While we recognize that most people would rank digging through economic data right up there with watching paint dry, the bottom line is that this market is all about the turn in the economy, which means that the economic data is vitally important during this phase. In short, the good news is we continue to see signs of improvement on the economic front. And while everything isn't peachy keen, there was some very good news this week.
For example, the Conference Board announced that its index of leading economic indicators, or LEI (an index designed to forecast economic activity in the coming 3-6 months) rose by a record 1.2%, which marked the first positive growth since April 2007. The increase was the most since March of 2004 and triggered an expansion signal for the economy.
What is important about this particular indicator is it has an almost perfect track record of calling the end of recessions! In addition, seven of the index's ten categories rose in the month of May, including consumer expectations, stock prices, money supply, building permits, and vendor supply deliveries.
Beyond the LEI, there were several other bits of positive news announced. For starters, the Philadelphia Fed General Business Index soared Thursday by 20.4 points to a reading of -2.2 which not only was the highest reading since September, but also well above the consensus reading of -17.0. And don't look now, but over the past year, this index is actually UP 15.5 points, the biggest year-over-year increase since 2004.
Moreover, manufacturers in the Philly region are increasingly optimistic about activity six months from now. The Future Activity Index rose 12.6 points, its third straight monthly increase, to 60.1, its highest level since September 2003. The improvement was broad-based, as all components advanced into positive territory with the exception of inventories. The sustained improvement in the future activity index suggests that manufacturing will pick up over the next several months.
Next up was the latest report regarding 30-year mortgage rates. The average rate fell from 5.59% to 5.38%, the first decline in weeks. This is good news for home buyers as it makes housing more affordable and helps toward stabilizing prices.
The Labor Department also announced good news on Thursday. The total number of people filing for unemployment insurance dropped by roughly 148,000 in the first week of June, marking the largest fall in over seven years. The figure also shattered a 19 straight record-high streak.
Though Thursday offered some positive news, worries over the future of the economy still weigh heavy on market players. Some economists offer that the unemployment rate, which reached a 25-year high of 9.4% in May, may reach double digits by the end of the year. Other worries lie in the nature of the recovery. Some economists project the recovery to be "jobless" - employers remain reluctant to hire while their businesses continue to improve. One of the most pertinent concerns economists share is the enormous debt incurred in an attempt to save our financial system.
But the good news is that our indicators suggest the end of the recession is near. So, while there is plenty of bad news out there, we felt obligated to share some good news as well.
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the top stocks for 2010 from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
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Recommended Top Stocks This Week
MD (Mednax Inc.--$41.05; -0.66; optionable): Neonatal, pediatric, etc. services
After Hours: $41.05
EARNINGS: 05/07/2009
STATUS: Double bottom w/handle. A pair of low lows, one in November and one in March set the foundation for this 10 month base. Rallied into May and then shot higher on its earnings. It is now testing, coming back to bottom this week at the 50 day EMA (38.87), bouncing Thursday and Friday though it could not hold the Friday move. Nice test, setting up a good opportunity for us this week if MD can hold and turn back up.
Volume: 764.034K Avg Volume: 348.803K
BUY POINT: $41.56 Volume=523K Target=$49.95 Stop=$38.65
POSITION: MD KH - Nov. $40c (52 delta, wide spread) &/or Stock
TLB (The Talbots Inc.)
TLB has made a very strong move over the last couple of trading days and has gone a little too far too fast for me to enter, but it looks like it definitely is worth continued watching perhaps to catch an entry on an upturn from a dip.
POT (Potash Corp.)
After showing us a great upside setup making us a lot of money on the upside on its May breakout and run higher (336% on our options, 40% on our stock), POT started showing classic signs of topping. In late May it peaked and gapped lower. It recovered, but after clearing the high on some very low volume it reversed intraday and then gave up the high with another gap lower. A low volume high, a reversal, an inability to hold the high. With that set up we were looking to enter on any further weakness.
We put it on the report, and as POT weakened again at $114 we moved in with some July $115 strike put options at $10.60. Pricey, but POT had surged and with this classic toppy pattern we were looking at a pretty big drop.
Well, POT did not drop right away. Instead of just a double top it held the 18 day EMA and bounced once more. It did not clear the prior second peak in this pattern, however, and thus we let the position work for us. Our mistake in the play was not buying MORE puts when POT showed a doji below the second peak, a triple top.
On 6-15 POT did make the break, gapping lower for the third time in the topping pattern. This time it did not recover at the 18 day EMA and the bottom of the lateral move. It sold $4.16 on to $107. It gapped massively lower the next session, falling $11.50 to close at $95.59. The decision at that point was whether to take gain, to take all the gain, or take part of the gain. A best stock that gaps sharply lower tends to continue that move. You have to look, however, whether it gaps THROUGH key support. If so, it is going to continue in the direction of the gap. If not it could find support and bounce.
POT did not gap through key support. Indeed it gapped lower to the early May consolidation range after breaking out from a 3 month base. That is pretty good support. Given that, we decided to sell half our option position. We sold the options for $19.40, banking $8.80 per option or 83%. We moved our stop because with the support at this level we had to watch to see if it was going to bounce on us. The next session it showed a doji, an indication it might try to bounce, but it still closed a bit lower. Friday POT gapped higher but rolled over to lose $2.30 and close at $92.72. A bit closer to the tops in the February to April base. Lowered the stops again, but not so close that IF POT does not rebound sharply but breaks below those peaks we are still in our position and able to make some really impressive gains. That is why we keep part of our positions working for us after taking initial profits; that is where the really big money is made, not just the 'fast money' that often gets people into trouble as they don't let their profits run.
FAS (Direxion Daily Financial Bull 3X Shares)
This past week, Option Trader closed a debit spread on FAS for a before commission gain of 76% in just under three months. Thereafter, a new debit spread was entered using slightly different strikes. For those with an interest in financials, FAS is an interesting vehicle.
CI - CIGNA Corp. is currently trading at $25.24. The July $25.00 Calls (CIGE) are trading at $1.75. That provides a return of about 6% if CI is above $25.00 on expiration Friday in July.
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