On Tuesday of last week, the House of Representatives completed the legislation to fund the federal government until the end of the fiscal year on September 30. This was one of the potential tripping points for the market that was being highlighted at the start of the year. This important news item was not headline news because banks in Cyprus, a country smaller than Rhode Island with an economy smaller than Shreveport, Louisiana’s, was in the process of shooting itself in the foot with a proposed tax on deposits.
The Cyprus bank crisis news caused an increase in volatility in the U.S. equity markets (VIX up 20% on the week) but had essential zero impact on the net value of the S&P 500 from the beginning of the week to the end of the week.
Not only did the noise from Cyprus nearly completely obscure the positive news regarding the continuing resolution passed by Congress, it minimized the focus on a few important earnings reports including earnings disappointments from FedEx (FDX), and Oracle (ORCL).
The current bull market has been relentless. If you have money sitting on the sidelines, it has been difficult to time a good entry point. Pullbacks last for a matter of hours. Since the beginning of the year, the only meaningfully sized pull-back occurred in late February. Otherwise, investors have had to buy the market highs on the hope the market continues higher.
As we approach the April 8 start of earnings season, we expect generally lackluster earnings reports to give us a better buying opportunity into the current bull market. Around this time of year, analysts begin to doubt growth rates and have an easier time seeing earnings challenges rather than opportunities.
Additionally, the resolution of the Cyprus bank problem involving taxing deposits over EUR 100,000 is likely to not sit well. It would not be surprising to see capital flow from the weakest European banks to the stronger banks out of fear that taxing deposits becomes a generally accepted way to strengthen failing bank balance sheets. If deposits start to flee weaker banks, those banks are at risk and the European sovereign debt problem could return to center stage. The initial reaction of the U.S. equity market today has been favorable to the Cyprus bailout plan but we recommend investors be patient to see if the initial positive reaction turns more bearish in the next few days.
Review of Positions
Dollar General (DG) – On March 19, we opened a position in DG May 52.50 Calls for $0.90.
Thomson Reuters (TRI) – On Jan 16, we opened a position in the TRI Jul 30 calls (TRI 130720C000030000) for $1.60 or less. On March 19, we closed the position for $2.40.
Dollar General (DG) – On March 19, we opened a position in DG May 52.50 Calls for $0.90. On March 21, we closed the position for $1.60.
Charles Schwab (SCHW) – On Mar 7, we recommended to buy to open the SCHW Sep 18 Calls (SCHW130921C000018000) for $1.05 or less. As of Friday’s close, these options closed at $1.03.
EMC (EMC) – On Jan. 10, we recommended to buy to open the EMC April 25 calls (EMC 130420C000025000) for $0.95 or less. As of Friday’s close, these options closed at $0.77.
Healthcare Trust of America (HTA) – on Feb 13, we recommended you buy to open the HTA Jul 12.5 calls (HTA 130720C0000125000) for $0.45 or better. On Friday, this position closed at $0.45.
Lilly (Eli) & Co. (LLY) – On Jan. 9, we recommended to buy to open the LLY July 55 calls (LLY 130720C000055000) for $1.45 or less. As of Friday’s close, these options closed at $2.06.
Parting Shot: Market Sentiment Indicator
Shown below is our MSI (blue line) superimposed on the equal weighted S&P 500 measured by the ETF (RSP). We are bullish on the stock market when the MSI is above the 50% market and bearish when it is below.
The scale for the MSI is on the left hand y-axis. The MSI has declined slightly from 76.7% to 76.5% through Wednesday of last week but has since turned higher. The market remains bullish in the intermediate term and is not showing signs of being significantly overbought.
Have a great week trading,
Nick Atkeson and Andrew Houghton
Big Money Options