Expiration Week Could Bring Fireworks and Fat Profits
1:30pm (EST)
The bulls pushed the market higher at the open on Friday after Wall Street got some encouraging news from the retail sector as domestic retail sales increased 0.3% last month versus expectations for a 0.3% drop. The Dow ran to a high of 10,644, up 33 points, but tapped the brakes after we got the consumer sentiment numbers.
The University of Michigan/Reuters preliminary consumer sentiment index fell to 72.5 from 73.6 in February and was expected to show a slight increase to 73.8. The market struggled with direction afterwards and finished mixed as all three indexes darted in and out of positive territory for the remainder of the day.
The Dow was the lone winner and closed at 10,624, up 12 points for the day. After closing lower on Monday, the index is on a 4-session winning streak which helped fuel a 58 point gain for the week, or 0.6%. It was the second straight week of gains and 4 out of the last 5 have been up. We like how the Dow held the 10,600 level and our short-term target remains 10,800 then maybe a run to 11,000.
We talked about the 1,150 level ALL week for the S&P 500 and how we would love to see a CLOSE above that level. After kissing this level on Thursday, the index made another 52-week intraday high of 1,153 on Friday but closed less than a point lower to settle at 1,149.99. Seriously, how crazy is that? If the market FADES from here, then this will be the clue we topped out again. For the week, the index was up 11 points, or 1%, and we are targeting 1,175 and then 1,200 if we continue higher.
And finally, the Nasdaq also hit a new peak at 2,376 before finishing a point lower for the day and closed at 2,367. For the week, Tech led the way as the index surged 41 points, or 1.8%. Our near-term target is 2,400.
We are hoping to see some fireworks this week and it’s possible with the March option contracts expiring on Friday. This usually brings added volatility.
We have been talking a lot about the current market conditions and right now the crowd is betting against a market breakout. We have tried to explain the difference between 2008, 2009, and the current environment. In 2008, the trend was down and last year the trend was up. Folks, basically we are right at the levels we were two years ago. Below is a 5-year chart on the Dow that also shows the years before were less volatile.
You can also see where the market made wild price swings and we saw trading sessions where the Dow would move anywhere from 500 to 800 points lower or higher on any given day over the past couple of years. We haven’t seen that type of action in a while as we are back to more “normal” levels. This chart also shows the two aforementioned resistance levels we are watching for the Dow – 10,800 and then 12,000.
The talking heads are saying we have come too far too fast as the Dow has been breathing fire since last March. The 1-year “anniversary” of the bulls marriage could end up being a two-year gig if we had to go on record right now. However, no one knows where the market will be in a year from now, let alone every day so we often ignore 1-year predictions.
We mention all of this because sometimes expectations can be high but the easy money in the market has already been made. The difference now is that instead of “trend” trading, we are “swing” trading. We have to accept this but at anytime the market can breakout to new highs OR hit resistance and fade. After fading, we could get a correction but we aren’t seeing that right now.
We think the rally still has legs but it feels like we are running on egg shells. There are some catalysts that we are watching that could ease our concerns…if unemployment can continue to improve and 1Q earnings come in solid then we will take the top off the convertible and put it in cruise control.
This week is also known as “Triple Witching” and this means the March options could make explosive moves. Triple Witching is when the contracts for stock index futures, stock index options, and stock options all expire on the same date. The event happens four times a year and occurs on the third Friday of March, June, September and December. It is an event dubbed as “Freaky Friday” on Wall Street.
We have talked about the key resistance levels for the Dow, Nasdaq and S&P 500 and despite the title, triple witching has actually proved to be a bullish time for the market over the last couple of years. No one really knows where the market will close this Friday when the March options expire but if you are bullish or bearish this is the BEST week to make speculative trades because the options are so cheap.
For instance, if a stock is at $40, you only have to pay 30 cents, or $30 per contract, on a $41 call option if you think the shares have a shot at $41-$42. This means you have the chance at making profits of up to 200%-300% if the stock makes just a 5% move. Here is how it works.
When a stock is at $40 there will be a huge battle for the bulls to keep it above $40 as where the short-sellers will try to take shares back under $40. If shares are at $40 and they makes just a 5% move it gets the stocks to $42. Those 30 cents options are now worth $1.00. If you bought a call option for 30 cents to buy the stock at $41 then the option would be worth $1 because it is considered in-the-money. So what is the return? 233%.
It gets better. If the stock rallies 8%, it gets shares to $43 and the call options would be worth $2. This means your profits are 567%. Of course, the downside risk is that the stock falls below $40 or doesn’t even make it to $41. This would mean the options expire worthless. So basically, it are risking $30 to make $100 or $30 to make $200. Sounds like Vegas, huh?
We recently started a “Watch List” for our subscribers and we will be profiling quite a few March expiration trades on companies that could be making huge moves this week. In fact, we are profiling 8-10 trades that could be triple-digit winners and they will be released Monday morning. We won’t be taking all of these trades put we could add one or two to our current portfolio.
The market will mainly trade on economic news this week and rhetoric out of Washington could help or hinder the current rally. Earnings are still trickling in and there are a few notable companies that will be reporting. The big test will come in April when we get first-quarter results as we will be able to see what companies have been doing so far in 2010.
If earnings continue to improve and the job market rebounds then we could get the mother of all rallies. Confidence is weak right now but there are a number of catalysts that can take us even higher. There is also the risk that things get worse for the economy but the market is always looking ahead and we think it likes what it sees.
We will be back in the morning with the economic news and an earnings preview on the companies reporting this week. The Members Area will also be full of new possible trades and we can’t wait for the action. We will see everyone at 9am (EST), sharp, on Monday morning.
Wall Street Braces for HealthCare Vote
Friday, March 19th, 2010
1:05pm (EST)
The looming U.S. Congressional vote to overhaul the U.S. healthcare system this weekend is putting a huge drag on the market as Wall Street prepares for the outcome. The market has fallen to session lows and it’s hard to say how this impacts Wall Street come Monday.
The concern from our camp is how the U.S. can pay for such a massive bill and the effects it will have on corporate America. Wall Street is not happy about the bill and you can see the nervousness as traders are locking in profits ahead of the weekend.
From a technical view, here is where we are.
The Dow is currently down 60 points to 10,719 after reaching a high of 10,819. As you know, we have been pounding the table on Dow 10,800 and as soon as we hit it the index today we faded. We are hoping for a close above this level and a push towards 11,000 but that looks unlikely today.
The S&P 500 is off by 7 points and is trading at 1,159 after reaching 1,169. Our targets are 1,175 and then 1,200 for the index but we also faded at that first level of resistance. The key level to watch to the downside is 1,150. A break below this level could lead to more selling pressure.
The Nasdaq is at 2,370, down 21 points, and has traded to a high of 2,396. We have been calling for 2,400 and this level was hit on Wednesday. The fact that we keep running up to this level and falling back is a little troublesome but we haven’t given up hope on a push towards 2,500.
Despite the concern over the health plan bill, the market can still go higher. All of the talking heads are calling for a huge pullback but they have missed the rally over the last 3 weeks. However, go by “feel” and all signs were pointing to a retest of the January highs.
Although the market faces serious headwinds and next week is a toss-up as far as direction, there are a number of positive catalysts that can carry us higher. First quarter earnings will start to roll in at the beginning of April and we think the numbers are going to be fantastic. We also have a shot at a better-than-expected jobs report in April and these two events could prove the economy is back on track and gaining strength.
As far as specific stocks today, HealthCare shares are having a good day. The group is up almost over 2% and is being led by Aetna (AET, $34.40, up $1.16), Cigna (CI, $37.56, up $1.72) and Wellpoint (WLP, $65.54, up $1.72).
The HealthCare sector has lagged the rest of the market for the past two months and a positive vote could remove some of the uncertain overhang from the stock of managed care companies. We expect to see a “buy the news” situation versus the “sell the news” we often talk about and we are seeing a little of that today.
Elsewhere, Palm (PALM, $4.42, down $1.23) is down over 20% and we wanted to follow-up on a couple of options we profiled this morning. The March 5 puts (UPY100320P00005000, $0.48, up $0.31) closed at 17 cents yesterday and are up 180% today. The April 5 puts (UPY100417P00005000, $0.90, up $0.45) have doubled.
We didn’t pull the trigger on these options but we have done well with some of our other trades this week. We were able to close two trades for winners this week so we can’t complain. Our subscribers booked nearly a 200% gain with Nike (NKE, $73.38, down $1.28) as they were stopped out of the other half of the trade this morning and over a 40% gain in Qualcomm (QCOM, $39.87, down $0.56) yesterday. We aren’t too worried about what the outcome of the health bill will be because we can trade any kind of market.
If it looks like the market heads lower or is going to tank then we will start looking at put options. And this is the way you should think. Look, we will play the market higher if that is the case but most investors are scared to play in the market when it is going down. Don’t be.
You can make just as much money in a down market as you can in an up market.
All of our 2010 CLOSED trades will be updated after the bell today so look for an update over the weekend for those of you who haven’t joined us. For our current subscribers, let’s get to the Members Area for the updates…
We will be back with our Weekly Wrap Sunday Night and it is one you won’t want to miss. Hopefully, we will have the healthcare news by the time we go to press and what you can expect come Monday morning.
Tags: health care vote, Nike call options, NKE options, Obamacare vote, option picks, option signals, options alerts, QCOM, Qualcomm call options, stock options trading
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