Conviction is defined as having a fixed or firm belief.  And, at the start of May, our conviction was that the month would not end without a sharp decline that would take most by surprise!  Last week was that surprise for many.  Not for us, however and not for Phil.  We were all quite skittish during the second run up to 13,100 just 6 trading days ago.

We went out on a limb late last week to call the top in oil also and backed up our conviction with a Trade Alert on the DUG.  Unfortunately, we didn’t get the pullback we wanted today on the DUG, so we decided to be patient before executing the trade.  If it comes in… great!  We will add it to our Exxon bear call from a few weeks back, which is in good shape now.  If the DUG never retraces, we will remain disciplined and will refuse to chase it.  We went bullish on the FXE and benefited from a perfect open last Monday before Tuesday’s pop.  The timing was equally spectacular on the FXI before that so we can’t expect the market to give us perfect opportunities every week!

One of our members asked recently about long-term plays and General Electric has popped up as a company that would fit well into this category now.  We had an internal price target of $30 in the short-term and $30.40, where it closed today, is good enough for the purposes of this article.  GE has not been this low for nearly 4 years (5-20-04).  In fact, you would have to go back to 2003 to find a 10 year low for this international behmoth!

When GE was trading at $32 per share, its CEO was purchasing stock.  With the stock trading almost $2 lower, we believe the $30 level could act as strong support.  Technically, the RSI is quite oversold and fundamentally the reward to risk ratio is becoming ever more attractive.  Even if $30 was broken, the next level down is $28, a point at which the stock hovered back in 2003.

Th…

At first glance, the past 5 years or so has been a glorious time for US stock market investors - a boom time!  The S&P 500 is up almost 80% since the low in March 2003, an annualized gain of almost 12% per year.  This is very close to the average long-term forecast espoused by many financial analysts, and a full 4% points above the historical performance of the stock market. 

If the only chart we paid attention to was that of the S&P 500, we might be lured into believing that this has been a boon period.  But the next chart reveals “something is rotten” (as Marcellus in Shakespeare’s Hamlet is famous for saying!).

The US Dollar Index has suffered a massive decline from close to the 100 level to its most recent close around 72.  Indeed, if the gains of the S&P were translated into euro terms, the result would be a 5 year gain of LESS THAN 20%, an annualized gain of less than 4%, which is HALF the historical growth rate!

If this is where the “rotten-ness” ended, we might be comforted.  But digging still deeper, we can see clearly the results of the decision by the Federal Reserve to cut interest rates and to stand by the statement that the “government is prepared to do whatever it takes to maintain financial stability in our market system”. 

 The result is soaring commodity prices and surging import prices.  As these commodity prices soar and living expenses mushroom, confidence among consumers diminishes as we have already seen with simply horrible numbers reported recently! 

As consumer confidence declines, spending on discretionary item…

CAVEAT EMPTOR - BUYER BEWARE!  This week brings retail reports….more on that later!

Monday’s Round-up!

Dow:  12,876,31 - up 130.43 points (+1.02)

S&P 500:  1,403.58 - up 15.30 points (+1.10%)

Nasdaq:  2488.50 - up 43.00 points (+1.76%)

Russell 2000:  733.23 - up 9.90 points (+1.83%)

The overall markets shrugged off a number of negative headlines today including

• High Oil Prices
• A huge earthquake in China
• A loss from Sprint Nextel (S)
• Plus a warning from Fedex (FDX) last Friday evening

Fedex was as low as $87.59 but managed to finish positive by days’ end, rising to $90.50 (+ $0.13). 

Despite relatively low volume and concerns over today’s action being a short-covering rally, the strength in the markets remained throughout the day.  This will be a very busy week with economic data and earnings reports, so we will soon find out if the strength will be maintained.

Earnings Reports

Tuesday:  Wal-Mart (WMT), Applied Materials (AMAT), Whole Foods (WFMI).

Wednesday:  Arcelor Mittal (MT), Diana Shipping (DSX), Deere (DE), Freddie Mac (FRE), Macy’s (M), Sony (SNE), Ctrip.com (CTRP), Jack In The Box (JBX…

One of our members recently asked us a question regarding generating monthly income while mitigating risk, and so we thought it might prove helpful to share some of our thoughts, particularly given the recent run up in equity prices.  The member had 5,000 shares of company stock and was concerned the stock would decline if the overall market fell.  At the same time, he didn’t want to sell his stock in case the stock managed to creep higher.  While he thought some upside was possible, he felt it was limited.  For every situation, an optimal strategy exists and for this situation, the Covered Call fit the bill! 

While Covered Calls may be applied in myriad ways, the strategy that best met all the stated objectives was the at-the-money Covered Call.  The at-the-money Covered Call simply comprises opening short call options at a strike price close to the stock price.  In general, for every 100 shares owned, 1 short call contract is sold.  So, for a 5,000 share position, 50 short call contracts may be entered.  The stock in question was Cypress Semiconductor, trading on Monday’s close at $26.86.  The nearest strike short calls were the strike 27 short calls, which in May offered $0.60 of premium.  Knowing the premium and the strike means that our Cypress shareholder wouldn’t want to see the stock rise above $27 by more than the net credit amount prior to May’s expiration - otherwise it would have been more lucrative in the short-term to simply hold the stock position.  Because $27.60 is so close to the existing $26.86 stock price, and with the market running up so quickly since our mid-April bottom call, a June strike 27 option offering $1.40 credit may be considered more prudent.  The additional credit means additional protection if the stock were to fall.  And it also means if the stock should rise higher,…

Take a look the data due to be released over the next few days….

Tuesday: Agco (AG), Archer Daniels Midland (ADM), Arris Group (ARRS), Avon Products (AVP), Bemis Company (BMS), British Petroleum (BP), Buffalo Wild Wings (BWLD), Burlington Northern Sante Fe Corp (BNI), Corning (GLW), Countrywide (CFC), Daimler AG (DAI), Domino’s (DPZ), Energizer (ENR), Express Scripts (ESRX), General Cable (BGC), Medco Health Solutions (MHS), Office Depot (ODP), Panera Bread (PNRA), Under Armour (UA), US Steel (X), Valero (VLO), Waste Management (WMI).

Wednesday: Akamai (AKAM), Centex Corporation (CTX), Colgate-Palmolive (CL), Cummins (CMI), Dean Foods (DF), First Solar (FSLR), Garmin (GRMN), General Motors (GM), HESS Corp (HES), IAC (IACI), Ingersoll-Rand (IR), International Paper (IP), Kellogg (K), Kraft (KFT), Murphy Oil (MUR), National Oilwell Varco (NOV), OfficeMax (OMX), Proctor & Gamble (PG), Prudential (PRU), SAP AG (SAP), Starbucks (SBUX), Sunoco (SUN), Symantec (SYMC), Time Warner (TWX).

…

The charts of today’s action tell the story of a ho-hum Monday.  The Dow pulled back ever so slightly, down 24 points.  The NASDAQ squeezed out a slight gain, up just 5 points and the S&P 500 dropped just a couple of points to close at 1388.  All in all, a win for the majors following last week’s gains.

The real news in earnings season happens after-hours.  And after-hours today, Netflix (NFLX) dropped almost 15% despite the largest subscriber gains in the online DVD rental service’s history.  Indeed, earnings were up 36%.  So, why the drop?  The dreaded forward-looking guidance comments; a projected slowdown going forward hurt the stock in after-hours trading.

Texas Instruments also dropped after-hours to the $30 region despite its quarterly profit also rising.  It was groudhog earnings day as Texas forecast results below Wall Street esimates, attributing hesitancy among its customer base in addition to reduced demand for high-end cell phones.

Chief Financial Officer Kevin March said “We’re just responding to our customers’ conservatism.  They’re managing their inventory very tight”

Tuesday brings a plethora of earnings announcements:

AK Steel (AKS), Ameriprise Financial (AMP), AT&T (T), Broadcom (BRCM), C.H. Robinson Worldwide (CHRW), Chicago Mercantile Exchange (CME), Coach (COH), Dupont (DD), Jacob’s Engineering Group (JEC), JetBlu (JBLU), Kimberly Clark (KMB), Lockheed Martin (LMT), McDonald’s (MC…

In a twist on I fought the law and the law won, we fought the rat and the rat lost!  More on that later!!

IBM, Intel, Google, Caterpillar and Honeywell all report earnings as the VIX is perched slightly above its 200-day MA…the same 200-day MA that held as support in October and December.  This most recent test of the 200-day MA almost broke through to the downside but failed to show much conviction and the danger is rising that support will be held again. 

At Stock and Option Trades, we have been keeping a very close eye on the 1325 level for the S&P 500.  If we disregard the panicked spike down in January, the 1325 level was quickly regained in January and held through much of February.  Indeed it wasn’t until March that the old support level turned into a resistance level.  This month that old resistance may well turn into support again and we believe that the next 24 hours will prove crucial. 

We mentioned over previous weeks that we expected a surprise bearish dip and last Friday that occurred.  Our internal models project strength over the next couple of weeks in the markets assuming the 1325 level can hold so Tuesday will be a very important day and we’re looking for anything above that key threshold level to signal high likelihood of a bullish follow through to the end of the month.

The NASDAQ moved too far too fast to the upside in late March and it was no surprise to see the doji followed by a reversal pattern bearish in April as predicted.  The likelihood now is for a resumption of the bullish trend for a couple of weeks, starting either Tuesday or Wednesday.

The oil …