Weekly Options Recap, April 10, 2009

Fifth Straight Week of Market Gains!

Another strong week as the broad market advanced last week for its fifth weekly gain in a row! The S&P Index has now pared its Year to Date loss to -5.2%. That is a dramatic 26% turnaround from the lows that were hit in early March. But the NASDAQ has been an even better performer and now sits with a Year to Date gain of 4.8%. We definitely sense that the market is beginning to stabilize and that investor confidence is growing. The stock market advance over the past five weeks has been strong and has been supported by higher trading volumes. The optimism that is building will encourage more and more investors to leave the safety of cash bringing even greater demand for stocks to drive prices higher. We too are feeling that the worst may be over for the stock market, although the economic struggles are likely to continue for some time.

Signs Economy is Stabilizing!

The economic data was a bit better last week, but still provides overwhelming evidence of a struggling economy. However, the economy appears to be showing some signs of stabilizing although at very low levels. US retailers posted smaller-than-expected sales declines, a hopeful sign that consumer spending may turn soon. In fact, the S&P retail index gained 4.6% for the week with Macy as one of the industry leaders. But the economy will likely continue to struggle for some time. New jobless claims fell last week, but claims remain at very high levels that suggest peak unemployment is still a ways out. Perhaps the biggest market mover last week was the financial sector. Financial stocks got a big lift from Wells Fargo after the bank forecast a profit of $3 billion for the first quarter and indicated they saw significant strength in their mortgage business after refinancing hit a six-year high. The financial sector has been at the heart of the global economic crisis, and an improving outlook for banks will surely drive the stock market higher. Another sign of the changing market sentiment is the Volatility Index (VIX), often referred to as the fear gauge. Last week the volatility index closed at its lowest level since September 2008. Lower volatility is a sign that the market is beginning to stabilize. However, as we have seen over the past year, market movements can swing wildly very quickly, particularly when there have been strong moves in one direction.

Option Tips For Investors!

Do we have option tips for investors? We expect the market (S&P) to swing between a trading range of 775 and 900 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 33 and 45 over the next month, mostly in the upper 30 range. We still consider the market downside risk moderate, but are encouraged that the market has held the large gains from the prior four weeks. Our primary options strategy is to buy long call options on stocks that hit our Momentum and Value screen. Given the rocky market since November, that strategy has been pretty much on hold. However, we now see encouraging signs including growing optimism and confidence amongst investors. We are now planning to selectively buy long-term options based on our Momentum and Value Screen. This strategy will not work in periods of a sustained market downturn, so we have been waiting until we felt the worst was over for the stock market. We still are not ready to go all in on options, but do plan to increase our option allocations over the near term. We are also prepared to buy calls and puts on the market index if there are large swings that show signs of a market overreaction. We expect to have more choices on options to buy now that the number of stocks showing on our Momentum and Value buy list is trending upward with the overall market. We are currently 80% cash in this portfolio, but plan to increase our investments and reduce our cash level over the coming weeks as long as market conditions remain favorable.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com