Weekly Options Recap

Light Trading But Positive Week

Last week the S&P index ended 3.6% higher in light trading due to the holiday shortened week. The Year To date return for the broad market is now in positive territory at 1.8% after what was a pretty slow week in terms of news and corporate developments. One important news item was the consumer confidence reading which came in much better than expected. Those readings helped the market off to a good start for the week. But perspective and caution is important here relative to consumer confidence. We like the up tick in consumer confidence readings and the fact that results were better than expected, but readings remain at very low levels. We will breathe a sigh of relief once these readings show a sustained uptrend. On a different note, Long term bond yields fluctuated significantly last week which caused a market stumble when yields rose. Initial jobless claims slowed again last week which suggests the pace of layoffs is indeed slowing. However, continuing claims continue to grow which indicates that the economy is still not generating enough jobs to compensate for even a slowing pace of job loss. That is a trend we do not expect to see reversed any time soon. General Motors was the big corporate news as the company continues to teeter on bankruptcy. The market speculation is that the company will enter bankruptcy as early as next week.

Option Tips for Investors?

We expect the market (S&P) to swing between a trading range of 875 and 975 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 28 and 38 over the next month, mostly in the low 30 range. The volatility or fear gauge has been trending down which is a good sign for long term investors. However, there is always downside risk given the fragile economy and uncertain corporate outlook, although that risk has been decreasing. As we mentioned last week, the biggest downside risks that we see center on housing and unemployment. We expect unemployment to rise throughout this year, but if it gets above 10% that could bring fear back to consumers and investors. Housing measures continue to disappoint. While the pace of decline has slowed, the bottom in housing remains elusive. Housing represents a large part of our economy and also makes up a large part of investor wealth. Investors are more risk averse since their wealth has come under pressure in part from falling real estate holdings. Despite these risks, we are still optimistic for the stock and options market.