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Oct

14

October 14, 2007 Market Report

Filed Under Market Snapshots 

Well I think that the one word that could best describe the activity of the US equities markets last week would be indecision.  We appear to have landed in a sideways market, subsequent to the major indices reaching new highs and now consolidating, albeit in quite violent intraday fashion.  The bulls and bears are locked in an impressive battle that is the result of both technical and fundamental factors, and we may not see a true breech or retreat from these levels until the next FOMC meeting, unless the forthcoming earnings data is both dramatic and broad based in either direction.

Fundamentally speaking, the bulls appear to be a little bit uneasy about their additional 50 basis points cut that most expected to be a sure thing before the end of the year.  Slightly stronger than expected data in the weekly jobs report and retail sales and PPI numbers point to a possibility that the much feared recessionary boogey man could be avoided.  Add to that the rumblings from Europe that their central bank may be prepared to hike, and that may lead one to believe that the beleaguered dollar cannot be devalued further.  A “stand pat” or god forbid a hike by the fed, could lead to a quite impressive sell off.  Lookout this week for CPI numbers for September and housing starts and new permits from September.  Both of these numbers will be released on Wednesday  

Technically the Dow ended the week up a meager 28 points for the week although there were several days of tremendous volatility, and the index closed above the very important level of 14,020, although not decisively enough for me to turn bull nor was it on impressive volume.  Looking to the SPY, the sell off that occurred on Thursday was on almost twice the volume that the rally days of the week had.  Energy and commodities continue to soar, and earnings are looming.  Monday, Citigroup will report before the bell with 44 cents per share expected, and Intel will report after the bell on Tuesday with an expectation of 30 cents per share.

In a market environment like this, with cheap volatility and violent intraday swings, the long gamma trading strategy can be quite profitable if the trader is vigilant.  A trader can use his gamma position(by purchasing options) to flip stock throughout the day and not have to exceed much in the way of his short theta (decay), because the price he paid for that gamma is relatively cheap.

There are two things one might consider going into this week.  First, will the devalued dollar serve to enable company earnings to be over inflated and therefore exceed expectations?  Secondly, E-Trade Corp. reports earnings after the close on Wednesday.  If they soundly exceed expectations, could that lead one to believe that more retail long players are entering the market, leading one to believe that we may be looking at the top in US equities?  Or would we be better off to continue to be indecisive?
 

Gregory Wolfe

The Options University

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