The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Friday, December 8, 2006
Email – #234
The Market… The Portfolio… The Week Ahead
Dear Volatility Trader Member,
Want an update on the entire Volatility Trader portfolio and every position in it individually? You got it. Every Friday, from now on, you’ll be receive a macro portfolio update, so you can read it over the weekend and be ready for the following week.
So here goes with today’s alert and portfolio roundup…
Market Wrap
While this week’s economic numbers generally weren’t very good, they were nonetheless good enough to keep the major indexes in the bullish trend. The trend lately has been to buy on all selloffs, especially towards the end of the day.
However, Friday’s employment situation report may have turned the tide. See, total employment was better than expected for November, while month-over-month wage growth remained low. What this means is that jobs are increasing, while wages are not indicating substantial inflation – good news for the economy.
So if the numbers were that good, why didn’t the market close up 100+ points? I’ll tell you why… because bulls know that the possibility of a soft landing means the Fed won’t lower rates next spring – an event bulls have been pricing in aggressively over the past month.
What’s more… although the Nasdaq 100 did recover from yesterday’s 1% drop, the fact that stocks like Research in Motion (Nasdaq: RIMM) were downgraded and declined over $6 in Thursday’s session, is now causing bulls to take a moment to look around and ask if it’s time to take some profits off the table?
And let me ask you… if a stock you owned was up 40%, 50% or even 100% for the year, would you consider closing the position? Probably so.
This is the reason we didn’t close up on Friday, and why the CBOE Volatility Index (VIX) spiked in Thursday’s session. Frankly, fear of a pull back is beginning to keep a few bulls from sleeping easy at night. Given that the Dow Jones Industrial Average only closed up 25 points today (with the positive employment situation report), money just isn’t flowing into the market now, like in previous weeks.
Portfolio Update
Payless Shoesource (NYSE: PSS)
Jan 07 $30 puts PSS-MF
Purchased: 12/6/2006
Price 0.75
Current Price 0.75
Return 0.00
While Payless Shoesource has not made a large down move yet, today’s employment situation report indicated that fewer jobs were added in retail the seasonally strong month of November, than normal. What’s more, retail stocks (clothing) are showing poor relative strength compared to the broader market. This position is setting up nicely.
AutoZone (NYSE: AZO)
Dec 07 $115 puts AZO-XC
Purchased 11/29/2006
Price 3.7
Current Price 0.4
Return -89.19%
AutoZone gapped up significantly earlier in the week on strong earnings and an upgrade from Standard & Poors. I’d be lying if I said I wasn’t worried about this position. However, there is a glimmer of hope with only five trading days to expiration. Despite the strong trading action this week, the stock has not been able to achieve a new high, which means, it could easily come under fire next week, which would be a big plus for us, and for the put option.
Mattel (NYSE: MAT)
Jan 07 $25 puts MAT-ME
Purchased 11/22/2006
Price 2.85
Current Price 2.95
Return 3.51%
We’re in the thick of toy-buying season, and Mattel is struggling to hold ground. Our position just went green today, despite the major indexes trading positively. This means that the stock is showing poor relative strength in regard to the broader market, and will crumble with any weakness in the major indexes. What’s more, because we implemented the January option, we stand to profit handsomely from post-Christmas shopping blues… especially if any fresh news surfaces regarding Mattel’s potential litigation liabilities form the Polly Pocket play. A government study just reported that at least one child has died and 19 others needed surgery after swallowing magnets. No one in their right mind wants to be in the way of this stock if it begins to dump. We do though, because we own puts.
S&P 500 Strangle (AMEX: SPY)
Option Buy Price Current Return
Dec 06 $138 puts SFB-XH 0.75 0.15 -80.00%
Mar 07 $146 calls SFB-CP 1.45 1.7 17.24%
I’m still waiting for the broader market to sell off, given bulls lack of chutzpah to be able to put in new highs – with volume. Next week could be all we need to exit our December puts profitably – just a few days before options expiration on the 15th. I’ll keep you posted on this next week, but please be prepared to exit the December puts, if the S&P 500 falls.
St. Paul Travelers (NYSE: STA)
Dec 2006 $50 puts STA-XJ
Purchased 11/10/2006
Price 0.3
Current 0.05
Return -83.33%
There hasn’t been any news released this week that would drive this stock higher. However, the position has lost significant ground, as it’s an out-of-the money option and we’re very close to expiration. However, the stock only needs to fall $2 (a doable number) for the option to hit the strike. I haven’t lost confidence in this position yet, and encourage you to hold.
FuelCell Energy (Nasdaq: FCEL)
Dec. $5 calls FQG-LA
Purchased 11/7/2006
Price 1.75
Current Price 1.3
Return -25.71%
Does the play “Waiting for Godot” ring a bell? We’re waiting for alternative energy, which is on the eve of a large bull-run. However, our December option may be too early. If we get a “pop” next week, we’ll close the December option and re-open January or March calls.
Vornado Reality Trust
January $125 Puts VNO-ME
Purchased 12/6/2006
Price 2.8
Current Price 2.65
Return -5.36%
I couldn’t be more optimistic about a position. Commercial REITs are overleveraged and overvalued in the short run and are demanding a pullback. When this stock sinks, it’s going to sink fast! And, we’ll be along for the ride. It’s vitally important to remember not to pay more than $2.80, if you’re still trying to get filled on the position. I noticed today that the spreads have narrowed to between $2.65 and $2.85 – a great sign for the option, and for those who are still thinking about implementing a position.
The Week Ahead
The big bang next week will be the FOMC meeting on Tuesday, where Wall Street will look towards comments from the Fed on inflation and the current state of affairs. Right now, Fed Fund Futures are pricing in virtually no chance of a rate hike or cut, so the current interest rate will not be a factor. However, investors will be looking for any comments relating to a rate cut early next year.
I believe the market has already priced in a quarter point cut in March, and any language inferring the Fed has no plans to actually drop the overnight rate, will result in a broader market selloff.
On Thursday, Retail Sales will prompt direction for our Payless Shoesource position, if the report shows consumer apathy in November.
Finally, on Friday, the CPI report will unveil fresh numbers on inflation for economists to scratch their heads over. I feel that because month-over-month wages in November were lower, this aspect will not be a factor.
However, oil remained above $60 a barrel for the latter half of November, which could easily come into play. Overall, the report should be tame, though in my view, inflation will be up just enough, that the market will think twice about a rate cut in March, something the Fed will have already stated earlier in the week. At the end of the day, we are on the eve of another pullback; it’s just a question of whether it will surface within the next two weeks, or the first week of 2007.
Until next time, have a good weekend.
Exit is everything,
Mark Whistler
