Weekly Options Recap

Market Beating Foresight: Summer Swoon Stokes Anxiety

The market lost ground for the fourth straight week as the summer swoon stoked more anxiety amongst investors. The market has been in the doldrums as concerns rise over the progress and outlook for an economic recovery. There was not a lot of economic news or quarterly earnings reports last week, but what was shared was not good. Oil led the market lower as concerns over declining oil demand from a faltering economy drove prices sharply down. The most recent ISM Services report showed economic contraction and jobless claims continue to rise. On a positive note, U.S. Treasury yields dropped significantly as investor demand drove prices higher which lowered yields. Smaller yields are good for Mortgage Rates as they trend closely the yield direction on longer term treasuries. To us, the market decline over the past four weeks is not all that surprising. We view recent performance as a correction and consolidation from the big run-up that started in March. The market had simply moved too far too fast and needed to catch its breath. Hopefully, four weeks of decline is all that is needed! The calendar next week will bring a heavy dose of economic data on inflation, production, retail sales, housing and jobless claims. In addition, reporting for second quarter earnings will be in full swing and will continue over the next few weeks. We believe the developments over the next few weeks have the potential to swing the market in a major way. Those developments could have a significant impact on the trend and direction that the stock market takes for the remainder of the year. We still view the stock market as reasonably priced, but caution that trading could become very volatile over the next few weeks. At the annual halfway point, the broad market is now down -2.7%. We still expect the market to finish with a positive annual return, that is as long as we avoid another market meltdown. We do have concerns that the market could test the lows hit earlier this year, but do not think that scenario is likely. We plan to stay fully invested in our stock portfolios and also plan to increase investment allocations in our options portfolio. The recent downturn in the oil industry has really pressured the stocks that we own related to that industry. We plan to carefully review these holdings over the near term and will make investment decisions based on future outlooks and price momentum.

Do we have option tips for investors? We have slightly downgraded our outlook from last week as we expect the market (S&P) to swing between a trading range of 860 and 960 over the near term. The market is currently trading near the bottom of that range and we expect that to continue over the very 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 an August position might be attractive, particularly for investors that are primarily long in the stock market. Premiums on SPX put positions have risen with market fears, and now may be a good time to capture income. Overall, the economy remains fragile, and anxiety is rising that any recovery will be long and slow. The economy is not yet in recovery mode, although declines have slowed considerably. We think the current market offers attractive call buying opportunities but we favor options with at least 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 FQIBC (Calumet Specialty Products). Calumet is in the Oil and Gas industry and we like this option despite current industry woes. This option is already in the money and the premium remains low. We think the option offers good value If you can get in at $2.00 or less. We dropped WLTGH (Walter Energy) from our options buy list as the energy sector has come under pressure with expiration rapidly approaching. We are looking for additional option buying opportunities and plan to increase allocations over the near term.