Weekly Options Recap

First Down Week In Nearly Two Months!

The broad market (S&P 500) had its first weekly loss in nearly two months. Market results were mixed though as the S&P 500 fell, but the NASDAQ posted yet another weekly gain on the strength of technology stocks. The S&P index dropped to a -4.1% return Year to Date. Trading was volatile as the market swung widely throughout the week. On a positive note, the market continues to hold the gains made over the past seven weeks. The NASDAQ has been the big winner so far this year in large part due to technology stocks. The NASDAQ has now reached a 7.4% Year To Date return, which is a big premium over the S&P Index return. Smaller cap stocks which make up more of the NASDAQ index have clearly performed better than the large cap stocks that dominate the S&P index. That is a good sign for our strategy as our stock screens tend to uncover more smaller cap stocks. Company size is not a criterion in our stock screen. However, small caps are more prevalent on our screens since our focus is on momentum, growth, and value, attributes where small cap stocks often excel relative to their larger counterparts. The facts suggest it is a lot easier for a $200 million company to grow 25% than a $20 billion company. We continue to be optimistic on the stock market as the recent trend continues to show significant strength. First quarter earnings season is now in full swing, and will continue to be the primary driver on market direction over the near term.

Earnings Down, Revenue Lower Than Expected!

Earnings reports were the primary driver last week and will likely be the focal point next week as well. So far, most companies are reporting significant drops in earnings which news reports suggest are down overall on average 40%. However, the majority of companies did beat analyst expectations relative to their earnings performance. Beating expectations is a positive, although we would caution that expectation levels were in general very low. However, we do think companies overall have been aggressive and successful with reducing expenses quickly, and that has help sustain higher earnings levels. In our mind the bigger concern is the behavior of top line growth, revenue. News reports suggest that overall revenue is down nearly 11%. That is a smaller decline that earnings, but what is interesting is that the majority of companies are posting revenue numbers that are worst than expected, the opposite of the earnings situation. Our concern is that it is easier for companies to manipulate earnings over the short term than it is to manipulate revenue. Revenue growth is usually a very good barometer for the long term health of a company. The fact that most companies are missing revenue expectations suggest that market and economic factors are indeed having a significant impact, one that will likely continue for some time. Declining revenue will certainly pressure companies over the near term, declines that could have a more significant impact as companies exhaust their cost cutting measures. The Treasury stress test is also causing volatility in the financial sector, although preliminary reports suggest that most banks are carrying more than enough capital. Existing home sales were down again in March, while new home sales were up slightly from very low levels. The Housing sector has just not responded yet to low mortgage rates, lower house prices, and government efforts to increase available credit. We view that as a sign that a recovery in housing is not going to happen overnight as job fears and higher inventories depress sales. In fact, we see a long term housing trend that will demand adjustments to what we would call the re-pricing of American real estate. That means a downward bias in long term real estate price trends, including smaller and cheaper homes.

Option Tips For Investors!

We expect the market (S&P) to swing between a trading range of 825 and 925 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 30 and 40 over the next month, mostly in the mid 30 range. The volatility or fear gauge spiked a little early last week before stabilizing in the upper 30 range. There is still downside risk given the fragile economy and uncertain corporate outlook. However, the next quarterly earnings cycle will shed light on the future outlook, and we remain encouraged that the market has held the large gains from the prior two months. 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, with the recent market strength and growing investor optimism, we are now ready to begin investing in this strategy again. In fact, we made one additional purchase on Force Protection which we introduced on our buy list last week. We are not ready to go all in on options, but do plan to increase our allocation on long call options over the near term. We currently like the following options, ERQJC (Sepracor, Oct, 15), ETEJE (Energy Transfer, Oct, 25), and TSLLV (Trina Solar, Dec, 12.5), for which all have underlying stocks that currently show on our Stock Buy List.

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