The week that was provided plenty for investors to worry about: a bloodletting in the subprime mortgage market, a Bank of Japan rate hike, inflation fears and Iran missing its deadline to halt uranium enrichment.
In response to a higher-than-expected core consumer price index, commodities rallied sharply this past week, with several commodities indices either reaching or approaching all-time highs.
Crude oil jumped 2.5% for the week, settling at $60.88 Friday, and gold jumped 2.3% to close at $688.30 per ounce.
Despite the week's negative news, the major averages held their own. After hitting an all-time high on Tuesday, the
Dow Jones Industrial Average
ended the week down 0.9% at 12,647.48. The
ended the week up 0.8% to close at 2515.10. And, the
ended the week down only 0.3% to close at 1451.19.
bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the
. 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
on taking what the market gives you,
on the switchover to penny pricing for options and
on the different factors behind the gold rally. Cody Willard was out this week.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: Can't Fight the Bullishness
Originally published on 2/23/2007 at 8:44 a.m.
"A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do."
-- Ralph Waldo Emerson
For many months now the market action has been consistently positive. Each time we threaten to roll over, we spring back to new highs and all dips are eventually bought. It has been a market where anything other than complete and total bullishness has been the wrong call.
There is nothing out there to indicate that this consistent bullishness won't continue. The technical conditions remain positive, the news flow benign and bullish market players are showing steely resolve. As the old saying goes, 'The trend is your friend' and there is little question which direction that trend is heading.
So, those of us who wish to make some money continue to bow to the foolish consistency that has become the market trend. There is little to do but honor it and partake of what it offers but that doesn't mean we become true believers in its infallibility. One day conditions will change and it is extremely important that we not be so inured to the consistent bullishness that we are unable to adjust.
The trick of the market is that for periods of time it hands out great rewards to those who embrace it and trust it and love it. Eventually, though, the market beast will turn on its paramours. It has absolutely no loyalty to those who support it for long periods of time. We must always keep that fact in mind even when the action is consistently bullish, as it now. Enjoy the consistent bullishness but always cast a wary eye when it seems it will never end.
As we finish up the week the semiconductors and small-caps have become market leaders while the big-caps that dominate the DJIA have faltered. One thing that we know about the market is that traders always goes back to what's worked recently and that means small-cap momentum, and now, maybe, semiconductors. If those trends falter then we need to adjust but for now it is consistency, not creative thinking, that is paying the bills.
We have a flat start this morning with little news flow. Overseas markets did little, oil is up slightly and gold down. There is very little going on.
Steven Smith's Blog: Every Penny Counts
Originally published on 2/21/2007 at 3:24 p.m.
The rollout of the
Penny-Trading Pilot Program, which will allow options to be quoted and entered in 1-cent increments, was completed when two exchange-traded funds, the
Nasdaq 100 Trust
Russell 2000 iShares
, were added last week. This rounds out the 13-name list that will constitute what is supposed to be a three-month trial period.
But the glitch-free transition and positive feedback pretty much ensure that trading options in pennies is not only here to stay, but will eventually expand to the majority of listings. The impact is already measurable, and traders are quickly taking advantage of the tighter markets.
The average daily trading volume of the equity issues -- which includes,
-- has seen a 9% increase on average since the launch. For the two ETFs, the volume increase has been about 2%, but considering that the QQQQs and IWM had averaged over 100,000 contract a day, this still a substantial increase of some 20,000 contracts.
The increase in volume is probably the result of several factors, but all stem from the tighter bid/ask quoted in the market, many of which have narrowed down to one and two cents for the active strike prices. "A tight market invites trading activity, especially among active professionals for whom every penny counts," says Alan Wickoff, chief strategist at Bal-Wick Capital, a New York based hedge fund.
Indeed, there have always been stocks that traders gravitate to even if they are not among the most "important" in terms market leadership, or even best performers. Throughout the 1990s,
tended to be a trader's stock, and its options often logged more volume than peers such as
, whose technology and business dominated the semiconductor space.
For active option traders, the tighter markets remove some execution risk, such as slippage or trying to leg into a position, and reduces costs. Multileg or spread orders now get scooped up and filled quicker and at better prices.
There is also beginning to be a subtle shift towards away from the
, which is the most popular proxy for trading the broad market, but is not part of the penny pilot, toward the IWM as the vehicle of choice for option traders. Don Kaufman, chief derivatives officer with
, the online brokerage firm, says since the IWM began in pennies, he has basically stopped trading Spyder options. "Why should I pay a nickel or a dime to buy a large amount of out-of-the money options that I need strictly for hedging or margin when I can them for two cents in the IWM?" Kaufman asks rhetorically.
His point is that index products, which have low volatility and are widely used for hedging or complex strategies, enjoy more contracts traded per average transaction size, higher daily volume and greater open interest than most individual listings, so it makes sense to use the lowest cost and most efficient market. Those pennies can quickly add up.
Tony Crescenzi's Blog: Behind the Gold Rally
Originally published on 2/21/2007 at 3:54 p.m.
At the root of the surge in the price of gold is the Bank of Japan'scannibalization of its quarter-point rate hike announced early this morning,as well as the lingering effects of
Chairman Ben Bernanke's testimony last week. Combined, the heads of both the Federal Reserve and the Bank of Japanindicated that the pace at which financial liquidity will be drained fromthe world financial system will be gradual.
To this point, Bank of JapanGovernor Fukui was direct, saying that the BOJ won't raise interest ratesconsecutively, that future interest rate adjustments would be slow and thatrates are to stay very low. In other words, Fukui greenlighted theyen-carry trade, letting it "carry" on, so to speak.
For his part, Bernanke has fed a new leg-up in asset prices. I noted a weekago that Bernanke had essentially eased monetary policy by spurring aloosening of financial conditions via higher stock prices, lower bondyields, tighter credit spreads and a weakening of the U.S. dollar. Thishas facilitated a rally in commodity prices.
Another important factor boosting the price of gold is the continuedbuoyancy of industrial materials prices. This is evident in the Journal ofCommerce-ECRI's industrial materials price index, which reached a recordhigh on Friday and closed a smidge below the record today.
Other factors include an increase in speculative fervor, as evidenced inrecent data from the Commodity Futures Trading Commission; a technicalbreakout; central bank diversification; and a strike at a South African goldmine.