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Nov

6

Market Talk - November 4, 2007

Filed Under Market Snapshots 

November 4, 2007

I honestly don’t know when this madness will end, and the US equities will just take their 25% correction like a man.  Last week, the FOMC, as expected, cut both the fed funds and discount rate another 25 basis points, but also finally made some not quite subtle comments regarding the stifling energy and commodities prices that are being precipitated, at least in part, by the continuing devaluation of the US dollar.  Although the markets rallied on this news, the bill was paid the next day in the form of a near 400 point drop in the DOW, even after over $40 billion of liquidity was pumped into the system on that day.  The fallout from the irresponsible lending and borrowing continues as Citigroup’s CEO Chuck Prince seemingly will follow the lead of Merrill Lynch’s Stan O’Neal and take his formidable severance package and quietly sneak out the back door.

The stock gave up nearly $5 on Thursday and Friday to close at $37.73.

My assessment of the week from a fundamental standpoint was that most of the data was stronger than expected, oil closed at a ridiculous $95.93, and the dollar is at all time lows versus basically every  other currency.  The whispers of a pause, if not a hike, will shake these markets further, because the additional 25 basis point cut that is expected on December 11, which I alluded to in earlier articles, might not take place and the technical dynamics of the major averages are having very difficult times with these toppy levels.

However, the VIX remains curiously low (went out at 23.01 on Friday), and downside protection will be cheap to come by.  As a matter of fact, it is this author’s opinion that the time to get long the dollar could be right around the corner, and of course that would lead one to be short equities, energy, and commodities and long the VIX.  Although, that is predicated on the fact that the folks in Washington remember that it “is not the job of the FOMC to bail out the US equities markets”.

From an options standpoint, cheap volatility and substantial intraday price swings would lead most traders to consider long gamma positions, this strategy would been appropriate in the recent past.  For an explanation of this strategy, go to www.optionsuniversity.com.  In addition, subscribers to our membership site would have been made aware of a possible short term price reversal in MRK, based on a technical scenario called price/volume divergence.  From Wednesday’s close to Friday’s close, MRK was down over $2, with very little in the way of extrinsic price in the Nov 60 puts.  I would tend to expect some short term sideways activity forthcoming with little in the way of data or earnings to be expected.  However, geopolitical activity is always on the radar, as is now perhaps some more resignations in the financial sector???

 
Greg Wolfe, Options University

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