RealMoney's Best of Blogs

As always, RealMoney's bloggers were all over the market action this week, and we'd like to share the best of their recent commentary with readers of TheStreet.com. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.

Let's take a look at Rev Shark on properly playing an earnings week, Steve Smith on how to use a dispersion strategy and Tony Crescenzi on the latest FOMC minutes.

Click here for information on RealMoney.com, where you can see all the blogs -- and readers' comments -- in real time.

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Rev Shark's Blog: Don't Get Battered by a Jagged Market
Originally published on 7/16/2007 at 8:05 a.m. EDT

Few men of action have been able to make a graceful exit at the appropriate time.
-- Malcolm Muggeridge

As the bulk of earnings season kicks off this week, the market is set up very well for some volatile action. A big spike on Thursday and some follow-through on Friday has left the indices technically extended, which creates the danger of a "sell the news" reaction as earnings reports roll out. However, this is a market with momentum, and buyers have made it very obvious that they will seize on even questionable news as an excuse to do some buying.

One of the reasons for the big move last week was better-than-expected sales from retail giant Wal-Mart (WMT Quote). If you dig into the news a bit, however, there seems to be little basis for euphoria. The better-than-expected sales were primarily due to a surge in food sales, while apparel and household goods were soft. What is driving the increase in food sales isn't increased demand but increased inflation. Food costs have soared nearly 7%, but because this isn't part of the "core" inflation calculation the whole issue is being ignored to some degree by the market.

It is very easy to poke holes in the arguments and justifications for why this market has been strong. There are some very good arguments for why this can't last and why things are going to get more difficult in the near future. However, investors just aren't ready to start worrying about negatives right now. In fact, the big move last week was probably driven in large part by fear of being left behind as the market continues to gallop higher.

What we have to watch for this week is a catalyst that kills momentum and triggers selling. Earnings are obviously the most likely source of a potential problem. The bar has been raised after the move last week and when companies like Intel (INTC Quote) and Yahoo! (YHOO Quote) report on Tuesday night, expectations are likely to be higher.

On the other hand, there is a tremendous amount of frustration among the many investors who have been underinvested too long. Many have patiently waited for pullbacks in which they can deploy their capital but have had only limited opportunities. As a consequence, there is a strong tendency to quickly jump in on any minor dip. That has kept strong bids under the market and when we do see some worries kick in and weakness result, it doesn't last for long.

That sets the stage for what is promising to be a very tricky week. Will good earnings be enough to keep this strong market strong or will the temptation to take profits kick in? Strong momentum has relegated macro negatives to the back burner, but that can change very quickly. We will need to be at the top of our game this week if we hope to profit.

We have a slightly soft open on the way this morning. Overseas markets are mixed, and there is no big news on the wires, other than a rumor of a deal between Vodafone (VOD Quote) and Verizon (VZ Quote).

No positions.

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Steven Smith's Blog: Defining a Dispersion Strategy
Originally published on 7/19/2007 at 2:15 p.m. EDT

Stock indices are holding higher, but the underlying movement in individual names is substantially diversified. Earlier this spring, stocks were moving uniformly, as stocks across a wide variety of sectors tended to move in unison on both up and down days.

But then in June, the subprime mess unhinged the financials from the rest of the market. Now, with earnings reports steadily flowing in, the lack of correlation among individual stocks -- even those in the same sector -- and the market at large has become more pronounced. Does this mean we are truly in a "stock-picker's market"?

It always helps to pick the winners (and short the losers), but the current environment lends itself well to using a dispersion strategy. While it can be fairly complex and labor-intensive, the strategy can be more forgiving to those who don't make all the right calls in individual names.

The basic premise of a dispersion strategy is to sell option premium, or get short gamma, in index products against buying volatility, or being long gamma, in individual names that make up an index.

The theory is that the moves in individual names will offset one another and leave the index trading with relatively low volatility, allowing you to collect option premium. In the meantime, you hope the individual names will have large price swings, providing the opportunity to profit from stock-specific positions.

The rub here is that either you still need to be a good stock-picker, or you have to buy strangles or straddles in the individual names and hope the price swings are sufficiently large to offset the relatively higher implied volatility and time decay of the more expensive options.

This strategy can be applied to sector funds and would have been working particularly well in technology, specifically if one had sold a strangle in the Philadelphia Stock Exchange Semiconductor index (SOX) and got long gamma in names such as KLA-Tencor (KLAC Quote).

Exchange-traded funds like the Semiconductor HOLDRs (SMH Quote) can also work, but be aware that in these products, a handful of names can account for nearly half the product's weighting.

The strategy would also be working nicely in the retail sector. Think of rallies in names like Target (TGT Quote) and Macy's (M Quote) and the large decline in Sears (SHLD Quote).

But again, I would choose the Select Sector SPDR: Consumer Discretionary (XLY Quote) over the Retail HOLDRs (RTH Quote), in which Wal-Mart (WMT Quote) represents nearly 28% of the product's weighting.

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Tony Crescenzi's Blog: Highlights from the FOMC Minutes
Originally published on 7/19/2007 at 5:55 p.m. EDT

Minutes from the Federal Reserve's June 28 FOMC meeting are largely consistent with recent public commentary from them, including this week's testimony by Federal Reserve Chairman Ben Bernanke.

The minutes are littered, as usual, with references to "some members" and a "number of participants" taking the opposite side on most of the hot topics of concern to the financial markets.

While there are many such references, they do not appear to signal any imminent shifts on major issues, such as housing and inflation. A relief is the lack of any reference to FOMC members contemplating scenarios that could lead to future interest-rate hikes.

Interesting was the lack of reference to the falling dollar, likely the result of careful editing of the minutes, a tone reflected in the oddly empty comments by Fed Chairman Bernanke on this important topic. The lack of Fed lip service on the dollar could weaken its value because the Fed almost seems to be leaving the value of the dollar to chance.

Interesting also were comments from the Fed indicating that there could be a downward revision to employment for 2006, hence pushing productivity growth higher toward levels consistent with the trend of the past decade (when the amount of goods produced is held constant, but there is a downward revision to the amount of people it took to make those products, the amount of production per workers is boosted).

Absent in the discussion over the employment revision was whether the Fed thought that there might be a downward revision to construction employment, reflecting the fact that many of the industry's workers are unauthorized.

The productivity discussion was important, in part because it also shows that the Fed might believe that the economy's growth potential has slipped a bit, something that the Fed has been acknowledging for some time, including today in comments by Chicago Fed President Michael Moskow (voting member retiring next month).

Predictably, the notion that inflation remained the predominant risk was mentioned in the minutes, but with no particular emphasis. In fact, "members generally regarded the risks to economic growth as more balanced than at the time of the May meeting." This does not mean that the Fed is tilted toward cuts, just that the recent moderation in inflation and the weak housing market had reduced the risks of accelerating inflation.

Communications issues were again discussed, and it looks from the Fed's limited commentary on the matter that everything is on the table, with both the Fed's policy statement and the minutes themselves discussed at the June 28 meeting.