Market Performance, First Full Trading Week
Last week marked the first full trading week of the New Year. Unfortunately the week marked the worst market decline (-4.4%) since November 2008. The NASDAQ was also down 3.7% for the week. Does this foretell doom for the rest of the New Year? Obviously, one trading week does not have any predictive power for the entire year. For perspective, the market has advanced more than 20% since November so a pullback is not surprising particularly in light of the constant bad news released every day. Furthermore, despite the losses last week, the market continues to show signs of moderating with lower volatility. Higher trading volume also returned last week, which often provides more reliable signals on both the direction and conviction of price moves.
Economic Insight, Job Losses Mount!
Most of the news last week was not good. Increasing unemployment numbers are grabbing most of the headlines. The unemployment rate rose to 7.2%, the highest figure in many years. In addition, the line of companies announcing cutbacks continues to grow as job losses continue to mount. Major retailers reported dismal December sales, no real surprise although Wal-Mart had been expected to do better than reported. Automakers also reported December sales declines of more than 30%. Oil prices were volatile, first rising early in the week on tensions in the Middle East, before falling sharply due to demand concerns from the worsening global economy. The fourth quarter earnings season has begun which is also causing investor anxiety. The quarterly reports that have trickled in to date highlight the toll the weak economy is causing. In addition, companies are adjusting future outlooks downward with greater regularity.
Market Beating Foresight
Fourth quarter earnings and future outlooks have the potential to really move the market. If earnings results and future outlooks are worse than expected, the market could plunge to much lower levels. Most observers expect results to be very weak. But at issue will be how bad results relative to expectations are. Obama is gearing up to take office January 20 and we are confident that his administration will push massive spending programs to stimulate the economy. That will help boost confidence in the economy and market, but will certainly take months before having any material impact on jobs and economic growth. We continue to believe that the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs.
Option Tips for Investors
Do we have option tips for investors? We expect the market to swing between a trading range of 825 and 950 over the near term. With that in mind, we may look to buy a call on the market index at the floor 825 or above if the market swings sharply down and we can get in with a good price. We are also looking at writing a February put and call option on the market index (SPX) at 825 and 990 respectively, if we can get good prices. In addition, we have started to look for straight call options on individual stocks, but will invest only selectively as the short term direction of the stock market is still volatile and difficult to predict. We are now 90% cash, but will continue to look for short term trading opportunities. Again, we would caution that investing in options is very risky and is appropriate only for the most aggressive investors who understand the inherent risks.
Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com
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