Rev Shark's Blog: Dogma Has No Place in Stocks
Originally published on 1/24/2007 at 8:48 a.m. "A life based on reason will always require to be balanced by an occasional bout of violent and irrational emotion, for instinctual drives must be satisfied."
-- Cyril Connolly The market is becoming increasingly difficult to navigate as the battle between logic and emotion intensifies. Although we have had some weakness, primarily in the technology sector, much of the market continues to hold up quite well. However, the action has been choppier and follow-through, either up or down, has diminished. The bears have had some recent success but the bulls remain in control. One moment it looks like we are ready to crack and the next it looks like new highs are on the agenda, which makes sticking to a strong opinion about market direction quite frustrating. In the current environment both sides are convinced the other side is being unduly emotional. The bulls believe the bears are blinded by negative emotions and the truth is that the economy is in pretty darn good shape, there is a high level of liquidity, and stocks are not outrageously overvalued. The bears believe the bulls have been sucked into unwarranted upward momentum that ignores issues like inflation, growth, and a technically extended market. Whatever your feelings about the market, keep an open mind in the short term if you hope to rack up some gains. Being overly dogmatic about market direction is going to cost you as volatility increases. There is money to be made on both sides of the market right now as the battle between logic and emotions plays out. Although the hard-core bulls and bears will tell you to stick with one thesis, the truth is that this is a time when moving fast and staying flexible are more important than usual. Don't forget to take gains into strength and don't be too fast to panic-sell on dips. Until we have a clearer technical picture we are going to have to keep on dancing to lock in some gains. We have a positive start on the way as Yahoo! ( YHOO) and a few others in the technology group put up good earnings reports. Yahoo! sold off initially last night due to poor forward guidance but talk about its long-awaited Panama ad system turned the stock sharply higher. Panama is very similar to Google's ( GOOG) system, which ranks search-engine ads by both the amount advertisers pay for keywords and the relevance of the ad, and apparently there are high hopes that being more Google-like will help Yahoo!. What is interesting to consider is that if Panama is such a great thing, why isn't Yahoo increasing its earnings guidance? In any event, the stock is up this morning despite a downgrade from Goldman. Oil and gold are driving big gains overseas. Also, hope that additional interest rate hikes will not be aggressive is helping London in particular. We have a pullback in oil and gold this morning after big moves yesterday and they should be in focus today. At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.
Cody Willard's Blog: eBay's Shining Skype
Originally published on 1/25/2007 at 4:32 p.m. To me, the story at eBay ( EBAY) was Skype's amazing results. eBay is still roundly trashed for having made that acquisition, but that will change shortly. Almost a year ago, I
Steven Smith's Blog: Get Your Options Priced Right
Originally published on 1/25/2007 at 8:01 a.m. Once again, the morning's trading activity will be focused on the names that have already reported earnings. In the afternoon, attention will turn to those scheduled to release their results after the close. eBay and Netflix ( NFLX) are sure to be among the most active this morning. Both delivered much better-than-expected numbers last night, and both stocks are poised to trade sharply higher this morning. The market's response also highlights the difficulty of gaming earnings and using options to play them. On Wednesday, the implied volatility for eBay's February options was at 60%, just shy of a 52-week high, making the options seem relatively expensive and pricing in about a 7%, or $2, price move. Premarket trading today shows the stock up some 15%, or $4, or more than double the expected move. In the case of eBay, buying options, even with inflated premiums, worked. Now the trick is to navigate an exit strategy in the face of what is likely to be a 25% decline in IV to around 40% by the end of the day. On the other hand, the options in Netflix seem to have overshot the anticipated response, by awarding an implied volatility of some 67% and pricing in about a 15%, or $3.40, price move. Pre-market trading indicates that Netflix will open some 7.6%, or $1.75, higher. If you sold short a straggle or straddle-type position here, you're happy. If you owned calls, you'll make some money, but probably not as much as you think you "deserve" for making a great bullish call. If you bought puts, you'll watch your option premium evaporate right before your eyes. Companies reporting after tonight's close include Amgen ( AMGN), Cypress Semiconductor ( CY) and, of course, Microsoft ( MSFT), for which the option markets are pricing in about a 1.8%, or 55 cents per share, price move.
Tony Crescenzi's Blog: Home Inventories Plunge
Originally published on 1/25/2007 at 10:43 a.m. Existing-home sales largely met expectations in December, running at a paceof 6.22 million compared with forecasts for a pace of 6.25 million. Moreimportant were the data on the level of unsold homes and theinventory-to-sales ratio. Both of these metrics showed sharp improvement.Threatening to upend the improvement is the interest rate climate, which hasturned sour of late in part because of the sense of waning drags from thehousing and automobile sectors. The biggest problem plaguing the housing industry is an overhang of unsoldhomes. This is why the inventory data are key to the housing outlook and,by extension, the economic outlook. In December, the number of unsold homesfell 302,000 to 3.508 million, 353,000 below the record high of 3.861 million setlast July. While a significant improvement, inventory levels remain aboutone million units above where they stood in 2003, 2004 and early 2005before inventory levels began to surge. In another inventory metric, theinventory-to-sales ratio fell sharply to 6.8 months of supply from 7.3months the previous month. The peak was 7.4 months in October. As withoverall inventories, significant progress has been made on this front, butthe ratio is high from an historical perspective. If inventory levels are to return to equilibrium, sales must stay stronginto the peak selling season in the spring. The rising interest rateenvironment could reduce the pace of progress. In addition, there probablyis some amount of "phantom inventory" that could return to the market duringthe spring if there is a perception that the housing market has bottomed.