Weekly Stock Options Trading Tips: May 4, 2009

Stock Options Trading Idea of the Week

What Others are Saying – A Report on Volatility from Yahoo! Finance

For several months, our portfolios have not performed as well as they have in the past because of the extreme volatility we have experienced in the markets.  Our strategies do best in a flat market, but we haven’t seen much flatness for almost a year.

This week I would like to share a report that clearly shows just how volatile this market has been.

Terry

What Others are Saying – A Report on Volatility from Yahoo! Finance:  Our current level of volatility is unprecedented in most of our lifetimes. Going back to March 1950, the average daily change in the value of the S & P 500 over the previous 60 years has been a tad less than 0.6%. In 2006, it was 0.5%. In 2007, it was 0.7%. In 2008, the average daily change in the value of the S&P index was 1.7%.

This is a huge variation: 300% of normal volatility, on average, day in and day out, for a year!  Here are the numbers:

That's an admittedly dense table. But look at the second column -- the way things "normally" played out, from 1950 to 2006 -- and you'll notice that 54% of the time, the S&P 500 closed up or down less than half of 1% in a day (rounding to 0%). An additional 38% of the time, the index closed up or down 1%, leaving a small percentage (less than 8%) of greater-than-2% movements up or down. In 2009, these larger moves occurred on more than 53% of the days.

So, to recap: It's normal for the S&P 500 to essentially close unchanged (less than half a percent up or down) about half the time. The year 2007 was close to normal, but 2008 and 2009 have been off the charts, with the volatility reaching a fever pitch in a surreal fourth quarter.  There have been just three days since March 1950 in which the S&P 500 moved up or down 10% or more -- and two of them took place in the fourth quarter of 2008! The only other crazy-volatile day was Black Monday, Oct. 19, 1987.

In 59 years, there were a total of 14 days in which the index moved up or down 7% to 9%. Six of those days were in 2008 -- five of them in the fourth quarter alone. In a "normal" quarter, the index moved less than half a percent up or down on an average of 32 or 33 trading days. In the fourth quarter of 2008, there were only four such days.

We have just experienced titanic levels of volatility that (hopefully) we will be able to tell our grandchildren about -- provided we live so long, and provided there isn't worse still to come. While it was on average more volatile than all of 2008, the recently completed first quarter of '09 was considerably less wild than the last quarter of '08. So far, so good.

Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s)  or give him your thoughts.

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I look forward to having you on board, and to prospering with you.

Terry

Andy's Market Report

April marked the second straight month of gains for the major indexes. Earnings reports have been the major catalyst that has pushed the market sharply higher over the past few weeks. The S&P 500 (SPY) rose 9.4% during the month which was the largest monthly gain since March 2000.

"After the big run-up everyone is just trying to step back and trying to put their game plan together for the next month," said Sean Simko, head of fixed income management at SEI Investments in Philadelphia.

The week began with the futures sharply lower on reports of a swine flu outbreak. The news dominated the headlines throughout the week. A day earlier (Sunday), Janet Napolitano declared a “public health emergency” which certainly spooked the market, but as we can see by the results at end of the week the scare was not enough to keep Wall Street down. I must point out that while the outbreak is potentially troublesome there have only been a few severe cases in comparison to the 13,000 deaths that occur each year on average from the “normal flu”. Just some food for thought.

It was a big week for economic data. Over the past few weeks economic data has proved to be quite strong in comparison to economists’ expectations. On Tuesday, the Consumer Confidence report came in at 39.2 which was significantly higher than the anticipated 29.7. The following day Chicago’s PMI came in at 40.1 and this was also higher than the 35.0 consensus. To top it off on Friday the ISM ?Manufacturing report came in slightly higher at 40.1 to once again beat economists’ expectations of 38.4.

Not all of the economic data proved positive. GDP came in much lower than expected at -6.1% and residential construction plunged to a 38.0% annual rate. As bad as the GDP number was it did not keep the market down as Wednesday marked the largest gain for the week. The rally occurred shortly after the
number was reported as the attention moved to the FOMC announcement that was due to come out later that afternoon. The FOMC kept its rate the same and seemed to carefully word its statement. In the end the S&P gained 2.1% on the day. 

"With things going according to plan for once, the FOMC has no need to conjure up some new liquidity tool to show that it is on the job," economists at Wrightson ICAP in Jersey City, New Jersey wrote in a note to clients.

"Today, the economy is still very weak, but there are some encouraging signs that support cautious optimism," Atlanta Federal Reserve Bank President Dennis Lockhart said on April 17. Lockhart votes on the Fed's policy-setting panel this year.

As we look ahead to next week, earnings results will continue to come out at a rather fast clip, but it should be noted that a number of the larger companies have already reported. Economic data will be fairly light until Friday's Nonfarm Payrolls report for April. Furthermore investors will finally see the results of the government's bank stress tests late afternoon on Thursday. This should create an interesting  market next week.

"There's some apprehension about the stress tests next week and the fact that (the results) were pushed back, I think, is more of a negative sign," said Michael James, a senior trader at Wedbush Morgan in Los Angeles. On the technical front, much like the last two weeks the S&P is once again at the 870 level which has acted as a strong area of overhead resistance. Moreover, the push into resistance has also created a short-term overbought state in all but one of the major indexes. As has occurred over the past two weeks, I expect to see a short-term pullback (1-2 days) as a result of the aforementioned. After that, well, we will just have to let Mr. Market guide us.

Overbought/Sold Condition Report

Overbought/Oversold as of May 1, 2009

• S&P 500 (SPY) – 70.8 (overbought)
• Dow Jones (DIA) – 71.6 (overbought)
• Russell 2000 (IWM) – 69.2 (neutral)
• NASDAQ 100 (QQQQ) – 78.4 (overbought)

Testimonial of the week

Testimonial of the Week: One of our goals at Terry’s Tips is to provide subscribers with enough options knowledge so they no longer need us.  We were delighted to receive this message from a former subscriber:

“I'm using your multiple spread strategy using the NDX as the underlying.  I papered traded it for 6 months and was up over 100%!  Went live on the Oct/Nov spreads and made 18% the first month.  Thanks for the education!!   ~ GregIdea