Solid or better earnings reports from a number of mega-caps, including Chevron (CVX) - Get Report, Apple (AAPL) - Get Report and Microsoft (MSFT) - Get Report, pushed the Dow to a record-setting close on the week. The average stayed above 13,000, finishing the week 1.2% higher at 13,120.94. The other indices enjoyed a lift, as well, and the S&P 500 closed the week up 0.7%, while the Nasdaq added 1.2%.
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 proper selling,
on the Forex effect on earnings,
on credit spreads and
on this week's new-home-sales numbers.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: The Strategy of Selling
Originally published on 4/23/2007 at 11:50 a.m.
In this market that is giving the impression it is never going to go down again, it is a good time to talk about one of my standard trading strategies, which is to steadily sell small portions of my positions into strength.
As a stock goes higher, I slowly peel off some shares and hopefully have reduced my holdings as the stock becomes extended and is ripe for profit-taking and/or consolidation.
The biggest mistake I usually make with this approach is selling too much too soon. It is always surprising to me how far a strong stock can run. Invariably, I need to be more patient, but when the stocks with strong momentum do turn, they tend to drop painfully fast.
Given the consistent strength in this market for so long now and my propensity to sell into strength, I find that my long-side exposure in certain names is falling fast. A good example is
(ROCM). This is a stock that has gone from 14 to over 27 this morning in a little over a month. I had a position that I sold too fast into the strength, and now have only 1,000 shares left, having sold the bulk of my position at an average price much lower.
The key with a strategy like this is to not be averse to rebuying a stock at a higher price. That is very difficult mentally for some people to do, but if you are going to play strong momentum, it is going to keep you on the sidelines a lot if you don't do it.
At the time of publication, De Porre was long ROCM, although holdings can change at any time
Please note that due to factors including low market capitalization and/or insufficient public float, we consider ROCM to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices
Cody Willard's Blog: The Effects of FX
Originally published on 4/26/2007 at 12:51 p.m.
I hesitate to write this post, as I'm never one to go Cassandra on ya. But the fact is I think the exuberance over the demand overseas is out of whack with reality.
Much of the strength from
, which got 42% of its sales from overseas this quarter, is directly attributable to the decline in the dollar relative to most other fiat currencies during the last quarter.
First off, look at how far the U.S. dollar has fallen against the euro:
Picture this scenario: You're Pepsi, and you're selling Doritos to Europeans. Those Europeans go to the store and pay, let's say, 1 euro per bag. You happen to have a great quarter, and you sell 100 bags of those MSG-laden Doritos to Europe's citizens.
At the end of the quarter, you have to take that 100 euros and convert it to U.S. dollars before you report it on your earnings report. Every dollar in that conversion at the end of last quarter cost you 0.78 euros, but today it'll only cost you 0.73 euros. If the euro hadn't appreciated against the dollar, you would have reported $125 in revenue. But with the dollar having collapsed against the euro since the end of the quarter, you report $137 in revenue.
Now, obviously there are more moving parts to this when it comes down to the reports from these companies. Some hedge currency risks, others don't. A few managements will even point out this FX impact to investors.
But to take the remarkable revenue growth that most of the
is showing in Europe and elsewhere overseas and to conclude that the world away from the U.S. is in outright boom mode is not the right analysis. Things overseas are steady and better than here in the U.S. (that's partly why the dollar has been so weak), but they're not exploding to the upside in the same way that these companies reporting such great overseas results are showing.
On a related note, by the way, I'm starting a boycott on Frito Lay products because I can't stand that they put propaganda on the packaging of their products like the Sun Chip bag that says, "Made with Whole Grains to Support Heart Health." I'm sorry, but eating a bag of whey protein concentrate, disodium phosphate, artificial colors and plenty of other chemicals is
support my heart's health
. How about keeping it real Frito-Lay, with a classic "Flip it"? Use this instead, "Sun Chips -- Not entirely made up of reconstituted food and chemicals. How bad can it be for your heart?"
At the time of publication, the firm in which Willard is a partner was net long Apple, although positions can change at any time and without notice.
Steven Smith's Blog: Shorting with Credit
Originally published on 4/26/2007 at 11:58 a.m.
the earlier post regarding my distaste for momentum markets and reluctance to buying new highs, I should admit I actually tend to start looking for ways to establish short or bearish positions when markets enter these types of straight-line run-up conditions. Standing in front of a runaway train can be a very dangerous and unprofitable game. That is why my first rule is to limit risk by using options.
Within that framework, I tend to look at using call-credit spreads, which are bearish, and establishing a stop-loss level based on the underlying stock price. By selling a call spread for a credit, two items work in your favor: Because the position benefits from time decay, it can still turn a profit if the stock remains flat or moves even moderately higher. Using a spread, which is a limited-risk position, established a natural stop, or maximum loss. Also, the spread, as a simultaneous purchase and sale of similar options, mitigates the impact of changes in implied volatility which, during earnings season, can be quite dramatic.
But since most credit spreads offer a higher maximum risk than reward, I also like to set up a stop-loss for exiting the position based on the price of the underlying shares. On the other side, as far as taking profits, I use a rule of thumb of taking profits once the position has achieved around 75%-80% of the maximum profits.
A Steely Example
Let's look at an example of how this might work. Earlier in the week,
I mentioned that I thought steel stocks, such as
were looking overbought, and I was looking to set up a bearish position. On Tuesday, I pulled the trigger on one of the names for the Option Alert Model Portfolio, but because the position is still open, we'll use an "XYZ" example to illustrate the call-credit spread strategy.
Assume XYZ was trading around $71 per share. One could sell the May 70 calls for $3 and buy the May 75 calls for $2 net credit for the spread. The maximum loss would be $3, or $300, per contract spread if shares of XYZ were above $75 on the May 8 expiration date. The maximum profit is $2, or $200, per contract spread if the shares are below $70 at expiration. But note that the position can actually turn a profit if the shares remain at $71, or even rise to $71.99, (excluding commissions of course) at expiration.
To further reduce my risk, I will initially set a mental stop-loss that if the stock rises above $74, I'll close the position. If this occurs within the next two weeks, the value of the spread will increase to approximately $3.50, meaning I incur a $1.50 loss. Setting that stop loss tilts the position to a more favorable risk/reward.
But as time moves toward expiration, the higher long call with the higher strike price, in this case the $75 call, will offer less protection as time decay depresses its value and delta, that is, its ability to increase in value as the stock rises. For this reason, once the position is two weeks from expiration, I would lower the stop-loss to a price at or just above the breakeven point, in this case, $72 per share.
You Got the Silver
Now to the good side, taking profits. Assuming a flat stock price, meaning XYZ remains around $70 per share, just as risk increases as expiration approaches, reward diminishes. This is the reason for my "taking profits at 75%-80% of maximum profits" rule above, in which I'll close the position at that point, regardless of the time frame.
In this case, it would mean buying back to close the spread for a net 50 cents for the spread. So, basically we end up with a position that has a one-to-one risk/reward; make a $1.50 or lose $1.50, an even money play. At that point in time, the short options' delta will start to approach 1.0 and make the position equal to just being outright short the stock.
An even-money play may not seem exciting, but consider yourself the casino in this case, in which the house takes its
vigorish for accepting the risk of paying a large payout. In this case, thanks to time decay, and hopefully being right on your directional bet, you get to scrape all chips off the table for taking on the other side of the bullish trade and handling the action.
Tony Crescenzi's Blog: Nothing New from New-Home Sales
Originally published on 4/25/2007 at 11:22 a.m.
Wednesday's report on new-home sales provides no new information to counter thewidely held view of weakness in the housing market. The report does not gobeyond, however, this bearish slant, which hence means that it won't beenough to derail the generally bullish sentiment that exists in the equitymarket. In part, that is because the report is better than Tuesday's existing-homesales report. For the bond market, the report will help to sustain hope ofan eventual
rate cut, but there is nothing in the report to suggest anyurgency.
New-home sales increased 2.6% in March to an annualized pace of 858,000, wellbelow forecasts for a pace of 890,000, but not substantially so, given thevolatility of the data series and the fact that the figure is annualized. TheMarch gain follows what was the lowest pace since June 2000.
The first quarter was a weak one, with sales falling about 14% compared tothe previous quarter's average. For those in the stabilization camp, it ishence notable that sales over the past three months have moved largelysideways, averaging 2,000 below the March figure. At the very least, thesefigures show that the rate of decline might be slowing. This is supportedby the combined figures on new- and existing-homes sales, which have beenrelatively stable over the past four months.
Inventory levels remain troublesome. The number of unsold homes was 545,000 inMarch, up 1,000 from February and about 200,000 normal levels. The inventory-to-salesratio fell to 7.8 months from 8.1 months in February, which was the highestlevel since January 1991. The current level is still about three months abovenormal.
In sum, the typically busy spring selling season has thus far been weak,which will leave the industry with burdensome inventory levels when theseason ends. If the economy were to slip, these inventory levels will takea very long time to clear, perhaps well into 2009 or even 2010, dependingupon the degree of economic weakness. The new-home market is likely toclear faster than the existing-home market, where there is 1.2 million inexcess inventory, largely because builders are responding drastically to thehousing slowdown.