The tech sector took a big hit this week despite strong earnings from several bellwethers -- Apple ( AAPL), Intel ( INTC) and IBM ( IBM) -- while energy was on the rise as oil prices plunged. Ultimately, volatility was the word, as investors got the usual jitters about earnings, and blue-chip indices and bond yields that were flat on the week.

As a result of this logic-defying action, the Nasdaq Composite lost 52 points over the four days, while the less-tech-weighted Dow managed to eke out a 9-point gain, and the S&P 500 lost 4 points for the week.

Once again, RealMoney's bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the 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 avoiding losses, Cody Willard on Apple's "core," Steve Smith on the caution required for ratio spreads and Tony Crescenzi on what a $1 drop in oil means to the consumer.

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


Rev Shark's Blog: Focus On Avoiding Losses, Not Making Profits

Originally published on 1/19/2007 at 8:53 a.m.

"The wise man in the storm prays to God, not for safety from danger, but deliverance from fear."

-- Ralph Waldo Emerson

After an ugly dip like we had in the Nasdaq yesterday, the question we must ponder is whether it was just a temporary squall of selling that is wringing out a little speculative excess or the start of something more ominous. It is always quite obvious after the fact, but when we are in the midst of a nasty dip it is a very difficult determination to make.

On one hand we don't want to be overly fearful and dump good positions that will recover quickly. On the other hand we don't want to ignore energetic selling that can drive things even lower, wipe out our good gains and put us in a deep hole.

Where exactly is the line between being prudently cautious and foolishly fearful? It is always going to be a guess and we usually will get it wrong to some degree, but in the stock market it usually pays to err on the side of caution. Our primary goal as investors isn't to make money -- it's to not lose it. It is far more important that we take action that helps us avoid the possibility of losses rather than stand steadfast in the hope of making gains.

Above all else, stick to your trading discipline. Even if it proves wrong and you end up selling a good stock on a temporary dip, you will be far better off in the long run for having a system that protects you when we have a dip. It is those times when the market does follow through to the downside that you will be rewarded for being disciplined.

I don't know if yesterday was the start of a more significant correction but I do know that the prudent thing to do is to cut some positions that have broken down technically and raise cash. Maybe the market will turn around and head straight back up and you will have locked in some poorly timed sale, but you can make that up far easier than if you simply hold and have to recover from a further decline.

Good investing and trading is about discipline. It is not about winging it on gut feelings and guesses. No matter what you do you will be wrong a lot, but being wrong won't hurt you too much if you are methodical in protecting your capital.

I believe the market has more downside coming so I'm being particularly prudent with money management and am lightening up quite a bit. At the same time I'm making sure I have a list of stocks that I want to buy should good opportunities arise.

Futures are a bit soft in the very early going as none of the earnings reports on the wires are offering any bullish inspiration. They aren't bad reports but just not good enough to inspire the bulls, who have been buying on the way up for many months now.

Overseas markets were mostly down but did not take hits to the degree that the Nasdaq did yesterday. Oil and gold are rebounding a bit. The University of Michigan Sentiment Survey after the open may give us a hiccup but most of the news of the day is already out.


Cody Willard's Blog: Getting to Apple's Core

Originally published on 1/17/2007 at 3:07 p.m.

Oh boy, Apple ( AAPL) is up on the earnings platter tonight. This has become one of the most overanalyzed, overscrutinized and overpublicized stocks in history, making Microsoft ( MSFT) look like the market's Jan Brady.

I don't know how anyone can accurately gauge the possible expectations for tonight's report. There's been so much hype over the iPhone and its potential that the stock price has little to do with expectations for the near-term fundamentals. That's how I see it, and that means I'm not trying to trade around it before the call. Here's what I think right now:

  • Mac sales are booming, and Apple is finally starting to gain some meaningful market share. Of course, when you have 3% of the market, any basis point of improvement can be called "meaningful." That's a bullish thing, though, as 97% of the market remains for Apple to attack. So Mac sales will be on fire. Have the analysts guessed right about how on fire they will be?
  • The iPod? Does it even matter what the iPod results are, given that Apple's coming iPhone makes the current generations of iPods seem rather technologically limited? And further, did the analysts guess right about which iPods sold strongly and which ones lagged behind? It's tough to get a game-able edge on this stock with all the iPhone buzz.
  • I don't give much weight to the analysis of tech trends and their impact on the iPhone's potential success (or lack thereof) from analysts who completely missed the iPod revolution. Did they suddenly get a clue and think they have an edge there? I'll stick to my guns and the stock that I've owned since $7 at the very dawn of the iPod.
  • I do expect that the options-backdating scandal will indeed flame up again and cause some real ripples ahead for the stock. Those might or might not be buying opportunities, but that's not today's business.

Did you notice that the last two points are rather irrelevant to tonight's call and how the stock will trade tomorrow off that call? Exactly. Ignore the noise around this Apple earnings call.

At the time of publication, the firm in which Willard is a partner was net long Apple and Microsoft, although positions can change at any time and without notice.


Steven Smith's Blog: Caution Needed for Ratio Spreads

Originally published on 1/16/2007 at 1:51 p.m.

The major indices are hugging the unchanged line at midday. Could this be a precursor to rampant pinning action for this week's option expiration? I don't play that game, so I won't even venture a guess on pin candidates until midday Friday.

Despite the tight range, the VIX is up some 6% to 10.80. However, some of this lift is simply due to the "Monday effect" (though, in this case, Tuesday) in which the theta markdown that occurs on Friday afternoon basically prices in today's decay, providing an underpinning for options during the morning hours. Also, with earnings and expiration on tap this week, traders were more likely to come in this morning as net buyers of option premium, as positions get closed or rolled ahead of the expiration.

The impact of expiration-related activity should also be taken into consideration when looking at the put/call ratios. The all-exchange ratio popped above 1.10 this morning, the highest reading in six weeks, but the equity-only ratio is still a subdued 0.62, in line with the 20-day moving average. The put/call on index products has jumped to 2.80, its highest level in two months, and that is lifting the overall reading. Much of the volume is coming in the form of rolling of out-of-the money puts from January into February and, as such, does not represent large directional or bearish bets.

The notable exception is coming on the Diamonds Trust ( DIA), which has seen heavy put activity in the March series. The $125 strike has traded 34,000 contracts against prior open interest of just 3,000, and the $120 strike has traded 20,000 contracts against prior open interest of 10,000 contracts. There is no corresponding volume in January or February expirations. However, the trade could represent a ratio spread in which someone is buying the $125 puts and selling the $120 puts for a net debit of $1.30 for the 2x3 spread.

I bring this up because some recent articles in The Wall Street Journal have been citing options strategists who recommend ratio spreads as a way of establishing downside protection at a minimal cost. In addition, some services such as OptionMonster.com are reporting an increase in frequency in this type of trade.

This is not a strategy I would suggest implementing if I was worried about a selloff. The risk/reward is not attractive, and the position's price behavior will be exactly the inverse if the sharp selloff occurs.

With the Diamonds trading right around $125, a 2x3 spread would provide about 5% of downside protection, covering a move from $123.80 to around $118, yielding maximum a profit of $3.70 if shares are at $120 on the March 16 expiration.

But the position would start losing money if shares fell below $111.50, or slid 10.5%. Of greater concern is that the position would also be hurt by an increase in implied volatility, which would likely accompany a decline of 5% or greater. Lastly, even if the underlying price is at the max profit point, it is very difficult to pull off a ratio spread for a profit until you get to about two weeks before expiration. This means for the ratio spread to pay off, it needs to be just right in terms of the magnitude, velocity and timing of the price move. Basically, it's a bet that the Diamonds will calmly drift 5% lower over the next three months. That doesn't strike me as a high-probability scenario.

With options prices sitting near 13-year lows, I don't see the sense in using a ratio -- which gives only a narrow price range of protection, is exposed to unlimited losses and handcuffs the position to a three-month holding period -- just to reduce the initial cost. I believe you'd be better off just making an outright purchase of the March $123 puts at $1.20 per contract. This has the same initial cost, but provides unlimited downside protection and, more importantly, the flexibility to trade around a near-term selloff and increase in implied volatility.


Tony Crescenzi's Blog: $1 Oil Drop is $7 Billion to Consumers

Originally published on 1/16/2007 at 12:56 p.m.

If you haven't seen the numbers before, or if you haven't seen them in a while, here again is the rule of thumb in terms of what a drop in oil prices means to the consumers.

With U.S. oil consumption at about 20 million barrels per day, each $1 decline in the price for a barrel of crude oil benefits consumers by about $7 billion per year. This is very significant, of course, and could be enough to offset a substantial amount of the drag expected from the housing market this year.

These numbers are very raw and do not take into account the fact that more than 40% of the oil consumed in the U.S. is produced domestically, meaning there will be a loss of income in the U.S. associated with the price drop. This income loss will take many forms, including declines in stock prices, reduced growth in dividend payouts, reduced revenues at gasoline stations, and so forth.

If you liked this article you might like

Getting Inside the Fed's Head

Getting Inside the Fed's Head

Why You Should Dump Facebook and Buy Apple

Why You Should Dump Facebook and Buy Apple

Analysts' Actions: ED, CMG, AKAM, AIG, PHM

Analysts' Actions: ED, CMG, AKAM, AIG, PHM

Analysts' Actions: MA, GE, LLY, PEP, NYX, TIF

Analysts' Actions: MA, GE, LLY, PEP, NYX, TIF

Analysts' Actions: LLL, MAR, NFLX, JNPR, EOG

Analysts' Actions: LLL, MAR, NFLX, JNPR, EOG