A Perfect Storm

“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

Bulls Dominate Holiday Week

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

Santa Comes Early for Tech Investors

Thanks to positive earnings announcements from Oracle (ORCL) and Research in Motion (RIMM), tech stocks including Intel and Microsoft were broadly higher on Friday helping the Dow Jones Industrial Average to erase the red ink it had displayed for much of the day, closing with a gain of 20 points. Earlier news from Boeing (BA) regarding the loss of a 200 aircraft order form Irish airline Ryanair had led the Blue Chips to a 45 point deficit before Santa brought the good news to tech investors. With only a few days left before Christmas, investors may not find much more under the tree, however, most are celebrating a 22 percent gain for 2009, after facing one of the steepest first quarter market declines in many years. Markets often experience a Santa Claus rally in the final days of December, but the 63 percent gain from the March lows experienced by the S&P 500 may be considered by most the ultimate gift of the season. The Dow’s resistence at 10,500 has proven to be a difficult ceiling to break through, as does the 1120 level for the S&P.

The dollar, however, continued its rally bringing cheer to investors holding hope for a strong economic recovery.  This has been a key factor holding equities to a narrow trading range and below technical resistence levels. Despite the dollars strength, gold moved higher on Friday after a sharp pullback on Thursday ending the week with a 0.01 percent gain. Crude oil moved higher on Friday in response to geopolitical tension between Iraq and Iran, after Iranian forces crossed in to Iraq to seize control of a disputed oilfield. Though Iraq sent troops to the area, a diplomatic solution is the likely outcome. I get the sense that this will end peacefully next week.

As holiday shopping draws to a close, light volume and year-end window dressing will probably cause volatility to rise through the end of the year. Portfolio managers will be selling weak holdings in favor of its stronger positions, in order to close out the year on a joyous note. This could lift stocks that have done well this year to even higher levels at the expense of the year’s under-performers.

Reuter’s reports that this week’s major economic indicators will include consumer sentiment, personal spending and the latest weekly claims. On Tuesday, the gross domestic product report is expected to show the U.S. economy expanded at an annual rate of 2.8 percent in the third quarter, in line with the previous reading. Existing home sales for November also will be released on Tuesday, with economists forecasting sales will rise to a seasonally adjusted annual pace of 6.25 million units from 6.10 million in October. On Wednesday, new home sales for November are expected to edge up to a seasonally adjusted annual rate of 440,000 units from 430,000 in October.On Thursday, the New York Stock Exchange trading floor will close early in observance of Christmas Eve.

The gifts continue to pile up under the tree for our managed portfolios with the hedged account closing Friday at $1,445,260 and the newer unhedged account coming in at $1,572,460.

For your free gift video, go to http://optionsprofitzone.com.

Happy Holidays to all, and to all a good-night,
Michael

The Dollar Takes Center Stage

Recent strength in the dollar has proven to be the single biggest factor driving both equity and commodity markets and may hold the key to stock market performance for 2010 . An environment where the dollar continues to move higher will push commodity prices lower and will cause last week’s blog, “Stuck in the Middle With You”, to be a best case scenario for equity prices as long as monetary policy remains indusive. Stocks and commodities have traded in inverse directions for much of the last 10 months, however, strong retail sales and consumer sentiment pushed stocks and the dollar higher together on Friday. This correlation may be the first sign that the dollar is reversing to the upside after forming a double bottom in the last 3 weeks. Rising interest rates in response to a strong dollar would likely be negative for stocks, as investors would sell stocks in search of higher yield and lower risk.

Gold and oil lost ground last week as the dollar gained momentum. Friday marked the eighth straight day of declining oil futures, settling in at a two month low while gold futures searched for support at $1100. Failure of the 1100 support level would cause gold to look for secondary support at 1000. Respect of 1100 may signal an advance to 1300, but only if the dollar weakens.

As the U.S. Dollar Index tests resistence at 76.5, some technical analysts point out that the last time resistence was tested, the dollar reversed downward to hit new lows over the next month. A breakout above 76.5 would be a bullish signal for the dollar and may trigger weakness in stocks. The S&P and the Dow are both facing resistence levels, as well, at 1120 and 10,500 respectively, which can also spell trouble for equities. Portfolio managers continue to be cautious at these levels until a breakout in either direction is apparent. Keep your eye on the dollar for clues as to how this will play out.

The coming week’s most notable economic news will be on Wednesday when the Federal Open Market Comitte (FOMC) releases its decision on monetary policy. Also announced during the week will be December’s Empire State manufacturing index, November’s capacity utilization and industrial reports and November’s leading economic indicators. Earnings from Best Buy(BBY) and Adobe Systems (ADBE) a due on Tuesday with Fedex (FDX), Discover (DFS), Nike (NKE), Oracle (ORCL) and Research In Motion (RIMM) reporting on Thursday.

In the meantime, our managed portfolios continue to climb with our hedged account closing at $1,425,871 and our unhedged account finishing Friday at $1,536,333.

We’ve just posted a new video interview with Sam Newman, co-author of “Winning the Race to Financial Independence” and the Options Profit Zone Home Study Course on our website at http://optionsprofitzone.com. Just click on the box near the bottom left of the page to see it.

Happy Holidays,
Michael

Stuck in the Middle With You

After digesting the news from Dubai and the weekend sales figures the Dow Jones Industrial Average moved into the month of December with a positive bias. But after spending most of the day on Thursday to the upside, due to news that Bank of America would pay back it’s TARP money, the index took a dive and closed down almost 100 points. Employment jitters were soon settled on Friday as the Labor Department reported that non-farm payrolls fell by just 11,000 last month, down dramatically from October and far less than the expected 100,000 number. It was the best showing since December 2007 and caused unemployment to edge down to 10% from the 10.2% reported previously. The Dow reacted by hitting a new yearly high of 10,516 before settling at 10,388 with a solid gain for the week. The S&P 500 also briefly touched a 14- month high and the NASDAQ rallied with an impressive 2.6% gain for the week.

The bad news is that resistance for the S&P lies at about 1120 and could be a challenge to higher movement in the coming weeks. This level also represents a 50% retracement from the March lows, a technical measure that has proven to be trouble from a historical perspective. According to Todd Salamone of Schaffer Investment Research, the 50% retracement level acted as major resistance for months in 2004. Moreover, he states, “the behavior of the iShares Russell 2000 Index Fund (IWM) in recent months may be indicative of the significance of the SPX’s 50% retracement. Since the IWM first touched 60.00 in September, it has gone into a three-month sideways pattern around this level.”

It also appears that portfolio managers are weary of accumulating positions at this level, which could cause the markets to become stuck in a small trading range for several weeks, thus my thesis, “Stuck in the Middle With You” (borrowed from the 1973 Stealers Wheel release, which doesn’t show my age at all).  Any sharp pull backs, however, could bring portfolio managers back into the spirit, as bargain hunters prepare for gift giving. The dollar may also get into the action, as an improving economy brings talk of rising interest rates and gives strength to the dollar. A stronger dollar has recently brought weakness to stocks and commodities. We witnessed the stronger dollar’s effect as gold pulled back last week.

Earnings reported in the week ahead will include reports from Pep Boys, AutoZone, Kroger, Costco, Dollar General Stores and National Semi Conductor. Economic reports will include consumer credit and U.S trade deficit for October, wholesale and business inventories, November retail Sales and the University of Michigan Consumer Sentiment Index for December.

Now, back to my thesis: I don’t think Gerry Rafferty (lead singer for Stealers Wheel) was singing about portfolio managers when he sang “Clowns to the left of me, Jokers to the right, here I am, Stuck in the middle with you.” But the guys on Capitol Hill could easily be the subject (read in- Healthcare Legislation and unreasonable taxation). But I digress.

The good news is that our managed portfolios are stuck in the middle of tremendous performance. The hedged account closed Friday at $1,405,841, over $40,000 higher than last week. But our newest, and unhedged, account continues to reign with a gain of almost $100,000 this week, closing at $1,510,351. Is that stuck, really? I think not.

 

 

Happy Holidays,
Michael
http://optionsprofitzone.com

A Bear Ate My Turkey

I was just getting settled in for the Thanksgiving holiday, after being on the road for a couple of weeks promoting our e-book “Winning the Race to Financial Independence”, when without warning, my door was knocked off its hinges by a  sloth of Bears. By the close of the market on Friday, they had eaten all of my turkey, the Dow Jones Industrial Average was down 154 points, the S&P had shed 19 points, and the NASDAQ lost 34. Not much thanks was left in the Bull camp.

One of my sources was quoted as saying “Black Friday quickly turned to red Friday on Wall Street, as traders reacted to news that Dubai World asked creditors for a six-month stay on repayment of $60 billion in debt.” This created a flight to quality, lifting the dollar and treasuries, which led the markets lower. Many analysts felt this was not surprizing due to the highly leveraged Dubai real estate driven economy while others wondered if this was the first domino of many to fall in a new wave of financial turmoil. If this turns out to be an isolated event, the markets may resume its upward bias into the end of the month, a pattern that has been predominate in the last several periods.

The Dow was initially down over 200 points on Friday but bargain hunting by the Bulls was able to recapture some of the lost ground.  Bargain hunters of the human variety also showed a big appetite as spending in stores was slightly higher than last years figures, but online sales rose by 35%. Door buster deals seemed to bring out the crowds and the best online deals were sold out within minutes. Lower inventory levels left many bargain hunters disappointed, as they were asked to pay more than they anticipated or were forced to leave empty-handed. The high-end retailers, and stores without deep discounts, were not seeing the traffic that was hoped for. The data seems to point to a pent-up consumer who wants to buy, but has little to spend.

Nonetheless, aside from Friday’s action, the market seems to be holding up well, giving the Bulls some food for fodder. We are bumping into resistence levels of 1121 on the S&P and 2200 for the NASDAQ theat could be trouble, but as long as the S&P stays above its 80-day moving average and it continues to point higher, the Bulls should remain in control. Additionally, as one analyst put it, “we continue to see too much skepticism for this bull run to be over. As long as we continue to see that, my money says we keep on going higher.”

The final Black Friday data analysis may help predict how the markets will perform through the end of the year. Data seems to indicate that positive Black Friday results lead the markets higher through December. Barring more negative financial news  the likes of Dubai, the holiday season should bring good cheer to the markets. Keep your eye on the value of the dollar as another indicator of market direction.

Slated for the week ahead is economic data including Chicago purchasing managers’ index, October’s construction spending, ISM’s manufacturing index, pending home sales and November auto sales. Later in the week, we’ll get employment data, Fed Beige Book figures for November and the revised third-quarter productivity report. Earnings from several retailers including Guess, Staples and Big Lots will be released throughout  the week. Earnings from construction bellweather Toll Brothers, who reports on Thursday, will be key to determining the strength in the housing recovery.

Our hedged portfolio continued to rise, closing on Friday at $1,364,978. Our unhedged account is still ahead of the value I last reported two weeks ago but lost some ground last week, closing at $1,416,681.

I’ll keep you updated during the week if there is more market turbulence resulting from economic events. Until then, be thankful for all of the abundance received so far in 2009.

Good Trading,
Michael

Dow Revisits 10,000

The bulls reclaimed territory last week amid a flurry of corporate earnings and economic data propelling the Dow to the first weekly close above 10,000 since October 2008. The week began with positive forecast from Ford and a better-than-expected manufacturing index. The mood continued on Wednesday with the Fed reporting “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” But Thursday’s 200 point rally was the kicker after an upbeat report from Cisco and a jobless number that was encouraging to some.

The S&P 500 closed higher for five consecutive days as the dollar resumed its weakness and the volatility index began to decline after peaking around 31. The VIX found resistence just below its 200-day average and moved back below its 80-day and 160-day moving averages, confirming a resumption of its downtrend. Assuming the patterns in the dollar and the VIX continue, the markets should resume its climb. The S&P could see a rally above 1100 by the end of the month. A break above 10,100 on the Dow would indicate that the correction has ended and another run at the 10,500 resistence level would be likely. A breakthrough of 10,500 would probably lead the Dow to 12,000 before encountering another level of resistence. The NASDAQ may be the weaker of the primary indices as buyers of technology shares seem to be waning. Failure of support at 1650 would confirm a correction, while a breakout above 1780 would indicate an advance toward 1900.

Historically, the November-December period has been bullish for stocks, and has sometimes been called a Santa Claus rally. It is also well-known that a World Series win by the Yankees generally precedes a market advance. Between Santa and the Yankees, the outlook appears to be good for the market, in general. Keep your eye on the VIX and the dollar for more technical indications of continued strength.

Last week was also beneficial for our managed portfolios, both seeing tremendous gains in the weak of the rising markets. Our hedged portfolio closed Friday at $1,336,272 while our newer account is still the reigning champion with a close at $1,353,343.

Don’t forget to visit http://optionsprofitzone.com for your free video and DVD.

Good Trading,
Michael

“V” is for Volatility

Just as next Tuesday will bring the return of the television series “V”, a remake of the original that aired in the 1980’s, last week saw the return of “V” for volatility that left the Dow Jones Industrial Average 260 points lower for the week. Last weeks blog noted that volatility had picked up amid the strength of the dollar and that a break below 9900 could lead to a test of the 9500 support level. Friday’s close at 9712 was a large step in that direction, erasing the previous day’s gain which was the best one-day move in a strong three-month period. Thursday’s 200 point gain was the result of the GDP report stating that the economy had grown at a 3.5% annual pace in the third quarter marking the end of the recession.

However, concerns that the recovery was unsustainable after government stimulus recedes, weak consumer demand and a stronger dollar lead to Friday’s decline and an increase in volatility. The Chicago Board of Options Volatility index, known as the VIX, closed above 30 for the first time since July. A VIX above 30 has historically been a signal of bearishness in the markets, indicating that Monday will probably see a continuation of weakness. All of the major indexes closed October below their 50-day moving averages, another indicator of more weakness to come. A break below 9500 would signal a secondary correction. The initial target for a correction would be  9000 with primary support at 8100.

Adding to the decline was the expectation that CIT Group, was expected to declare bankruptcy as early as Sunday or Monday. Sunday, the rumors were proven true as they did indeed file after a debt-exchange offer to its bond holders failed. A restructuring plan, however, was approved allowing CIT to continue operations. Under the reorg plan, creditors will own the company and bond holders will end up with new CIT debt worth about 70% of the face value of the old debt. The government will lose the $2.33 billion it invested in CIT shares in December 2008 through the Troubled Asset Relief Program (Tarp). It declined to give more aid earlier this year.

Monday will bring earnings announcements from Ford and Chesapeake Energy, as well as, more economic news in the form of construction spending, the ISM manufacturing index and pending home sales. Later in the week we’ll see earnings from Cisco, Time Warner and Pulte Homes. More importantly,  the FOMC will announce it’s monetary policy on Wednesday and we’ll end the week with reports on wholesale inventories, non-farm payrolls and unemployment numbers on Friday.

As expected October ended up being a rough month and November may get off to a volatile start. Keep your eye on the VIX for clues as to the direction of the markets and don’t be afraid to take your profits early on Monday. You’ll want to raise cash in order to have buying power when the market resumes its march forward.

It’s not a suprise that our managed portfolio took a bit of a hit this week, closing at $1,242,126.

 

Michael

It’s All About The Dollar

Despite last weeks deluge of positive earnings releases, the U.S. stock markets could not manage to end the week in the black. In fact, since the Dow Jones broke through 10,0000 on October 15, it has failed to close out either of the following Fridays above the emotional level. Volatility has begun to climb as good news drives prices higher, only to decline on profit taking and worry about near term economic performance. Yesterday we saw a 200 point swing after a strong opening bell lifted the Dow to 10,072 but then closed at 9,867 after negative statements from a well-known analyst regarding the 2010 outlook for financial stocks. The break below 9900 could lead to a test of the 9500 support level. A breakout above 10,100 would signal the resumption of a primary uptrend.

However, the real force behind the decline was the rising dollar. After finding support at 75, the U.S. Dollar Index rallied for the first time in weeks. This caused a decline in gold prices, oil and, of course, the stock markets. As I stated in an earlier post, the dollars weakness in the last several months has been a major contributor to the strong upside move in stocks. A rising dollar will naturally have the opposite effect, pushing stocks lower.

Many believe that, contrary to public commentary, the government prefers a weak dollar which makes it easier to pay back the tremendous debt that has accumulated from the issuance of bonds that have funded Bernanke’s currency printing press. The current monetary policy of injecting unprecedented amounts of capital into the system, believed to be needed to prevent deflation, unquestionably results in a weak dollar.

At some point, our creditors, i.e. China, will demand a stronger dollar by threatening to drop the dollar as the preferred reserve currency which will force the U.S. to move to support the dollar. China has already begun to look elsewhere, evidenced by the purchase of IMF Notes and adding to their gold reserves. The higher interest rates at this weeks Treasury auction may be early signs that the U.S. is taking action to halt the dollar’s slide.  A breakout above 77.50 would indicate that the decline of the Dollar Index has ended. This is unlikely in the short-term but should be watched closely.

More likely, the strength in the dollar is simply the first blip on the sonar of choppy waters to come. It is possible that this is the first signal of consolidation of the dollar at these levels which will eventually lead to the beginning of an uptrend, a glimpse of what may be in our future. With a rising dollar, expect stocks, gold and oil to move lower.

In the meantime, our managed portfolios continue to gain.

Visit http://optionsprofitzone for more info.

Michael

Dow 10,000 One Year Later

It was just over one year ago that the Dow Jones Industrial Average broke below 10,000 on its way to a March low of 6626. Last week, seven months later, the Dow returned to the emotional 10,000 level, holding it for two days before disappointing earnings and economic news led to profit taking that left the Dow at 9995 by the close on Friday. Though closing on a negative note, the major indices remained in positive territory for the week. Earnings from Intel and JP Morgan were among the bright spots of the week, but a downgrade of Goldman Sachs and Bank of America’s failure to satisfy expectations led to concern that the market’s climb could be nearing its apex.

Though 10,000 is a nice round number for investors to key on, technical resistence appears to be closer to 10,500 on the Dow and 1121 for the S&P. With resistence in sight, more bad news on the earnings front could test the bull’s resolve in the coming week. Monday also begins a new five-week option expiration cycle. Historically, the first week of a long expiration cycle has been bearish due to hedging activity from market makers. There have been recent exceptions, however, so any positive earnings announcements may boost the markets to new highs.

Earnings from Apple and Texas Instruments start the week off Monday with numbers from Caterpillar, Dupont, UAL, Yahoo and Coca-cola due on Tuesday, along with September home starts and PPI reports. Other companies reporting later in the week include Boeing, Amgen, Merk, 3M, Microsoft and Wells Fargo. Jobless claims and leading economic indicators are due Thursday with existing home sales reported on Friday.

Our model portfolios continue to climb with our hedged variety coming in at $1,315,274 and the unhedged account topping $1,372,500.

 

Good Trading,
Michael