Weekly Options Update

Market Shrugs Off Flu!

The market was able to resume its advance last week, despite wide ranging fears over spread of the swine flu. Concerns over the swine flu appear to have been overdone and by the end of the week the broad market (S&P 500) finished up 1.3%. The Year to Date loss on the market index has now been trimmed to -2.8%. However, the NASDAQ continues to be the big winner and is now up 9% for the year thanks to technology and smaller capitalization stocks. Subscribers will notice that our investment activity has begun to pick up over the past month. The number of opportunities that show on our stock screen has grown each week over the past month. We remain optimistic as the market continues to show strength and resiliency. First quarter earnings season is still in full swing, but will wind down over the next couple of weeks. All things considered, the market has held up pretty well with the onslaught of earnings reports.

Earnings Down, Revenue Lower Than Expected!

Economic reports last week were mixed. On the positive side, consumer confidence readings came in much higher than expected. In addition, manufacturing readings also come in higher than expectations. However, for perspective, the manufacturing readings still indicate contraction, although the pace of contraction has slowed significantly. There were also some negative economic readings released. Preliminary readings on first quarter GDP came in much lower than expected for a declining annualized rate of -6.1%. It appears that some of that GDP decline is attributed to sharply reduced inventory levels, which may tend to overstate the ongoing economic weakness as inventory replenishment will need to happen over time. In addition, reports on technology and construction spending were drastically down for the quarter. We are very encouraged with the consumer confidence readings as improvement in that key measure is vital towards jumpstarting spending levels. And without consumer spending, economic growth will be challenged. Consumer confidence remains at low levels, but the upward trend is an encouraging sign that a economic bottom may be near. However, other reports such as GDP and construction spending highlight just how weak the economy is. Our view is that the economy is still declining, but at a much slower rate. Early bird speculators might see that as the green light to rush in and buy more stocks. We also see this as a sign to increase equity allocations, but would caution those investments are best made only gradually over the near term.

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 mid 30 range. There is still downside risk given the fragile economy and uncertain corporate outlook. Quarterly earnings for the most part have been better than expected, although revenue expectations have fell short for a majority of companies. Earnings are easier for companies to manipulate over the short term than revenue, with the later perhaps a more objective measure on the long term health of the business. Lower revenue expectations are a sign to us that the economy is having a more negative impact on companies that initially expected. That leads us to believe that the recovery may take longer than expected. 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 have begun to invest in this strategy again. 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 are adding the following option to our buy list LLIAE (Energy Transfer, Jan, 25). We are currently 75% cash in this portfolio, and are looking to buy one or more long call options, if we can get in at good prices and market conditions remain favorable.