In a week marked by sometimes giddy media anticipation, the
flirted with but ultimately failed to break its all-time closing high, while window-dressing helped the stock market record its strongest third quarter in nearly a decade. Once again,
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 the strength of the market,
on reading charts,
on a buildup in buying pressure,
on trading opportunities in New River, and
on whether rising stock prices offset falling home values.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: A Market That Deserves Promotion
Originally published on 9/29/2006 at 10:21 a.m.
The big difference between this time at the highs and the last time? How about the fact that people really are going out of their way to criticize this market, while the last time everyone loved it?
It's become reckless to champion the market, and it's become prudent to steer people away from it.
I recognize that it is really important to keep a balance and remain skeptical. But given this rise is based on lower interest rates, a peak in inflation, a big decline in real estate speculation, a lower fed funds rate coming, a peak in oil and gas, and many companies poised to do better than expected because estimates are too low (check out
Research In Motion
just last night), what more could we want?
When is it
prudent to champion a market if it isn't prudent to do it this time? When is it ever right, if it isn't right this time around?
In May when we challenged highs, it was based on commodity-price increases, a rise in oil and a sense that the cyclicals could lead us. That's a bad high. That's a high that flies in the face of the
, and it is a high that was unsustainable. That was the run worth being skeptical of.
But a run based on the banks moving up? A run based on earnings increases? A run based on a colossal short position and a decline in IPOs and a substantial amount of money on the sidelines? A run based on the fact that we have never had as much money wanting to take over stocks -- the private equity sums?
It is ironic that the last couple of times it wasn't worth being a champion. But now that it is, you get more people being skeptical and so afraid of being part of the party.
To me, this is one of those moments where it is reckless to be so skeptical as to keep people out. So, let me be prudent and champion the darned thing!
At the time of publication, Cramer had no positions in stocks mentioned.
Rev Shark's Blog: Knowing a Good Chart When You See One
Originally published on 9/29/2006 at 1:19 p.m.
Despite an increase in strong opinions about where the market is headed in the short term, we have some pretty dull action today. It seems that the bulls are becoming more bullish and the bears are becoming more bearish, and they are battling each other to a standstill at the moment.
Even though the indices are flat, breadth even and volume dropping, the arguments back and forth about where things are headed from here seem more heated than usual. That's partially a function of the growing frustration by those who have missed out, and partially caused by the bulls, who have an edge and are having a lot of fun pressing it. It is going to make for some interesting volatility in the near future.
I've mentioned quite often lately that I can't find "good" charts. Trying to define a "good" chart is much like trying to define pornography. In 1964, Supreme Court Justice Potter Stewart tried to explain pornography by saying: "I shall not today attempt further to define the kinds of material I understand to be embraced ... but I know it when I see it."
I feel the way Justice Stewart did. I can't always clearly define what I consider to be a good chart, but I know one when I see one. That protestation aside, I'll try to provide some general guidance. Typically, what I want is something that has not already made a move straight up but has some sort of base.
However, a base alone isn't enough to cause me to buy; there also must be some indications that the stock is inclined to break out of the base and have some sustained momentum. To determine that, I'll look at volume, the nature of the base and more subtle signs that buyers are accumulating. Also, the overall state of the market, the sector and even some fundamental factors may also play a role.
In my view, chart-reading is much more an art than a science. That means it is very subjective, and two people can reach very different conclusions when looking at the same charts. I suspect there are many folks who disagree with my assertion that there aren't many good long-side charts. Neither of us is right or wrong. We just have different perceptions.
I'm not finding things I want to buy, and that determines my view of the market. I'm skeptical and patient until my chart review justifies a different opinion.
Cody Willard's Blog: Firepower Builds Ahead of Earnings Season
Originally published on 9/28/2006 at 9:20 a.m.
has been dead money at best. The stock started the year at $414, and it's trading at $403 right now.
? Dead money at best in 2006.
? Once again, dead money at best. The stock collapsed this summer largely because of the still-unresolved options-irregularity scandal and the company's "no big deal that Jobs was involved" line of justification. The stock opened the year at $70ish. Today, it's $70ish.
Remember when energy and commodities were hot? And how construction in the U.S. and demand in China and India made those sectors "can't miss"? Oops. They're not even dead money. They're more like dead -- at least so far in 2006.
The so-called mo-mo names like
? They sure were great stocks in the first few months of the year, and they sure have been dogs since then. The net/net of their action this year? Dead money.
Retail? Ugly most of the year + rally of late = dead money.
The markets have been churning and burning, but only those who sold in the spring or who nailed the bottom in the middle of the summer seem to have some good gains to show for the year. Few shorts have printed money. Few longs have printed money. As we head into year-end, both sides are going to start getting more aggressive. And that firepower just might break this market in one direction or another.
What's most likely to determine that direction? Earnings outlooks. Will the guidance into the fourth quarter be strong because the economy's picking back up? Or will it have to be taken down because the economy's cooled and estimates haven't quite caught up with that chill?
I've been slowly but surely putting some more money to work lately, and I plan to continue to do so. However, I'll be listening to a lot of earnings calls in the coming weeks to gauge how the earnings outlooks will or won't justify the current prices.
Into earnings season, the risk/reward seems to favor the bulls, as the latest earnings reports from the likes of
(up 40% on the year and decidedly
dead money) and
(mostly dead money this year) have indicated that business is looking pretty good into year-end.
That said, I did buy some semiconductor puts yesterday. Earnings season doesn't hit in earnest for another couple of weeks. The bears have been stockpiling the ammo in retreat during this big rally, while the bulls are throwing parties.
Let's hit it.
At the time of publication, the firm in which Willard is a partner was net long Apple and Google and net short Semiconductor HOLDRs, although positions can change at any time and without notice.
Steven Smith's Blog: Try to Remember New River
Originally published on 9/28/2006 at 1:32 p.m.
Option activity is starting to pick up in
New River Pharmaceuticals
as traders brace for next week's decision by the Food and Drug Administration on the company's application to market its attention deficit disorder drug to children between six and 12 years of age.
The stock is currently trading around the middle of its 52-week range at $26, but the implied volatility of the October options has already climbed to an eye-popping 170%, which is not only a two-year high but several magnitudes above the stock's average historical volatility of 35% over the past three months.
Using options to play these FDA rulings is extremely difficult as there are several rungs of expectations and pricing that one must successfully navigate in climbing the ladder toward a profitable position. Assuming one can accurately predict what the FDA's decision will be, it's hard to gauge how the stock and its options will respond.
- Shares are up some 14% in the past three weeks -- are they or will they continue to price in an approval, setting up a "sell the news" reaction?
- Option prices are currently pricing in a roughly $6, or nearly 25%, move following the decision. That's a substantial hurdle for a buyer of options to overcome. Whether it be buying one side, such as the $25 call or put at $4.50 each, or moving out of the money to the $20 put at $2.30 or $30 call at $2.50, it will take a significant price move to realize a profit.
Likewise, making a pure-volatility bet using a straddle or strangle is equally tricky given that implied volatility is likely to get cut in half within a day no matter what the decision or resulting price movement. So does selling the $25 straddle around $9 or the $20/$30 strangle for around $4.80 make sense? It's certainly tempting, but history has shown you do not want to be naked or net short options ahead of an FDA ruling.
The number of occasions in which stocks like
or more recently
have moved up or down 40% in a day are too numerous to list. The point is: If you don't limit your risk, these drugs stocks can kill you.
So if one is dead set on selling this pumped-up premium (which is likely to creep higher in the days approaching the FDA's decision, so be patient), I'd suggest using limiting risk by using spreads. That is selling a spread for credit, such as selling the October $20 puts and buying the October $17.50 put for a net credit of $1.20 for the spread. If you combine this with the sale of the $30/$35 call spread for a net credit of $1.50 -- note, unfortunately there are no $32.50 calls listed -- you have created an iron condor for a total net credit of $2.70.
This $2.70 is the maximum profit realized if shares of New River are between $20 and $30 on the Oct. 20 expiration. The maximum loss is $2.30, which would be realized if shares are above $35 at expiration. The downside is fully protected because the width between the strikes of the put spread is just $2.50 and the position has collected a premium of $2.70. So even if the stock tumbles to any price below $17.50 at expiration, the condor will deliver a 30-cent profit.
The FDA is supposed to hand down its decision on New River's drug next Friday, Oct. 6. So while everyone else is focusing on the monthly jobs data, we'll hopefully be making money, and curing ADHD, if we can remember to establish this position.
Tony Crescenzi's Blog: Falling Home Prices vs. Rising Stock Prices
Originally published on 9/28/2006 at 2:53 p.m.
As a determinant of consumer spending, home-price declines are more important than stock-price gains over the long run.
However, the refrain "all-time high," if repeated often enough in upcoming days, would contribute to a delay in consumer retrenchment.
Household holdings of real estate are greater than their direct holdings of corporate equities:
Holdings in the House
Real estate easily trumps equities
The above must be qualified for the fact that households have another $11.2 trillion in pension reserves, a large portion of which are held in corporate equities, although direct holdings matter most.
The uptick in stocks will nonetheless draw attention away from the decline in home values, which when combined with the decline in gasoline prices, will help to keep spending from falling significantly in the fourth quarter.
The decline in home values has been sullying consumers into a funk. The rise in stock prices will ease the situation over the short run. This makes the January rate cut scenario look less likely.
David Morrow is editor-in-chief of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.