Weekly Options Market Recap

Market Beating Foresight: Rocky Week Dampens Enthusiasm

The market started last week sharply lower, then recovered in the middle of the week only to drop 3% on Thursday. It was certainly an up and down week as investors searched for market direction and a near term trend. The weekly news was more negative than positive and the lighter trading volumes due to the holiday week combined to make for a rocky trading. The biggest news was jobs data and consumer confidence, both of which came in with a negative bias. Job losses continue to mount and results have been worse than expected. But frankly this remains no big surprise to us as we expect job losses and unemployment to rise through the rest of this year. Even if we hit an economic bottom in the fourth quarter, it will take time before businesses to show an interest and willingness to expand payrolls. Unemployment may not improve until well into 2010! Investors were also startled at greater than expected declines in June consumer confidence. Consumers will likely continue to hoard cash and reduce spending which will restrict growth in demand for goods and services. Furthermore, oil prices fell over 4% last week in large part due to falling expectations of global demand due to weakening economic conditions. That negative bias, along with lower trading volumes, made for a rocky week of trading. In the end the bears won and the market ended with another weekly loss. As we have said before the economy is not good, and its recovery will likely be slow and weak. Quarter two earnings releases will begin in full force through the month of July and that will have the potential to move the market in a big way. We plan to closely monitor those earnings releases over the coming month. The market could be in for a major bump if companies fail to meet earnings expectations or if their future outlooks deteriorate. However, we still view the stock market as reasonably priced at the 900 level (S&P) and we plan to buy stocks and options long when we can at those levels. Volatility has been trending down, but could spike once again if investors get spooked with earnings news. At the 2009 halfway point, we are fully invested in our stock portfolios, but do plan to increase investment allocations in our options portfolio. In addition, over the near term we plan to prune laggards from our stock portfolios and replace with stocks that show stronger investor demand. We fully expect our portfolios to outperform the market for the remainder of the year.

Option Tips For Investors

Our outlook remains unchanged from last week as we expect the market (S&P) to swing between a trading range of 880 and 980 over the near term. We also expect volatility (VIX) to trade between 23 and 35 through the end of July. We think taking a short position on the SPX index with a July or August position might be attractive, particularly for investors that are primarily long in the stock market. With long positions, if the market moves up strong, investors lose on the short position but gain on their overall portfolio. However, if the market maintains a narrow trading range, investors can collect the income from the short at relatively low risk. However, risk is high particularly with naked positions, as those investments not offset by long positions theoretically offer unlimited loss. Overall, the economy remains fragile, but there appears to be a growing sense that the worst is over. The economy is not yet in recovery mode, but declines have slowed considerably. We think the current market does offer attractive call buying opportunities but we favor options with 5 to 6 months to expiration. That extra time to expiration may be needed for the stock market to regain its footing and advance forward. We currently like the following call options PQOLW (Innophos Holdings), and newly added WLTGH (Walter Energy). We dropped QYKLD (Chart Industries) from our options buy list as the premium on this one has gotten too expensive after the recent declines in the underlying stock price. We are looking for additional option buying opportunities and plan to increase allocations over the near term.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com