Option Trading Idea of the Week
Favorite Suggested Books for the Conservative Options Investor
I am often asked about my favorite books on investing (other than my own Making 36%: Duffer's Guide to Breaking Par in the Markets Every Year, In Good Years and Bad).
Here is my list of favorites:
McMillan on Options, by Lawrence G. McMillan, (New York: John Wiley & Sons, second edition, 2004). This is generally accepted as "The Bible" on options. It is fairly expensive and the text is ponderous for most people, but everything is there.
Options Plain and Simple, by Lenny Jordan. (London: Prentice Hall, 2000). One of many books which describe just about all the option strategies with some good advice as to which ones work under which conditions. Much lighter reading than McMillan on Options.
Winning the Loser's Game, by Charles D. Ellis, (New York, McGraw-Hill, 4th Edition, 2002). While this is not about options per se, it is just about the most sensible book I have ever found that discusses stock market investments in general.
The Little Book That Beats the Market, by Joel Greenblatt, (New York, John Wiley, 2006). Again, this book is not about options, but is perhaps the best book written in the past several years about how to select individual stocks.
The Little Book of Common Sense Investing, by John C. Bogle (New York, John Wiley, 2007), Another book which is not about options, but I challenge anyone to read this book because if they do, I believe there is no way they would ever buy a mutual fund again (except a no-load broad market index fund).
Andy's Market Report
As expected, the Fed decided to keep interest rates at 2.0% on Tuesday. The announcement was accompanied by a message on inflation and the economy that eased concerns about a potential rate hike in the near future. The S&P rallied 2.9% on the news and created quite a few subplots for the rest of the week
The news led to a 21 month high in the dollar which also helped push oil prices to a three month low. All in all, it was a wonderful week for the bulls.
For the week the Dow, S&P, NASDAQ and Russell 2000 advanced 3.6%, 2.9%, 4.9% and 2.5%, respectively.
The FOMC's statement Tuesday warned of higher inflation and continued weakness in the economy yet the stock market loved the message. Why?
Traders were relieved by the growing notion that the Fed won't be raising interest rates anytime soon. "The Federal Reserve said little new," said Marc Chandler of Brown Brothers Harriman. The statement, however, "gives little reason to expect a [September] rate hike, which we previously had thought was possible."
"While the Committee is undoubtedly concerned about inflation, the statement points to an expected moderation in inflation and implicitly notes the recent fall in energy and some commodity prices," wrote John Ryding of RDQ Economics. At the same time, the Fed apparently expects several quarters of weak economic activity, translating into higher unemployment into 2009, added Ryding, who believes the Fed won't change interest rates until next year.
There is no doubt that the recent plunge in oil prices and commodities in general helped to keep rates steady, at least temporarily, as the Fed struggles to balance between a rise in inflation and a weak financial sector that has been devastated by the credit crisis.
After spending the first half of the year soaring to new highs, the prices of grains, metals and energy have dropped sharply over the past month. Crude oil has moved 20% lower since peaking at $147 a barrel on July 11. Crude dropped another $4.82 a barrel this past week to close at $115.32.
"The first leg of the decline in commodities is under our belt," says PNC economist Stuart Hoffman. Hoffman stated the commodity-price decline could "take the edge off inflationary expectations".
However, not all news was good this week. The financial sector continues to struggle mightily as Freddie and Fannie both reported huge quarterly losses. Freddie, for instance, posted an $821 million second-quarter loss Wednesday. In response, the big mortgage firm set plans to slash its dividend by at least 80% and withdrew its guidance for future credit losses.
Legislators have made clear, through their interventions on behalf of Fannie and Freddie and other moves, that they will defend the institutions they consider crucial to the financial sector and the real economy. Some have called the policymakers' actions socialized capitalism. Taxpayers pay for the losses, while the corporations benefit from any potential profits. Either way, the decision to back the mortgage behemoths has led to a 30% rise in the financial sector.
On the technical side of things the market has pushed back into an overbought state and back at the top of the six week trading range. Overhead resistance was breached Friday, but only by a narrow margin so not much can be taken from the move. However, if the market is able to consolidate and hold above current levels then we could see another push back to the 1320 area in the S&P.
Furthermore, all of the sectors that have led the market higher have pushed into an overbought state so I would not be surprised to see a short-term push lower once the market enters the week of options expiration.
Overbought/Sold Condition Report
Overbought/Oversold for August 9, 2008
Major Benchmarks - Dow (DIA) - 64.3 (neutral)
- S&P 500 (SPY) - 63.4 (neutral)
- Russell 2000 (IWM) - 68.6 (neutral)
- Nasdaq 100 (QQQQ) - 73.8 (neutral)
Emerging Markets (EEM) - 56.1 (neutral)
Testimonial of the week
"I've got one unit of each of the shoot portfolio entries. I'm very happy with the way these have performed, and I have set up a couple of my own using that model and those are also doing decently. Have you thought about adding more Shoot stocks?
This is a winning strategy you should really be proud of and I would welcome the chance to participate in additional positions." - Eugene 8/11/08
