Market Down .5% For Second Down Week In Row!

The market dropped sharply on Friday as investors sold stocks in the wake of unrest in Egypt. The flight to safety came as concerns that upheaval in Egypt might spread across the Middle East creating more world tension and uncertainty. In particular, Oil prices rose sharply as the risk of supply concerns grew. We think the Headline risk from Egypt will cause only a temporary, but needed pause in the market. The bigger story is the recovery of the US economy, where reports last week showed that GDP growth rose a solid 3.2%. Some analysts suggest the recovery was even stronger than those numbers suggest after adjusting for inventories built up from prior quarters. In addition, to date quarterly earnings reports have been overwhelmingly positive. There are still many more companies left to report over the next two weeks, but the consensus is that we will see more of the same positive reports. Interest rates remain low and we even had reports of growth in New and Existing Home sales. All in all, the data shows the US economy is recovering and that consumer confidence is improving. The US recovery is the bigger story that will drive the stock market higher longer term. However, given the uncertainty in the world and the volatility surrounding earnings season, we think the best strategy near term is to show patience and minimize trading activity. In our own trading, we sold Herbalife (HLF) last week for a 2% gain. Herbalife has had disappointing stock performance after trailing the market the past three months and we were happy getting out with a small gain. We plan to sit on the sidelines this week given the market uncertainty and the onslaught of earnings reports, but will remain opportunistic with our trading as conditions warrant. We were opportunistic last week with the purchase of our Walter Energy call spread and have already seen our position soar from a net entry cost of 47 cents to $4.15 per share! Sometimes the best trading opportunities arise when volatility spikes and investors overreact.