OptionsVest

With all the talk about the market recovery from the March lows, the SP 500 and the DJIA have done nothing in the last two months. The technology heavy Nasdaq continues to be the strongest market index, but even that has picked up only 5% over the last 8 weeks.

On the good side, the financial markets managed to hold support levels; Nasdaq at 1400, the SP 500 at 875, and the DJIA at 8200.

Expect more of the same in this short week going into the 4th of July holiday.

JD

As expected, the stock market took a breather from its three month rally. The drop was not significant, but it was on heavier volume than the previous week. The market has been consolidating for a month now, tightening the noose around a narrow trading range.

Interestingly, the SP 500 headed south off of a resistance level reached at the start of this year, but managed to find support from the intersection of its 200 day MA and its 50 day MA. On the other hand, the DJIA could not hold support from its 200 day MA, but was held up by its 50 day MA. The Nasdaq has been leading the market up during this recent rally, but took a breather for the second week in a row. It will not be surprising if the financial markets continue to meander around over the next few weeks.

JD

The stock market continues to trade in a narrow range half way through June as the debate rages on between the bulls and the bears. There are good arguements on both sides of the fence, most likely leading to the market going virtually nowhere for a while. The SP500 is trading between 875 and 950, the DJIA is confined by 8200 and 8800, while the Nasdaq 100 has been a little more volatile between 1350 and 1500.

Upside momentum continues to diminish as interest rates have started to rise. This is likely to be a better time to be selling premium than buying premium, even if you have a directional bias.

The Iron Condor is a good strategy for a relatively stable market that may be a successful approach for the July expiration.  This is the combination of selling a Bull Put Spread below the market and selling a Bear Call Spread above the market. You can enter this trade all at once, orenter one side at a time. For example, with the market currently on the high end of the trading range you could sell the 100 call on the SPYand buy the 101 or 102 call for protection to enter your Bear Call Spread. Then wait for a market pull back to around the 900 level on the SP 500 to sell the 87 put and buy the 85 put to enter the Bull Put Spread side of the trade. How you approach this trade is a matter of personal preference.

JD

The stock market finished the first week in June with a volatile day. It ended close enough for government work to the same place it ended the day before. In fact, looking at a chart you can see that the SP 500 is just about Dead Even with where it started the year. Speaking of the government, it was the release of the May unemployment numbers that caused the volatility in the market. We are still losing jobs at a clip of 1 million a quarter, but the news media keeps telling us that things are getting better. While that is better than the 2 million a quarter just that long ago, how do they consider that a good sign? 9.4% unemployment is not a good thing. The lack of progress by the market today indicates that I am not the only one questioning this rally.

And then there is increasing interest rates and climbing commodity prices. These do not normally go hand in hand with a streaking stock market.

If you are still riding this bounce, it it time to take some profits, and look for a better level to get back into the market.

JD

The headlines this week shouted out that Home Depot (HD) posted a 44 percent increase in 1st quater profits. Looking a little closer at the details we find that the reason this number looked so good was because it was compared to the year ago quarter when HD wrote off the expense of closing its Home Expo stores. What the headline doesn’t tell you is that sales were down 10%, not exactly good news. Savy traders took this opportunity to book profits on the home improvement store’s 50% rise since the March lows.

HD’s story illustrates what has been happening over the last couple of weeks in the financial markets. Traders have been taking profits on this two month rally by selling to investors that are afraid they are going to miss the boat on a new bull market. If we have a real bull market, the is no need to hurry.

The SP 500, DJIA, and MNX all made their first ‘lower’ high in a couple of months this week. It was a good time to initiate some bearish option trades. Watch the 875 level in the SP 500, 8200 in the DJIA, and 134 in the MNX for support.  If these hold, expect the stock market to stay in a trading range for a while. If they break down, this pull back will become a full fledged correction.

JD

As you should know by now, I have been waiting for confirmation that the stock market’s bounce off the extreme lows in March had run out of gas. Yesterday those signals arrived. The most significant of those was the Nasdaq gapping right through its 200 day moving average, failing to hold this key support level. In addition, Momentum has turned negative and most oscillators, including Stochastics and MACD, have rolled over, signaling the end of the up trend.

We do not expect the market to fall to its March lows, but rather provide opportunities for investors to get back into stocks at better levels. The SP 500 could find support at 25 point intervals as low as 800.  The DJIA should find support around 7800, while the MNX is likely to hold up around 128.

JD