Weekly Options Recap

Sixth Straight Week of Market Gains!

Another positive week as the broad market advanced last week for its sixth weekly gain in a row! The S&P Index rose 1.5% reducing its Year to Date loss to -3.7%. The stock market continues to show significant strength in what continues to be a challenging economic environment. The NASDAQ also continued its hot pace rising 1.2%for the week, but even more striking is its 6.1% Year to Date gain. We are encouraged with the strength the market continues to show as volatility moderates. We grow more optimistic every day that the worst may be over for the stock market. However, uncertainty remains high, and the market could easily fall 10% as it trades within a wide and choppy range. But all in all, we think the bottom was most likely reached in March. Investor confidence is growing and the money flow into the market appears to be growing momentum which will drive stock prices higher.

Economy Disappoints, But Earnings Up Beat!

All in all the economic data was a bit disappointing last week. Retail sales were slower than expected putting a damper on what had been an improving consumer trend over prior weeks. Housing data was also very disappointing with starts dropping to a 510,000 annual rate for one of the lowest levels over recent readings. Housing permits also fell bringing more questions over whether housing has really bottom. The data would suggest that an overall declining trend remains in force, although the declines do appear to be slowing. It is positive that the downward trend is slowing, but the bottom will not be hit until the trend reverses. Industrial production also declined and was worse than expected. Despite the worse than expected economic data, the corporate earnings released last week have shown promise. Intel, JP Morgan, Citigroup, and GE all posted earnings that were better than expected. That helped provide some juice to move the market higher despite the disappointing economic data. However, some perspective on Corporate earnings is important here. While these companies are reporting better than expected earnings, its worth noting that expectation levels are very low. So it is not like company prospects are returning to pre-recession levels any time soon. To date, future outlooks from these companies also remain somewhat mixed. We still look for the economy to begin improving late this year or by first quarter 2010.

Do we have option tips for investors?

We expect the market (S&P) to swing between a trading range of 800 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 has dropped to levels not seen in many months, and that is encouraging for the market. There is still downside risk given the fragile economy and uncertain corporate outlook. However, the next quarterly earnings cycle should shed light on the future outlook, and we are encouraged that the market has held the large gains from the prior six weeks. 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 are now ready to begin investing 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.