaq surged 43.9 percent. It was the market’s first annual advance in two years. In 2008, the S&P 500 slid 38.5 percent when the economic crisis led to Wall Street’s worst year since the Great Depression.

According to Reuter’s, “Major factors in the stock market’s 2009 rally have been ultra-low interest rates and the Federal Reserve’s purchases of securities. Most of the year’s advance is the result of a nine-month rally, led by gains in technology and materials shares on expectations the economic recovery will spur capital spending and increase demand for energy, metals and other natural resources.”

The S&P 500’s best-performing stock for the year was XL Capital (XL), up a whopping 395.4 percent in 2009. IBM rose 55.5 percent for the year, Microsoft gained 56.8 percent in 2009 and American Express jumped 118.4 percent.

Remarkably, however, Reuter’s went on to report that “despite a 65 percent gain in the S&P 500 from its 12-year closing low in early March, stock investors have lost money this decade when total returns are taken into account. Even with dividends reinvested, it was the first negative decade ever recorded on a total return basis. The Dow is down 26 percent from its record closing high on October 9, 2007, while the S&P 500 is down 29 percent from its record close on that same date. The Nasdaq is down 55 percent from its March 10, 2000, closing high. A drop of 20 percent or more technically signifies a bear market.”

“Nevertheless, investors will remember 2009 as the year that the U.S. stock market made a substantial turnaround from its plunge in 2008 when fallout from the implosion of subprime mortgages and the credit crisis forced Lehman Brothers into bankruptcy — changing the landscape of Wall Street forever. Analysts see further upside in stocks in 2010 if the recovery proves sustainable.”

Our hedged account closed the year at $1,440,197 (a 63.50% annualized return) and our superstar un-hedged account came in at $1,578,042 for an unbelievable annualized return of over 120%.

I trust your 2009 trading portfolio was as profitable as ours and wish you an even better 2010. For more info about the trading strategy used in our managed accounts go to http://optionsprofitzone.com.

Happy New Year,
Michael

Bulls Dominate Holiday Week

December 27, 2009

All three major market indexes closed the short holiday week at their highest levels of 2009. The Dow managed to crack the 10,500 level, though volume was on light, leaving the true conviction of the move in question. Nevertheless, the market finished the week in positive territory, delivering joy to investors ahead of the holiday weekend.

Healthcare stocks surged early in the week after the Senate made strides in passing the long-awaited health care reform bill which is seen as favorable to health care and drug companies. The strongest month-over-month existing home sales pushed the markets higher on Tuesday due to a surge in first-time buyers taking advantage of the federal tax credit, though momentum was tempered by a revised third quarter GDP which was cut to an annual rate of 2.2%. New home sales disappointed the markets on Wednesday but a rebound in commodities and earnings from Micron (MU) and Red Hat (RHAT) helped lift the NASDAQ and the DOW into the black by the close. Favorable unemployment reports helped the DOW and S&P break through resistence levels on Thursday, closing the week on a festive note on Christmas Eve.

Heading into the last week of trading in 2009, expect continued light volume. No major economic news or earnings announcements are scheduled. The markets will be closed on Friday for New Years Day.

Our hedged portfolio lost a little ground closing the week at $1,433,104. Our other portfolio fared better, closing at $1,568,441.

Happy New Year,
Michael