Market Close –> Wednesday, March 28, 2012

Recent stock market action has unfolded just as we had anticipated.  Our current SPX “call spread” position is now 80 points “out-of-the-money” with market action working in our favor – our trade is looking great at this time!  After yesterday’s weak performance, a poorly received report from the Commerce Department this morning drove the bulls to the sidelines. Orders for durable goods rose 2.2% in February after falling 3.7% in January; however, this reading failed to match the 3.0% growth anticipated by analysts.  While market dynamics have fueled an impressive 1^st Quarter performance, don’t assume this “bullish” move will continue!  The “Sell in May” phenomenon might just come a little early this year.

As we mentioned earlier this week, portfolio managers have to a large degree perpetuated stock market gains during March, BUT, quarter end “window dressing” is near an end.  Also, portfolio managers are facing forced “asset allocation” re-balancing as we head into the 2^nd quarter (because of the market gains, this means selling stocks to re balance).

As we have mentioned for months now, we continue to believe that the best thing this market has going for it right now is NOT improving fundamentals and economic outlook, it is the U.S. and European commitment towards current monetary policies (“easy money” and a commitment to low interest rates).  While these policies cause hard assets to appreciate (including stocks), it is not necessarily a “good thing” and does not ultimately help the situation and is not sustainable (the stock market moving higher).   To say these policies have had diminishing returns to enhancing “economic stimulus” is an understatement!

While these policies have ultimately NOT helped spur economic growth and prosperity, they have helped inflate stock prices up to this point.  The “wealth affect” across America, however, has not been so successful.  With a dismal employment and jobs environment, a housing market still in recession and now skyrocketing energy costs, the disconnect between prosperity/U.S. citizens standard of living and the U.S. stock markets continues to widen.

Without a doubt, equity markets have risen sharply since the market lows of October 2011.  From a technical perspective, however, markets are showing signs of being over extended.  Fundamentally, it is becoming increasing difficult to make a cogent case for improving economic conditions and earnings growth (with related multiple expansion).  The SPX is currently at roughly 14 times forward earnings (2012) in a seemingly slowing earnings environment.

Serious problems in Western Europe (and U.S. economy), combined with slowing global emerging economies (i.e. China, India, Brazil), have put the global growth story in jeopardy.  China’s GDP is slowing and with Europe’s economy contracting even more than previously anticipated (China’s #1 export destination), China’s robust growth may continue to cool.  Without robust emerging market economies (and Europe entrenched within another recession), U.S. growth could easily slip from a lackluster 2% level to a “flat to negative growth” outlook (recession or even worse).  While analysts are notoriously “late” in ratcheting down earnings estimates in a slowing economy, earnings could very likely be ratcheted down as we continue through 2012.

At this point, the S&P 500 is already at or ABOVE the majority of analysts/money manager year-end price targets!  Bottom line – the rest of 2012 may be a lot more volatile and investors could be in for a wild ride!

At 1405, the SPX is now below levels when our trade executed on March 19^th (approximately SPX @ 1412).   We continue to look for limited upside potential over the near-term with SPX 1425 – 1435 as the next level of resistance.  Support levels in this environment are more difficult to determine but we would anticipate a fairly narrow trading range over the near-term with a rise in volatility.

Again, we are not necessarily anticipating a significant or dramatic selloff within the equity markets at this time.  Even so, a pause or minor pullback and some back filling with the major averages is well overdue and highly anticipated over the near-term.

For now, we simply need to remain patient and let the market dynamics work in our favor.  Stay tuned…..

Market Close –> Monday, January 9, 2012

Over the course of this latest option cycle, equity markets have performed just as we had anticipated and our trade is positioned extremely well with only 8 trading days remaining until expiration!

Earnings season is once again upon us with Alcoa kicking things off with their earnings report after hours.  Alcoa could provide a preliminary insight as to the general strength and global demand for basic materials….we shall see.   With economic instability and uncertainty (and now geopolitical risks) a major overhang on the equity markets, any sign of strength (or weakness) could quickly move stocks.

Technically, markets remain in a seemingly “wait and see” holding pattern.  Trading ranges within the major averages have been extremely narrow during the New Year with both support and resistance remaining very entrenched.   Not to sound like a broken record, BUT, volume remains VERY anemic with buyers simply not willing to step in and buy stocks with conviction.   While volatility levels have declined from levels reached last week, we are anticipating volatility (risk) to increase once again in the days/weeks ahead.

While not looking “bearish” at the moment, price action across the major averages is starting to show signs of worry and warning.  Again, stability in these types of markets can often provide a false sense of security and disappear rapidly.  The longer stocks continue to trade sideways (in a very narrow trading band) and volume remains LOW, the likelihood of selling pressure (risk off) increases dramatically.  Since the New Year ’s Day “pop”, the SPX has remained “flat”.  The Russell 2000 is perhaps the weakest link in the major averages, essentially flat since mid-December 2011 and still unable to break through its 200-day moving average and establish any uptrend.

Our initial resistance level of 1285 on the SPX has indeed been a significant hurdle for the S&P 500 up to this point – it has been tested repeatedly and has been met with some selling at that level.  If the bulls are to remain in control, a move through 1285 must occur soon.   Beyond 1285, we would consider 1310 – 1315 the upper resistance levels on the SPX IF a rally does ensue.

Frankly, however, the risks to global markets remain extremely high and the catalysts to propel stocks significantly higher are becoming an endangered species.  We have not and do not buy into the “misguided” logic (proposed by many Wall Street gurus) that stocks MUST outperform other asset classes simply because “alternative” investments and interest rates (bonds, money markets, and savings rates) are SO LOW that investors will ultimately choose to invest in stocks…….we think that is a very weak and incorrect assumption.

For now, equities are entrenched within a fairly solid trading range.  Beyond that, nothing has changed this week which would alter our near-term outlook for the equity markets.  Currently, we are 55 points “out-of-the-money” from our contingent exit point with only 8 trading remaining in this option cycle!!

The SPX closed today at 1280.70.  Our 1345/1355 “Bear Call” credit spread has just under  two weeks to go before option expiration and our trade still looks to be in good shape at this time.

Market Close –> Tuesday, November 1, 2011

CONGRATULATIONS!  Option Empire auto-traders successfully executed a credit spread option trade today (expiring November 18^th, 2011)!  All auto-traders received a $.50 net credit (5.26% return on capital) with the execution of the SPX (S&P 500) 1050/1040 “Bull Put” credit spread.

With seemingly “insane” news out of Greece last night, panic rippled through equity markets across Europe in overnight trading.  When U.S. markets opened, stocks were slammed with a major selloff.  Markets tumbled across Europe in response to the announcement by the Greek Prime Minister to hold a “referendum” on the agreement which is expected to take place in a few weeks.  The Greek Prime Minister said he would “let its people vote” on an unpopular European plan to rescue the Greek economy.  This was unbelievable and unexpected news out of Greece and it would undoubtedly have severe negative outcomes for Greece and ultimately Europe and the globe!  Later in the morning, however, another Greek official announced that this “referendum” was NOT going to happen.  By mid-afternoon, the outlook was again uncertain.  Regardless, the situation is very tenuous across the pond!

The Dow Jones industrial average plunged over 300 points by late morning.  As European markets closed, Italy’s main stock index dropped 6.8 percent. France’s fell 5.4 percent and Germany’s fell 5 percent.  Once the “bone head” announce was unofficially “rescinded” however, U.S. stocks rebounded somewhat off their morning lows.  By the close of trading, the major averages had drifted lower once again and closed near their respective lows of the day.

After monitoring U.S. markets and international events VERY closely, we elected to place our current trade – a “Bull Put” credit spread on the S&P 500.  Unlike yesterday (in which were not even close to obtaining the necessary spreads or premiums), today was a completely different story.  By mid-morning, we were able to execute our desired Put Spread at 1050/1040 and receive a $50 net credit!

As you have seen, investor sentiment and market action is very manic and fluctuates from the “risk on” extreme to the “risk off” extreme virtually overnight!  Just last week, the SPX was near 1300 and many market pundits were predicting “new highs” before year-end.   Three days later, Europe is again seemingly “imploding” and investors are running for safety.   Although we are not overly bullish short-term (and certainly not longer-term), circumstances do favor enhanced support levels within the markets.

The case of strong underlying market support is both fundamental and technical.  The markets are now entering the most “bullish” period (historically) within the U.S. equity markets (November – January).  Corporate earnings have remained quite strong this earnings season with relatively positive outlooks (industrials).  In fact, earlier indications of a “double dip” recession have larger been diminished or discounted.  Even though interest rates remain extremely low (indicating bearishness), the “allure” of equities (especially large, dividend paying stocks) becomes more and more appealing as stocks retreat back into “bargain territory”.  This is particularly true this year since many fund managers have once again been dramatically “underperforming” their respective bench mark averages and are feeling tremendous pressure to perform and “close this performance gap” (buy stocks on dips).

Technically speaking, the major averages have held major support levels since the August lows/selloff.  The SPX, for example, has held very strong support levels between 1115 and 1125 after testing these levels 4-5 times since the beginning of August (only violating briefly on October 3^rd and 4^th).

Bottom line – we anticipate continued volatility and disappointing news out of Europe (after all, it is Europe!).  However, we are also anticipated strong support levels and other market dynamics (above) to put a floor under this market (well above our Put Spread).  At this time, we would look for 1175 as the next level of support on the SPX.  IF the SPX violates this level, we would anticipate major support at 1125 – 1135.  For now, however, our PUT SPREAD is “out-of-the-money” nearly 170 points (or nearly another 14%) with 12 trading days remaining until expiration.

The SPX closed today at 1218.28.  Our 1050/1040 “Bull Put” credit spread has two and half  weeks to go before option expiration and our trade still looks to be in great shape at this time.

CONGRATULATIONS!  Option Empire auto-traders successfully executed a credit spread option trade on Tuesday (expiring October 21^st, 2011)!  All auto-traders received a $.2738 net credit (2.82% return on capital) with the execution of the SPX (S&P 500) 1350/1360 “Bear Call” credit spread.

With equity markets near their highs Tuesday morning (S&P 500 at 1219), we were able to execute our October 2011 “call spread” on the SPX (S&P 500).   Although equities posted nice gains throughout the morning hours, we viewed this move as extremely suspect.  The SPX bumped up against the 1220 resistance level, before pulling back throughout the afternoon hours, closing DOWN 2.00 points at 1202.09.

After the Fed’s “acknowledgement” on Wednesday that the U.S. economy is “in trouble”, together with a bankrupt Europe and slowing economies in China and other emerging markets, investors dumped stocks and ran for the exit doors.  As of Thursday’s close, the S&P 500 is now down over 10% for 2011.

By contrast, our current 1350/1360 SPX call spread generated a nearly 3% profit for the month, is over 200 points “out-of-the-money” with a nearly 100% probability of success (all profit) and our YTD performance will be over 25% profit for 2011!!

After inept governance within the U.S. and Europe and with massive structural economic impediments still very much intact, the markets are finally coming to grips with a potential economic recession on the horizon.

Where do the equity markets go from this point?  Again, not much has changed. The trend and bias is decisively “bearish”.  The SPX has in fact “re-tested” support levels in the 1120 – 1130 range this week yet again.  As we mentioned on Tuesday, IF the SPX does re-test these levels and does hold again, equities could once again enter “rally” mode back to resistance levels (SPX 1220 – 1230).  However, another re-test of support would be the third “re-test” in the last month and would statistically point to a further break-down (another leg down).

As always, we closely monitor and track the bond markets.  Although not foolproof, the bond markets are often a more reliable indicator of “what lies ahead”.  Treasury yields continue to decline and indicate trouble ahead.  The 10-yr Treasury, for example, is at yield levels only seen once in the last 100 years!!

The red flags have been waving and, in our opinion, equities will have a difficult time moving substantially higher.  Europe is still a “mess” with seemingly little urgency (and perhaps even ability) to help itself out of its fiscal nightmare.  With the U.S and Europe (nearly 50% of global GDP) teetering between little-to-no growth and recession, the risks are significant.  Unfortunately, the economic and political structural issues that plague the U.S and European Union have simply not be addressed or corrected up to this point.  Without those structural changes, the “best case” scenario, in our opinion, is that the U.S. and global economies muddle through economically and avoid the “worst case” or catastrophic outcomes.

We believe the technical and fundamental backdrop within the equity markets has definitely shifted and we would suggest extreme caution for investors considering “going long” equities at this point. Many “long only” advisors and fund managers routinely try and make the case that equities are “cheap” at this point based on many historical and fundamental metrics.  If viewed in isolation, this could be true.  However, the playing field and the rules have changed and “value” may now need to be re-evaluated.  In other words, “cheap” does not always equate to “value” and “cheap” does NOT necessary equate to a “buying opportunity”!  That goes for “dividend stocks” also.  Many of the “advisor lemmings” propose fleeing to “safety” in high dividend paying stocks.  Again, don’t think that high paying dividend stocks are a “safe” investment!!  For example, a stock which pays a 5% annual dividend and loses 25% of its share price value is STILL DOWN NET 20%!!

The SPX closed yesterday at 1129.56.  Our 1350/1360 “Bear Call” credit spread has just over four weeks to go before option expiration and our trade still looks to be in great shape at this time.

Welcome to Summer 2011!  After a decisive downtrend within the U.S equity markets, stocks logged their fourth consecutive day of gains.  Economic data, however, continues to confirm a U.S. and global economic slowdown.   Since the U.S equity markets have been and continue to be tethered to international growth (the U.S. domestic economy is essentially “dead in the water”), U.S. equity markets will be highly correlated and dependent upon international economic conditions.

Technically speaking, the equity markets were certainly “oversold” during last week’s downdraft.  The SPX did in fact trade very close to our downside target of 1250 (the SPX hit an intraday low of 1258 last Thursday).   After highly anticipated “good news” regarding another Greece bailout, stocks rallied yet again today.  Today, the SPX advanced 17.16 points, or 1.34%, to close at 1295.52.  The Russell 2000 advanced 17.88 points, or 2.27%, to close at 806.37!

So where do the equity markets go from here?  Again, the equity markets were very oversold last week and this “rebound” is not a big surprise.  In addition, much of today’s action was a result of “short covering” and not necessarily “conviction buying”.  Nevertheless, this latest advance could continue higher over the coming days if sovereign debt concerns subside …..at least for now.  However, we do not anticipate “higher highs” on the major averages and, in fact, would look for major resistance in the 1320 – 1325 range on the SPX.  That does not necessary mean we expect U.S. equities to continue higher, it is simply a short-term trading possibility.  We still maintain our negative bias on the U.S. equity markets – technically and fundamentally.

Many economists are again “throwing darts at the board”, trying to predict when we (the U.S.) will recover from this “temporary slowdown” and resume on a sustainable economic growth trend.  In our opinion, these economists are once again missing the “big picture” and have mistakenly viewed these moves as “cyclical” in nature, not “secular”.   Again, while markets fluctuate and cycle throughout any economic environment, the longer-term trend in a secular bear market is always DOWN.  Until, and if, the structural issues and dynamics of our economy are addressed (from a policy, fiscal, taxation, regulatory and social perspective), the uphill battle appears “dire” from an economic standpoint.

From the standpoint of our next trade, however, we are taking a wait and see approach at this point.  Since the markets are currently in “unpredictable” territory, we will continue to monitor the markets for more clarity and conviction before making any moves/trades.   Even though the June trade was a very “stress free” trade (just the way we like it!), we do not feel the need to rush into a position for July given the current market conditions.  At this point, the S&P 500 is barely in positive territory for 2011 (just over 3% on the SPX) while Option Empire subscribers have nearly a 20% gain as of the June 2011 option expiration!!

Regardless of the long-term market outcome, we continue to subscribe to our basic investment philosophy – investors should have long-term objectives but manage their capital and risk on a short-term basis. Why do we focus on Index option “credit spreads”? Once again, at the end of the day, we all have our opinions and projections on the long-term economic outlook.  With our short-term credit spread strategy, however, we do not have to make this prediction, nor put our capital at risk placing a bet on such a long-term prediction.   We are only concerned about “short-term” market activity (in our case, typically 21 – 31 days)!  We are perfectly content with our 3% – 5% average monthly profit, without being at the mercy of the equity markets going higher and regardless of the final outcome! And, just as we have seen during this option cycle, placing a conservative option position based on our unbiased and objective analysis is much more predictable and profitable than the “Buy, Hold and Hope” investment strategy!

We will continue to focus on the market “technicals”, in combination with the fundamental backdrop, and wait for the right trading opportunity to present itself over the coming days or weeks.   We will continue to be patience and wait for our opportunity…stay turned!

Market Close –> Friday, June 3, 2011

Friday’s market action produced more of the same….”ugly” economic news resulting in falling stock prices.  Again, this is NOT a surprise and investors SHOULD beware!   Most of the major averages close at or near their respective lows of the day.  The SPX closed at a significant technical level – 1300.16 (down 12.78 points, or nearly 1%).

Last Thursday, we mentioned that the S&P 500 was threatening major support levels.  By Friday’s market close, the S&P 500 had in fact broken two significant support levels.  The SPX closed below its 100-day average for the first time since last August.  In addition, the weekly charts show the SPX ending well below the “up trendline” drawn under its August/March lows.  Both of these technical violations place a great deal of weight of the bearish outlook for the U.S. equity markets.

At this point, our downside target on the SPX is a drop to the March low near 1250.  Incidentally, this level also happens to coincide with the 200-day moving average. The 1250 level on the SPX represents a significant support level for a number of reasons.  It happens to represent the bottom of Wave 4 in an Elliott Wave sequence, in addition to coinciding with the 200-day moving average.  Also, the 1250 level represents a test of a two-year “up trendline” drawn under the 2009/2010 lows.  Essentially, that means that the SPX needs to remain above that level to keep the two-year bull market intact.

The SPX closed today at 1300.16.  Our 1385/1395 “Bear Call” credit spread has less than two weeks to go before option expiration and our trade still looks to be in great shape at this time. All auto-trade subscribers recognized a 3.09% Net Crediton our current credit spread position.   Upon a successful expiration on June 17^th, 2011, our 2011 YTD return will stand at a 19.63% PROFIT!!

Welcome to JUNE!!

OUCH! U.S. equity markets sold off today after another wave of “very ugly” economic data.   Following yesterday’s “irrational” market advance, we stated – “It can be rather amazing and perplexing at times to “make sense” out of seemingly irrational market behavior.  In reality, other factors are usually at work which have relatively little, if anything, to do with the headline news.  Starting tomorrow, however, the month on June is upon us and the bulls will likely NOT have “clear sailing ahead”.”

Indeed, today’s market action and investor sentiment was VERY different from yesterday and was very sobering!  Most of the major averages plummeted throughout the day and closed at or very near the lows of the day.  At the close, the S&P 500 lost 30.65 points, or 2.28%, to close at 1314.55!

This mornings ADP jobs reports was pretty ugly with only 38,000 new private sector jobs in May.  That’s well below the 175,000 jobs that were expected.   This is a major confirmation of the recent slowdown, and a very ominous sign ahead of Friday’s big jobs report.

The ISM manufacturing index weakened sharply in May, falling to 53.5 from 60.4 in April. The new orders and production components both fell by roughly 10 points (a very large decline by historical standards). The ISM Manufacturing Employment Index also fell to 58.2 in May from the April 62.7 levels.   On the international and emerging markets front, economic data is also affirming a global slowdown across China, India, Korea, and many parts of Europe.

In our opinion, the market downside risk has increased dramatically…both from a fundamental and technical perspective.  For now, the equity markets are performing as expected and our trade looks very well positioned at this point.  In this type of “technical” environment, support levels can quickly become “temporary” if selling accelerates and investors head for the exit doors.   For now, we would look for 1300 on the SPX as the next level of support.  If breached, 1275 is probably not far behind.

The SPX closed today at 1314.55.  Our 1385/1395 “Bear Call” credit spread has just over two weeks to go before option expiration and our trade still looks to be in great shape at this time. All auto-trade subscribers recognized a 3.09% Net Credit on our current credit spread position.   Upon a successful expiration on June 17^th, 2011, our 2011 YTD return will stand at a 19.63% PROFIT!!

Market Close –>  Friday, May 20, 2011 

Congratulations to Option Empire subscribers on another profitable month!  Our SPX 1395/1405 “Bear Call” credit spread expired this morning resulting in a profitable trade for the month of May 2011l!  All auto-trade subscribers recognized a 3.09% PROFIT for the monthly option cycle ending May 21, 2011!  Our 2011 YTD return now stands at a 16.54% PROFIT!!  

Stocks continue to slide on more evidence of global economic slowing, from Europe to China (of course the U.S. has yet begin to true recovery).  Today, the S&P 500 slide 10.33 points to close at 1333.27, essentially the lows the day.   

The equity markets performed almost exactly as we had anticipated over this past option cycle.  Our 1365 upper level resistance level on the SPX did indeed hold through the end of April.  After the early May pullback, we targeted an upper level retracement target of around 1350 on the SPX.  Up to this point, the 1350 level seems to be holding as a major resistance level ….for now.  For weeks now, we have been monitoring a lot of sector rotation within institutional buying.  There has been a rotation out of many of the industrial, energy and financial sectors and into more defensive sectors such as health care, consumer staples and utilities.   This type of sector rotation is usually indicative of an economic slowdown ahead and is not a good trend if you are “bullish” of the equity markets.   

Since last year, we have been discussing the affects AND IMPLICATIONS of “easy money” (debasing our currency via “printing money”) and the results of such actions.  Of course, hard assets, commodities, precious metals, AND YES, STOCKS increased dramatically in value….. that IS the result of printing money and that WAS the intent (as stated by Mr. Bernanke of the Federal Reserve).  However, as we stated last fall – this is a temporary measure which does NOT address or remedy the underlying problems/issues and only serves to worseness the economic situation longer-term.  Hence, the current U.S. economic and fiscal condition.   

Structural unemployment (within the U.S.) continues to remain a chronic drag on our economy and U.S. consumers.  With high under/unemployment, the impact of inflation and perhaps another leg down in the residential real estate market, the question remains – will the Fed’s “master plan” of injecting massive amounts of money into the system, driving up the price of hard assets (and thus creating a “wealth effect” for consumers) actually be enough for stimulate (or save) the consumer and thus the U.S. economy going forward??  So far….not yet.

BUT, QE2 is “officially” over in June 2011….right?  Well, maybe “officially” but not unofficially!  The Fed is already “planting the seeds” by announcing further support efforts (whatever means necessary) and is gearing up to shift into another easing program.  Although we don’t anticipate a “QE3” type program, there will undoubtedly be more “easing” disguised under a different name/method.   We believe this pre-announced “commitment” by the Federal Reserve is serving to provide an enhanced support level under the equity markets at this time. 

And what about inflation?  According to Mr. Bernanke, our current inflation “concerns” are simply transitory and “temporary”.  In our opinion, that is highly unlikely.  The long-term trajectory of the U.S. dollar is DOWN.  Granted, other fiat currencies are also under pressure and the U.S. is not the only country enmeshed within a fiscal and monetary nightmare (i.e. most of Europe).  Even so, the downward pressures on the U.S. dollar are simply too great.    

The recent “rebound” in the U.S. dollar over the past week (however temporary in nature) has taken some of the air out the equity markets as well as commodities.    

The double edged sword, however, is the ongoing economic strength (or lack thereof) within the emerging/developing countries. If this economic growth continues, the paradox (or divergences) between a strong U.S. equity market and a suffering U.S. consumer will continue to widen.  Emerging market strength will likely reveal itself within the commodity sectors – oil, coal, copper, steal and agricultural commodities to name a few.  Even with a stabilizing U.S. dollar, continued economic growth within the emerging/developing markets will ultimately drive the demand for energy, materials and food (agricultural related commodities) and thus continue to exacerbate inflationary pressure at home and abroad. 

Regardless of the long-term outcome, we continue to subscribe to our basis investment philosophy – investors should have long-term objectives but manage their capital and risk on a short-term basis.   Why do we focus on Index option “credit spreads”?  Once again, at the end of the day, we all have our opinions and projections on the long-term economic outlook.  With our short-term credit spread strategy, however, we do not have to make this prediction, nor put our capital at risk placing a bet on such a long-term prediction.   We are only concerned about “short-term” market activity (in our case, typically 21 – 31 days)!  We are perfectly content with our 3% – 5% average monthly profit, without being at the mercy of the equity markets going higher and regardless of the final outcome! And, just as we have seen during this option cycle, placing a conservative option position based on our unbiased and objective analysis is much more predictable and profitable than the “Buy, Hold and Hope” investment strategy!

We will continue to focus on the market “technicals”, in combination with the fundamental backdrop, and wait for the right trading opportunity to present itself over the coming days or weeks.   The June option cycle is a four week cycle.   At this point, earnings season is essentially over and we have now enter the “slow period” within the equity markets and still a great deal of overhead resistance within the major averages.   We will continue to be patience and wait for our opportunity…stay turned!

Congratulations to Option Empire subscribers!!

Our SPX 1360/1370 “Bear Call” credit spread expired last Friday morning resulting in a profitable trade for the month of April!  All auto-trade subscribers recognized a 7.53% PROFIT for the monthly option cycle ending April 15, 2011!   Again, our trading strategies are based on a disciplined and conservative methodology, designed to produce consistent returns or profits (on a monthly basis), irrespective of the market performance or direction.   Our profitable trade success ratio is in excess of 90%!! 

This latest option cycle was a classic example of why we rely on the “facts” and “technical data” and NOT the rhetoric and “talking heads” to place our trades. 

After the March selloff, a “relief rally” ensued within the equity markets (not unexpected).   However, as we mentioned on March 22^nd, this did NOT mean the markets were once again “back to the races” and they would revert back to a sustainable “bullish trend”.   At that time, our analysis was forecasting very strong resistance at the 1325 – 1330 level.  Although we did not proclaim a market “top”, we were seeing limited upside movement at that point and forecasting a market consolidation or perhaps even more downward movement over the near term.  However, the short-term trend, or bias, was “bearish” at that time and we continued to view substantially more risk to the “downside” in the U.S. equity markets. 

Even though the SPX “relief rally” did continue into the mid 1330’s, resistance did indeed hold and the short-term trend maintains its “bearish” bias at this point. 

Just as in Washington, where the “thinking” inside the beltway is often disconnected from “Main Street”, Wall Street often functions in a similar manner. Most economists are notorious for being extremely analytical and having the ability to “talk a good game”, however, most are also perpetually WRONG in the end. Cursory analysis based on outdated models or flawed assumptions are simply no match for “common sense” understandings of basic economic truths and realities.  As for Wall Street, many analysts and money managers also promote their own interests, motives and agenda.  Be careful who you listen to and do your own homework.  For traders who are looking to capitalize of short-term opportunities, don’t ignore “common sense” and “what the markets are telling you” (technicals).  

Again, it is important for traders/investors to realize that short term moves within equities markets are NOT necessarily driven by fundamental factors (in other words, just because the market is going up does not necessarily mean that “things” are improving).   It is also important for “traders”, as well as investors, to remain objective and disciplined in their investing approach and NOT let emotions influence their trading decisions. 

At this point, we continue to evaluate the equity markets and prepare for our next trading opportunity.  Technically, the short-term outlook continues to exhibit a bearish bias.  Fundamentally, our view has been and remains that the underlying economic fundamentals are indicating “weak to moderate” growth which would NOT support multiple expansion within the equity markets (in other words, not much upside for this point).  Economic growth and expansion are vital and key if equity markets are to continue substantially higher from these levels. 

The one caveat, however, would be the Federal Reserve.   If the Fed does indeed initiates another round, or continuation, of quantitative easing (essentially EQ3), all bets are off. 

If this occurs, investors would likely benefit from “keeping their chips in the game” and riding equity prices even higher.  BUT, this “house of cards” will undoubtedly collapse as another equities bubble develops, waiting to devastate unwary investors in the future.  We believe that this is a very real possibility….especially if we see further quantitative easing (printing money), in which case equities (and other hard assets, including commodities) continue to escalate through 2011.  Obviously it is too early to make that prediction; however, the forces are definitely in motion at this time.  Regardless of the long-term outcome, we continue to subscribe to our basis investment philosophy – investors should have long-term objectives but manage their capital and risk on a short-term basis.  

We have enjoyed enormous success, in large part, due to our subscriber’s eagerness to share their success with friends, family and business associates.   If you have friends and family that could benefit from our service, we welcome to opportunity to help them achieve investment success through Option Empire.

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Market Close –> Tuesday, March 15, 2011

Equity markets opened this morning with much more “fear” as stocks sold off hard in early morning trading.  Concerns and fears over Japan’s nuclear plant disasters (and the unknown consequences) ripped through the European and U.S. equity markets.  In the first fifteen minutes of trading, the SPX traded down to 1261 (nearly back to the 1257 level the SPX closed at December 31, 2010).  After hitting their respective lows during the first hour of trading, the major indexes started a slow and methodical recovery to close well off those lows (still down over 1% on the day).  During the last fifteen minutes of trading, however, selling volume increased significantly and the SPX dropped from 1288 to close at 1281.

As we mentioned yesterday, the “buy on dips” investors are seemingly becoming an endangered species.  Is this the extent of the “selloff” in equities?  Is this now a buying opportunity for investors?  Again, as we mentioned yesterday, we believe the technical and fundamental backdrop within the equity markets has definitely shifted and we would suggest extreme caution for investors considering “going long” equities at this point.

Leading economic indicators across Europe (with the exception on Germany) and Asia (primarily China) have all been weakening as of late and pointing to an economic slowdown.  To what extend, still an unknown.  Many of the major brokerage firms and analysts have lowered their global and U.S. GPD outlook (growth projections) and estimates for 2011 and 2012.  However, those same firms have yet to lower their corporate earnings projections.  If corporate earnings start to show real deterioration, look out below!! 

This gets back to our P/E multiple expansion argument.  As we have been stating since the beginning of this year, economic growth MUST be accelerating and earning growth must be expanding rapidly to justify P/E multiple expansion.  IF corporate earnings do not expand at “robust” and healthy levels, or perhaps even slow or contract, earnings multiple expansions can not be justified.  Given a slowdown in corporate earnings growth, multiple expansions are NOT justified and U.S. equity markets would be considered “FAIRLY” to “OVERVALUED” at current levels!

As the S&P 500 struggles to remain in positive territory for 2011, our 2011 YTD performance will be 5.92% once our current call spread expires this Friday.  At this time, our current trade looks like a slam dunk!  Our SPX 1380/1390 call spread is nearly 100 point, or 7.81%, “out-of-the-money” with two days (plus Friday’s opening settlement) to go before this Friday’s option expiration. 

The SPX closed today at 1281.87.  Our 1380/1390 “Bear Call” credit spread has two days (plus Friday’s Opening Settlement) to go before option expiration and our trade still looks to be in great shape at this point.