My Stock Winners

Third quarter trading came to a close Friday, and for the eighth time in the last nine quarters, the Dow Jones 30 showed a positive return, adding 3.6%. The tech heavy Nasdaq gained 3.8%, as Apple and Google have both led the latest rally; while the S+P 500 picked up a mere 1.6%. Still, the quarter was the ninth gain out of the last ten quarters for both the S+P and the OTC market.

Things weren’t so rosy everywhere though, as the Russell 2000 small cap index broke a four quarter string of gains losing 3.4%. Even though the Federal Reserve followed the script and cut interest rates, concern for smaller companies growth prospects always come to the fore when a slowing economy becomes the headline focus.

Positive fourth quarter performance is reminiscent of how the American League has dominated the National League in the annual All-Star Game. For nine consecutive years, the stock market has moved higher in the year’s final frame. Besides nine in a row, it’s been 24 of the past 27 fourth quarters that have seen stocks advance by year end. So, unless you’re an extreme contrarian, it’s probably a good time to hang on to your hat and your stocks.

Even though interest rates are lower, credit markets are still squeaky tight. And while tech stocks have resumed their flight, the Dow Tranports and financial stocks of every flavor have been noticeably absent from all the rally hoopla. With housing having gone from the dog house to the outhouse, it will be intriguing to see whether the consumer steps up to the plate for the Holiday Shopping Season. IMHO, AMZN will go much lower as I point out in http://www.mystockwinners.com/high-pe-ratio-amzn-get-ready-for-the-fall/

However, it is almost a sure win to buy Chinese Stock which is regulated by USA rules, such as http://www.mystockwinners.com/china-stock-watch-vcdyob/
(Note: stock symbol has recently changed to chri.ob see more here http://finance.yahoo.com/q?s=CHRI.OB )

Best of Luck on the coming week!

From Tuesday’s closing low, the Dow Jones Industrials rallied 317 points into the Labor Day Holiday weekend. That’s the good news. The bad news was that the popular benchmark still managed to lose 21 points on the week to close at 13,357.74. In fact, the only popular average to gain on the week was the NASDAQ Composite, which added 20 points to close at 2596.36.

The S+P500 added 41 points from its Tuesday low to finish the week down just 5 points to 1473.99. The small cap Russell 2000 was the week’s weakest performer dropping 6 points to close the week at 792.69. Stocks were aided by comments from Fed chief Ben Bernanke, who assured Wall Street that he’s ready to cut rates to avoid any further crisis. Those comments were backed up by President Bush, who went on the record by saying the Federal government will do all it can to help the people who shouldn’t have bought homes in the first place, so at least they might be able to keep them. That is as long as it wasn’t hit by a hurricane first. If that was the case, then you’re in trouble.

So, while those in the media (along with those at Starbuck’s) argue the pros and cons of whether or not the Fed will cut rates, one thing is for certain. Housing is dead in the water, and no one knows how long it will take before that is ultimately going to affect this nation of happy-go-lucky consumers. How about never? What more can you expect from a society where an infamous convicted tax dodger known as the “Queen of Mean” dies and leaves nothing to her grandchildren but ponies up $12 million for her poor lonely little dog.

The trade shortened week starts on Tuesday with U.S. auto sales expected to post a fractional gain for August, while the ISM manufacturing index is expected to decline. Wednesday, the Fed’s beige book of regional economic data is released, while July home sales are seen dropping 3% in July. HP unveils a number of new PC’s and computer game products, while Apple releases its latest iPod in San Francisco. Challenger, Gray & Christmas report August job cut announcements.

Thursday, retailers report August sales of the back to school variety, while home builder Hovnanian reports third quarter earnings expected to shed further light on the weak state of the new homes market. H&R Block is at the center of a proxy fight being staged by Richard Breeden with results expected to be announced. Friday brings the non farm payrolls report expected to rise 95,000 and below the level to keep unemployment stats unchanged. Expect the jobless rate to rise to 4.7%.

Weekly Closing Market Commentary 8-03-2007

The path of least resistance the last several weeks has been down, as a mixed labor report did nothing to abate the additional bad news concerning another Bear Stearns private mortgage fund belly flop. Who could expect anything less during these dog days of summer?

It’s interesting to note that all four indices we follow were down more in just one day, today, than they were on the week. A brief rally did take hold late Wednesday and into Thursday and ahead of today’s dismal headlines, but there just wasn’t enough steam to maintain the follow through.

The Dow 30 lost 84 points (-0.06%) to close at 13,181.91 despite being down 284 points (-2.09%) today. Likewise, the S&P 500 gave up 25.89 points (-1.07%) for the week even though it lost 2.66% and was down 39 points in the week’s last trading frame. The tech heavy NASDAQ gave up 2.51% today (-64.73 points) but finished the week off 1.99% (-50.00) to close at 2511.25.

The Russell 2000 again took it a little harder than the rest. For the week, the small cap OTC index gave up 2.88% (-22.41 points) to close at 755.42. In Friday trade, the Russell gave up 3.64% and was down six points more than on the week. With an absence of any bright spots, the mixed labor numbers today would cause us to expect to hear more “street chatter” regarding hopes that the Federal Reserve may ride to the rescue with a rate cut. More benign inflation news could be just the trick to halt this bull market correction.

U.S. stocks corrected this week just after three of the four indices rose to new all time highs recently. The fear “fire” was fueled by poor numbers from the housing market that made Fed Chief Ben Bernanke’s $50-$100B sub prime problem look like a lowball estimate.

The week’s sell off occurred despite news from the Conference Board today that GDP came in above consensus at 3.4%, while inflation also showed signs of cooling off. While the Fed has tempered its language about inflation, they still haven’t shown any predisposition to lower rates. Whether the Fed comes to the rescue still remains to be seen for now, but it is looking less likely.

An attempted rally late in the session failed as stocks sold off into the close ending at their lowest levels of the week. The Russell 2000 lost most, down 58.61 points (-7%) to close at 777.83, followed by the S&P 500 off 75.15 (-4.9%) to finish at 1,458.95. The NASDAQ Composite gave up 125.36 (-4.66%) to 2,562.34, with the Dow giving back 585.61 (-4.22%) to finish at 13,265.47.

Stocks are not oversold yet, especially AMZN, still at 110 PE. And even though low can go lower, it appears the worst may not be over. More soon!

The Institute for Supply Management report showed manufacturing activity strengthened to its best level in 14 months and provided further evidence that the U.S. economy has tempered the recent setback caused by excessive inventories of unsold goods. The June index rose to 56% from 55% in May, and came in 0.09% above expectations.

As a result, U.S. equities stormed higher out of the gate and are up strongly across the board. Combined with Friday’s core inflation report that came in at 1.9% and within the Federal Reserve’s target of 1-2%, market participants bid stocks higher today as the fear of further interest rate tightening continues to show signs of fading.

Look for factory orders to fall 1.3% in May after a decline of 2.8% in the durable goods component according to Lehman Brothers, while the International Council of Shopping Centers-UBS report on weekly chain store sales comes out. The prior report showed a decline. Wednesday brings the Fourth of July National Holiday and U.S. financial markets are closed.

Thursday watch out for the monthly job cuts report from Challenger, Gray & Christmas. Initial unemployment claims for the week ended June 30 are expected to be little changed from the previously reported 313,000. The trade shortened week comes to a close Friday when the Labor Department issues its payrolls report. Economists expect employers to have added about 120,000 jobs in June after May exhibited a number (157,000) higher than the recent trend. Look for unemployment to hold steady at 4.5%. Anything lower than that will likely cause more pain in the bond market.

Courtesy of OTC Digest

Last week’s drop in the Chinese stock market caused weakness in the opening and into mid-day trading as the popular averages were down slightly but have since changed course. Several mergers and acquisitions helped stem the downward tide and propel today’s nice reversal. Commerce department reports showed a lack of demand for cars, boats, and airplanes sending the Dow Transports lower however, and that has not changed.

Wednesday brings the revised first-quarter productivity and unit labor cost reports, with expectations that non-farm productivity growth will be revised to show a 1% annual growth rate. Virginia Fed Reserve Bank Pres Jeff Lacker speaks on; you guessed it, inflation, while New York Security Analysts hold their annual metals and mining conference.

Thursday brings the Labor Department’s report on jobless claims for the week ended June 2, expected to come in at 310,000 while Freddie Mac reports on mortgage interest rates. The nation’s largest retailers post same-store sales for May with that number expected to show an increase and the Federal Reserve reports on consumer credit for April.

The week closes Friday with the Commerce Department’s international trade report for April expected to show a small decrease in the deficit over March’s number. That’s it for the week’s economic news that will power the markets! More soon!

The broad market refuses to be de-railed. The S&P 500 Index (SPX) tacked on 0.78 percent during the week, and even managed to close above the 1,500 level. The Dow Jones Industrial Average (DJIA) has finished four of the past five sessions higher, or eight of the past 10, or 23 of the past 26 trading days were gainers. In fact, the Dow jumped more than one percent last week and continues to hit successive record highs to the grumbling of Wall Street analysts. Technicians are worried about the streak and what this could be foretelling, as other technicians fret about the “sell in May and go away” seasonality that has not come about. Others are worried about market’s disconnect with slowing economy, gas prices above $3, and earnings quality (earnings in large-cap companies being driven by weak dollar and strong overseas growth).

What has many analysts ruffled is that this uptrend has beaten the odds and expectations. We entered the earnings season with expectations for growth of approximately 3.7 percent, but currently, SPX component earnings are coming in above seven-percent growth.

Furthermore, economic reports have been a somewhat mixed bag recently. While the latest Institute of Supply Management reports for the both the manufacturing and services sectors came in stronger than expected, the preliminary first-quarter Gross Domestic Product (GDP) came in at a measly 1.3 percent, which marked the slowest growth since the first quarter of 2003. Even April’s nonfarm payrolls were nothing to shout about, increasing by just 88,000 ?the slowest pace in more than two years.

Meanwhile, investment advisors can hardly be classified as being overly bullish. The latest Investors Intelligence poll showed that the percentage of bullish advisors increased slightly to 51.7 percent. However, the biggest jump showed up last week among those who believe the market is due for a correction, increasing to 23.6 percent.

Additionally, we have begun to once again see a steady uptick in odd-lot shorting activity. As I’ve mentioned in previous editions of this column, short interest on both the New York Stock Exchange and Nasdaq has risen sharply during the past couple of months. This buildup of bearish positions leaves the market with ample sideline money available that can still come in and push the market higher. In fact, the current behavior of the short players in this market is looking very similar to their behavior at the tail-end of the correction in May-June 2006 and the recent February-March correction. In other words, even as the market grinds to new highs, the shorts are displaying fear that is consistent with corrective phases in the market that have ultimately marked bottoms.

Furthermore, the CBOE Market Volatility Index (VIX) continues to hold firm in the 13 area and this has very bullish implications. With the VIX still around 13, the market now has more upside potential before encountering the “single-digit VIX” headwinds we have seen in the past. Perhaps this elevated VIX level can be explained in terms of the uncertainties still associated with earnings reporting season, or by the fact that investors have “learned their lesson” from the 2/27 market plunge and are no longer going to accept a single-digit VIX in these “riskier times.” But in the end, I believe any such explanation only supports my position that complacency has by no means set in, and this has very bullish implications for the staying power of this rally.

This week’s big news will likely prove to be the conclusion of the Federal Open Market Committee meeting on Tuesday. The Fed is widely expected to keep rates unchanged at 5.25 percent, considering that the latest economic reports showed a slight moderation in inflation levels (though inflation is still above the Fed’s comfort zone of one to two percent) and mixed economic strength. With the Fed content to maintain its wait-and-see attitude, the market is free to continue its ascent.

It was one month ago Friday that U.S. equity markets heeded the prognostications of most major financial media outlets and put in what was described by Street pundits beforehand as “a much needed correction.” Last week’s action saw the major indices climb within spitting distance of their pre-correction highs in an impressive show of strength.

The big gainers in last week’s trading were the NASDAQ Composite, which added 0.8% (+21) to end at 2,492 and the Russell 2000 adding 0.7% (+6) to close at 819. The big cap S&P 500 gained 0.6% (+9) to end the week at 1,453, while the Dow Industrials managed just a 0.4% (+52) lift. One group of stocks that has not kept up with the month old rebound (and yes, it is still only a rebound until the old highs are taken out) have been most anything financial related.

The main underlying concern these days continues to be anything “sub-prime” related, with even the likes of Dow component General Electric (with a sub-prime unit) not keeping full pace with the recent rally despite a good earnings show last week. The flip side has been Alcoa, another Dow component whose earnings came in higher than anticipated (+9% for the quarter) and has bounced nearly straight back up. The big money, it appears, is going defensive all the way.

We have been left to wonder where all this recent strength has come from (especially with the dollar at two-year lows.) So we just continue to remind ourselves that markets love to climb those “walls of worry” and take it as it comes. That we’re reminded daily there are plenty of worries out there is hardly lost on anyone. So let’s identify the other recurring themes. Inflation fear, rising food and energy prices, slowing profit growth, “tight money” Fed policy and the sub-prime “spillover effect” are all the usual “risk” suspects. Let’s hope these markets can do better than they did, say, twenty years ago October? The closer we get to those April highs, the closer we’ll be to an answer which way this market is headed. Until then…

Stay tuned!

Friday’s March employment report showed better than expected job growth (180,000 jobs added) and the unemployment number contracted to 4.4% showing a U.S. economy that just refuses to quit despite Alan Greenspan’s warning several weeks ago. All that fell on stocks like a deaf ear, as equity markets were closed Friday. Contrary to our concern last weekend, stocks zoomed ahead in the holiday shortened week.

The NASDAQ Composite was the weekly leader gaining 49 points (+2.0%) with the Dow a close second adding 206 points (+1.7%). The S+P 500 picked up 22 points (+1.6%) and the Russell 2000 wasn’t far behind adding 12 points (+(1.5%). That stocks did so well in just a four day trading week was way ahead of our own modest expectations, but we’ll take it.

While stock trading was closed for the Friday holiday, bonds did trade in an abbreviated session. The seesaw economic numbers released over the past week or two have finally created enough impetus to push the yield on the 10 year Treasury note to 4.75% by Friday’s close. For the first time in a while, the yield curve has finally flattened and it will remain to be seen how this affects the stock market.

Combine a flattened yield curve with the fact that analysts have been anxiously reducing U.S. economic growth estimates for the remainder of the year and the risks increase that stocks could reverse even though they bolted higher last week. Equities were further boosted by the fact that crude oil prices finally gave back 2.4% of their recent gains and the Street is awash in liquidity. Big time merger and acquisition activity (Chrysler and First Data) remains exceedingly strong, even after last year’s record pace.

In the week ahead, Monday Nokia’s royalty deal with Qualcomm expires with the San Diego-based company expected to seek arbitration to settle things up. Tuesday, Alcoa reports earnings and the Bank of New York holds a shareholder meeting. Wednesday, minutes from the last FOMC Committee meeting should offer clues about eliminating references to further rate hikes, while Fed Chief Ben Bernanke talks about market discipline and regulation in the afternoon. Chicago Fed President Michael Moskow addresses economic outlook in Illinois Wednesday night.

Thursday brings the initial jobless claims report with most analysts expecting an up tick to 320,000-330,000 claims. Economists will also be looking closely at the non-fuel portion of the March import prices report which fell 0.2% in February. (Let’s hope there’s not an up tick in prices to further spook the Fed.) Friday the March producer price index is expected to show a 0.7% rise in the headline index and a 0.2% increase in the core number, and GE’s first quarter report will reveal how bad a hit the Dow leader’s lending unit has taken from the sub-prime mortgage fiasco.

It ought to be an interesting week, so stay tuned!

Lately, the residing fear “du jour” keeps looking more and more like that early 80’s stock market-killer “stagflation.” It’s still a whisper word that no one appears willing to admit. Sub-prime mortgage concerns continue to raise fears of an economic slowdown. Add an inflation rate 07% higher than the Fed’s desired target range (1-2%); and that’s kept interest rates higher than they probably should be. Face it, if most people can still find a new car loan at a 0.0%, why isn’t anyone on the evening news or the “new” Congress questioning why the Fed has pushed rates 17 times to the current rate of 5.25%?

The greatest irony (in our humble view) is that the people experiencing the actual problem making sub-prime loan payments certainly aren’t the same people selling stocks off these last several weeks. At the end of the day, we should probably just thank the major media outlets for doing their darn best each and every day (and night) to make sure Americans feel as downtrodden as possible about everything from the war in Iraq to the temperature of the planet and everything in between. Not us!

Well, we should fear not. Just because markets do occasionally correct, one place you can always rely on for great information is our stock pick. It provides anyone who wants to invest seriously with great stock investment ideas and an easy approach to building equity in stocks. Remember, even though it’s the stock market, it’s more a “market of stocks.” Fortunately, they don’t all go up or down at the same time. That’s the best part of what we do. Here’s what happened last week.

The second biggest drop of the year pushed the Dow Jones Industrials down 1.4% on the week, to a close of 12,110 and that off of a midweek bounce below 12.000. The S+P 500 dropped for the third time in four weeks with a 1.1% retreat to a 1,387 finish. The Nasdaq Composite lost just 0.6% or 15 points to close at 2,373, while the Russell 2000 gave up 0.8% ending the week’s trade at 779. For the week ahead…

The housing market index is expected to decline to 38 this month from 40 in February and is reported on Monday. On Tuesday, housing starts are expected to rise 2.5% to a seasonally adjusted pace of 1.45 million in February after January’s unexpectedly big decline. However, the week’s biggest potential market-moving day is again on Wednesday. That’s when monetary policy-makers from the Federal Reserve are expected to continue to be more concerned about inflation than the very economic slowdown tight money policy is causing. If, as expected, rates hold where they are right now, that’s not big news. A rate cut anyone? Don’t count on it, but there is one thing you should do.

Good day trading!

The broad market continued its retreat last week, with the Dow Jones Industrial Average (DJIA) shedding 0.62 percent and the S&P 500 Index (SPX) retreating 0.58 percent. This drop came as no great surprise, as the CBOE Market Volatility Index (VIX) for SPX options closed below the key 10 level on Wednesday. As we have observed in the past, closes below this round-number level have resulted in sharp, quick declines in the broad market.

This dip into single-digit VIX territory causes a fervor among nervous speculators, as buying put protection has suddenly become “cheap” on a relative basis. The increase in put activity thus creates a swell of selling pressure that pushes the market even lower as the short put positions are hedged. Yet, as we saw through most of 2006, this buildup of put open interest becomes a boon for the market as it not only supplies a layer of technical support, but the eventual unwinding of the shorted shares also provides the market with a lift.

Moving in for a closer look, the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) saw fewer than 95,000 calls contracts added among its near-term options since January options expired. On the other hand, put open interest soared by more than 194,000 contracts among the same series of contracts. As a result, the Schaeffer’s put/call open interest ratio (SOIR) for SPY hovers at 2.01, as put open interest doubles call open interest among options with less than three months until expiration. This ratio is also higher than three-quarters of all the readings taken during the past year.

But the growing pessimism among options players isn’t exclusive to the SPY. The composite SOIR for all equities dropped following the expiration of January options, but continues to linger near its annual highs, pointing to high levels of skepticism on the Street as traders cling to the belief that the broad market has run out of steam.

U.S. stock markets closed lower on the last day of 2006 but finished the week slightly higher. The Dow Jones Industrials (12,463.15 +119.93) and the Russell 2000 (787.66 +6.84) each picked up a shade under one percent while the S+P 500 (1418.30 +7.54) and the Nasdaq Composite (2415.29 +14.11.) each added just under a half of one percent on the week.

On the year, the Russell 2000 (+16.9%) came back to the pack but still edged the Dow Industrials (+16.2%) while the S+P 500 (+13.6%) and the Nasdaq Composite (+9.5) brought up the rear. While we don’t typically include the NYSE Composite in our weekly commentary, it should be noted that the biggest of the big actually bested the bunch by advancing 17.9% in 2006.

That the seemingly strong new housing sales numbers failed to inspire equity markets higher last week raises a bit of a “yellow flag” for bulls. The housing market appears to be in more trouble than most people on Wall Street seem to want to contemplate. Combine that with a stock market that failed to break out when it could have, and the second half rally we just enjoyed starts looking a little vulnerable in early 2007. With that said there remains hope that all is not lost. Corporate profits appear to be solid; otherwise we doubt the pros at Goldman Sachs would have been handed out the countless millions they received in year end bonuses.

Trading in stocks resumes Wednesday. Market making news will include Ford Motor Company’s report of what is likely to be a drop in December sales with analysts expecting Toyota to move into the number 2 spot in U.S. sales. December Fed meeting minutes are released along with ISM manufacturing numbers expected to remain under the magic number of 50. Thursday, jobless claims are reported and should show an increase, the 110th Congress convenes in Washington with Democrats in control by a very slim margin, and factory orders are expected to show a 1.7% rise in November after October’s 4.7% decline.

Friday brings the December employment report which will be widely watched in an effort to determine if the economy is as strong as it appears despite what still feels like a housing slump. Numbers are expected to be steady from the last report, and show a modest increase in hourly earnings. Fed Chairman Ben Bernanke addresses economists in Chicago and should provide great fodder for next weekend’s financial media outlets.

The first five trading days of January tend to be a harbinger of things to come as far as U.S. equity markets are concerned. Due to the passing of President Gerald Ford, equity markets are closed Tuesday, however the bond market will close at 2 pm in shortened trading.

With that said, we’d like to extend our best wishes to you for a healthy, happy, and prosperous New Year!

And thanks for staying tuned!

The final days of 2006 have come, dwindling to just a slim four trading sessions. Before the open today, the year-to-date stats for the major market indices stand at a gain of almost nine percent for the Nasdaq Composite (COMP), a 13-percent increase for the S&P 500 Index (SPX), a 15-percent jump in the Dow Jones Industrial Average (DJIA), and a nearly 16-percent increase for the small-cap Russell 2000 Index (RUT).

Of course, last week’s broad-market performance gave investors nothing to cheer about. The SPX closed the week with a loss of 1.1 percent on extremely weak volume. In fact, Friday’s trading volume on the New York Stock Exchange came in at roughly 991 million shares, which was the second weakest volume of the fourth quarter, falling behind trading volume of 520 million shares on the holiday-shortened November 24th (the Friday following Thanksgiving).

Meanwhile, the lackluster broad-market performance sent many traders scrambling to add put positions to the portfolio. The SPX saw particularly heavy put trading on Friday, as open interest at the 1,400 strike continues to build. On Friday, nearly 17,700 contracts changed hands at this out-of-the-money strike. This burst in put activity combines with the extremely light stock volume to increase the influence of option activity, which in this case is a drag on the market due to put-generated shorting.

Yet, while the previous week proved to be negative due to the light trading volume and increase in hedge-related shorts, it could have a positive influence during expiration week. Should many of these puts remain safely out of the money when expiration rolls around, these hedges will be unwound, providing the market with a fresh round of buying power.

Looking ahead, the S&P Depositary Receipts (SPY: sentiment, chart, options) have another potential trick up their sleeve. The exchange-traded fund (ETF) is looking at a dual layer of support in the 139.50-140 region. The trust’s 50-day moving average has climbed to the 139.50 level and could help to buoy the shares during the near term. Furthermore, the 140 strike is the site of peak put open interest in the front-month series, with nearly 29,000 contracts. This duo could work to contain any further pullbacks in the broad market.

Now, as we close the year, a number of traders are banking on another “Santa Clause rally” to finish 2006 on a high note. And history is on their side. According to the Stock Trader’s Almanac, U.S. equities have gained an average of 1.6 percent during the final week of the year since 1969. Of course, the “Santa Claus rally” has now become a well-known phenomenon in trading community so that it is now touted on every financial media show and in every publication. It begs the question, “has this indicator become a little too crowded?” At the very least, it warrants a little caution as we prepare to enter a week plagued with extremely weak volume and light economic news.

I would like to present a couple notes of caution as we enter the final trading week of the year. The RUT continues to struggle with the round-number 800 level. This region has capped the index since the start of the month, sending the RUT back down to support at its 50-day moving average.

Furthermore, bullishness among options players have become a little more muted, but we are not seeing any aggressive bears at this point.

The S&P 500 Index (SPX) locked in another positive week, as it gained roughly 1.2 percent from the previous Friday’s close. What’s more, it was another expiration week that enjoyed gains. As I mentioned in last week’s Monday Morning Outlook, nine out of the past 11 expiration weeks had seen gains. This positive uptrend was most likely helped by the unwinding of hedges against out-of-the-money put positions on the broad-market exchange-traded funds (ETF) such as the S&P Depositary Receipts (SPY).

In fact, it appears that this trend could continue as option trading grows more popular. In reviewing some of the data provided by the Options Industry Council (OIC), it looks like we’re operating in an environment where option open interest is about 50 percent higher than the levels of two years ago. It would seem that the influence of option activity on the stock market has grown substantially.

Furthermore, it is interesting that the put/call open interest ratio is exactly flat from beginning point to end point (this information is updated daily). What seems to be of greatest interest in the put/call data is the bottoming of the ratio in mid-2006 and the rise since then as the market has been rallying sharply. This is the only period encompassed by the attached data in which the market was clearly trending.

Meanwhile, as the OIC put/call open interest ratio has been on the rise during this market rally, indicating a growing preference for puts over calls, many market watchers have been quick to point out the ascent in the percentage of bullish advisors in the Investors Intelligence survey. Last week’s report revealed that the percentage of bullish advisors slipped slightly to 59.6 percent after hitting a high of 59.8 the prior week. The highest level before that was 60.4, which was reached in December 2005. Those polled are displaying healthy optimism in the market and in the economy, thanks to a successful earnings season that has been put to bed, reduced energy prices, and an election turnout that leaves the country under bipartisan rule.

While extremes in optimistic sentiment often mark tops in the broad market, there are a couple things a contrarian needs to keep in mind. The first being that optimism in a bull market is to be expected and, thus, is a far weaker contrarian signal than optimism in a bear market.

One other interesting fact that Joseph Sunderman, head of our Quantitative Analysis Department, pointed out last week, is that pullbacks following highs in bullish sentiment according to the Investors Intelligence survey have been far weaker in a bull market than pullbacks in a bear market.

Another indicator that has sent many market watchers into a froth has been the descent in the CBOE Market Volatility Index (VIX). Last week, the index dipped back below the 10 level and tagged a fresh 14-year low of 9.34. While this is a potential sign of complacency, anecdotal evidence points out that many are interpreting this indicator bearishly.

When the VIX closed two consecutive sessions below the 10 level (on November 20 and 21), the SPX pulled back following the Thanksgiving holiday roughly 1.4 percent before putting in a bottom. However, from that bottom, the broad-market index has rallied nearly three percent during the past three weeks. Not exactly the weakness expected by analysts who have expressed negative views about the VIX in the media. In fact, the steady ascent in the SPX has resulted in a general reduction in volatility, creating a low VIX.

While there are signs of optimism in the market (such as the high Investors Intelligence survey), there is a guarded quality to this optimism, as the financial media is filled with bearish comments and headlines regarding the low VIX and slowing economy. This wary atmosphere is very much unlike the exuberance that filled the air in 2000 just before the bubble burst. Such caution leaves the door open for additional gains as more of the skeptics leave the sidelines.

From a technical perspective, we have a pair of round-number levels drawing interest. The Russell 2000 Index (RUT) continues to struggle with the 800 level. The small-cap index briefly popped above the round-number level on December 5 when it tagged a high of 801.01, but has since moved sideways, hammering against this level. This barrier needs to be taken out soon if the market is going to make much progress by year-end.

Meanwhile, the London FTSE 100 has found support at the 6,000 level. The index pulled back to and bounced off support at both the round-number level and its 80-day moving average at the beginning of the month. The recent rally in the index has carried it near a six-year high.

The broad market resumed its rally last week, with the S&P 500 Index (SPX) not only closing with a gain of nearly one percent from the previous Friday’s finish, but the index notched a new six-year high in the process. A mid-week pullback and some concerns surrounding the release of November’s nonfarm payrolls caused the CBOE Market Volatility Index (VIX) to pop briefly higher, but the index continues to be capped by its 80-week moving average. Since mid-August, the VIX has locked in only one weekly close above this intermediate-term trendline.

Looking ahead, we find ourselves facing the final option expiration week of 2006 and this could be a good week for the Street. We have found that the SPX tends to rally during expiration week. If fact, during the past 11 months, the Standard & Poor’s Depositary Receipts (SPY: sentiment, chart, options) have suffered a weekly loss during the week of expiration only three times and the average return during this time period is a gain of 0.64 percent.

Jan.: -2.1 percent
Feb.: +1.7 percent
March: +1.6 percent
April: +1.9 percent
May: -1.7 percent
June: -0.5 percent
July: +0.3 percent
Aug.: +2.9 percent
Sep.: +1.3 percent
Oct.: +0.1 percent
Nov.: +1.5 percent

I think one potential reason for the upside bias in expiration weeks is the unwinding of heavy out-of-the-money puts that accelerates during that week. As these out-of-the-money puts are bought back to capture what little time value is left, those who took the other half of the trade and sold the puts are able to buy back the SPY shares they sold as a hedge against the short put position. This unwinding action in turn helps to add buying pressure to the SPY during this week.

As we head into this final week of trading for December options, the SPY has a solid accumulation of puts at the 135-139 strikes, totaling nearly 225,000 contracts.

Of course, the S&P 100 Index (OEX) isn’t without its own supply of puts, which could be unwound this week. The December 630 -650 puts have a total of more than 56,000 contracts in place at the moment.

Shifting to a more technical perspective, we enter this week with the SPX facing the 1,400 level as support versus its prior role as resistance. Furthermore, since the market put in a bottom during July, all corrections so far have occurred in non-expiration weeks.

Changing gears to check in on small caps, we find that the Russell 2000 Index (RUT) is back to leading the market on a year-to-date basis (though by a smaller margin that we saw earlier in the year). The index is currently up more than 17 percent since the start of 2006, compared to the SPX’s return of nearly 10 percent and the Dow Jones Industrial Average’s (DJIA) gain of almost 15 percent. The RUT is currently struggling to overcome round-number resistance at the 800 level. Last week, the index was soundly rejected by this level on more than one occasion.

The one wild card that investors have to keep an eye on this week is the Fed. The Federal Open Market Committee is set to meet on Tuesday and will release its comments on the economy (along with its decision on any change in the interest rate) at 2:15 p.m. Eastern time. Economists are currently expecting the Fed to keep rates unchanged at 5.25 percent. Comments from Bernanke will be closely watched for any indication as to which way the Fed is leaning. A recent weak manufacturing report paired with a strong-than-expected employment report have left many traders scratching their heads.