Cramer's Blog: Options Pressure and the IndicesOriginally published on 7/21/2006 at 8:59 AM Expiration plays more havoc than ever, except people simply don't understand it. They don't understand it because they have never had to flatten positions out, they have never had to try to reconcile the stocks themselves with the indices. Yesterday I commented that the Oil Service HOLDRs ( OIH), when it was at $137, looked like
Rev Shark's Blog: Turn-Catching a Fool's GameOriginally published on 7/18/2006 at 8:10 AM "An ounce of patience is worth a pound of brains."
-- Dutch Proverb
Most investors place too much emphasis on trying to catch the market at exact turning points. They develop all sorts of theories and reasons about why the market is going to turn at some exact point. It is very exhilarating and satisfying when we can actually catch a turn, but as far as determining our ultimate success as investors, it isn't all that important. Good investing results are not a function of precise market timing. It can be helpful to time things accurately, but the key to good results is cutting losses and protecting capital when the market is weak and catching uptrends and riding them when the market is strong. You need not catch the exact bottom or top to do such things. It is the bulk of the move that will determine your success. We are at a point now where there is increasing pressure to call for some sort of market turn. The indices have sold off big, the news is uniformly negative and earnings season is starting to heat up. Those are the conditions that usually lead to some sort of turn, or at least a decent bounce. It is extremely important that we stay patient and not be overly aggressive in trying to catch a turn. First, the losses you can rack up while constantly trying to catch a bottom can cut into any gains you ultimately realize. In many cases you are better off missing the early part of a move rather than overanticipating, because the downward moves have a tendency to last longer and go further than seems reasonable. It is also important not to become overly excited at the first sign of strength. In this sort of market there is a strong inclination for trapped bulls and aggressive shorts to sell into strength. We saw this yesterday when the markets couldn't gain any upside traction although the move to the downside had slowed. Stay patient. The market will make a lasting turn at some point, and when it does there will be plenty of time to participate in the festivities. If you miss the early part of the move you more than likely will still be ahead because you missed the tail end of the downward move. Precise timing is nice, but it's more about ego than it is about making money. We have the makings of another challenging day. Overseas markets, particularly the Nikkei, were weak overnight, oil has bounced back after a selloff yesterday and the conflict in Israel remains very active. Earnings from Merrill Lynch this morning looked good and the stock is trading up. We have PPI data coming up and that may attract a little attention. At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.
Cody Willard's Blog: Intel's Inventory Issue
Originally published on 7/20/2006 at 11:44 a.m. The bulls should be very pleased with the mostly sideways action this morning, along with the
Steven Smith's Blog: A Lesson in Apple's OptionsOriginally published on 7/20/2006 at 11:56 AM Reader JOAT wonders what IV crush I could possibly have been talking about or expecting in Apple ( AAPL) following its good earnings, which has the stock up some 11% to $61 per share this morning. The IV of Apple options prior to earnings had been running around 75% in July and 58% for the August. Note that the July reading gets very skewed, as the value of the time decay, which must constantly drip away at an accelerated rate, essentially gets rerouted into the IV component of the five things used to calculate an option's value. For example, the IV in July options has declined some 20% to the 60% level, and the August options have also declined some 20% to 40% so far this morning. That is a premium crush in anyone's book. But because the options had only been pricing in an 8% move, this morning's 11% gain far outweighs the premium crush, allowing those long calls, or better yet, short puts, to profit handsomely. But, as economists like to hold a bunch of variables constant to prove some meaningless point, let's assume this was not an earnings report and therefore had no expectations for a change in IV. That would have us turn to the option's delta to gauge our expectations for what size of a price move we could expect on a $6 move in the underlying. With Apple at $54 yesterday, the delta on the July $60 call was around 30%; this means when including the sloping nature that, given a $6 price move in the stock, one could reasonably expect the value of the call, all else being equal, to increase by about $2 on today's move. The call is up $1, or a 300% increase, so it's certainly a big winner. But be sure there is a premium crush occurring behind those gains.
Tony Crescenzi's Blog: Putting the Data in Context
Originally published on 7/20/2006 at 11:50 AM Now that the durability of the U.S. expansion is being questioned, many are asking what it would take to convince investors that the economy will stay strong enough to sustain earnings momentum. In terms of data, many weekly reports will be telling. I am very interested in weekly data on chain-store sales, mortgage applications and jobless claims. The data on chain-store sales, for example, will tell us a great deal about the health of the consumer. I would also track data on the issuance of commercial paper and commercial and industrial loans, which correlate well with the production sector of the economy and with employment. If companies are raising working capital through these vehicles, it is likely that conditions won't weaken as much as many now fear. Just what will convince the markets that the economy is holding up depends upon context, as one can't know for sure. In other words, a shift back toward confidence in the economy could in fact be a process rather than an event. That is why it is often difficult to predict when an overbought or oversold condition will end -- we might know that the fundamentals justify an end but often must wait on an unknown catalyst. So there is no certain answer as to what specific data point will convince investors about the durability of the expansion.