US Market Report – week ending 6th July 2007
Buyers rally through the week, though the greater trend and market direction remains range bound. Although the broader market is still trying to gather buyer momentum, Technology stocks found a leg up to drive the NASDAQ market into a new long-term high.
It was a shortened week of trading with the 4th of July holiday celebrations finding the
Bullish activity prevailed, supported by positive Unemployment data before market open Friday. Following the previous weeks uncertainty, and considering the major averages had been trading above medium-term support levels, there were numerous reasons for buyers to rejoin the markets.
During this time, market volatility has also decreased. The VIX indicator measures investor fear, and when it is high, it suggests there is a strong potential for markets to fall. It has been retracing over the last 2 weeks, and is now trading near average levels.
All-in-all, it was a rather positive week that gathered buyer momentum the more the week progressed. This suggests we may experience an attempt to break through the recent long-term highs that have been set on the S&P500 and Russell2000 indexes – the benchmark indexes that FMR Analysts reviews to establish general market direction/activity.
Market participants are continuing to show cautious behaviour at the moment. In the coming weeks, the 2nd quarter earnings reporting season will begin. This quarterly event typically increases the market volatility, presenting numerous surprises that causes buyers and sellers to panic buy and sell.
For the astute investor, this can be a period of great profit. Option Writers can benefit from changing expectations, benefiting from strong price movements on stocks that have been carefully selected.
An example of this can be illustrated with a Covered Call strategy. If you have selected a stock for investment based on it being a strong Fundamental company, with good Financials and a higher probability of continuing to produce increasing Revenue and Profit results (this could be based on industry analysis or expected earnings results), then by writing an Out Of the Money (OTM) call option will produce a premium return (income) and lock in a sell price.
Looking ahead to when the company is scheduled to release its earnings (you can do this from the following site: http://biz.yahoo.com/research/earncal/today.html), you could purchase the stock now and if the company announcement meets your expectation of producing a good/stronger earnings report, you could then write a covered call against your stock after the share price has risen.
Other factors to consider with this strategy include; the volatility of the markets and the stock (sell at high volatility), what the stock performance has been in the past (evaluate the chart for support/resistance levels), and where your breakeven level for the position is in relation to the past stock price movements (establish an exit strategy before you enter the position).
Currently, the July option contracts only have 2 weeks left until expiration. These would not be ideal to write at this stage for the above strategy. By the time earnings season is underway, writers should be evaluating August options.
The coming week is relatively quiet in terms of scheduled economic announcements. Import/Export data will be released on Friday, along with Retail Sales. However, through the remainder of the week investors are likely to be more focused on company announcements.
As we had mentioned in last weeks report, the price of Crude Oil had been sneaking beneath the radar of average investors. The commodity has increased due to increased tensions in
Investors should be cautious as the
There is a good potential that higher prices in crude are likely to cause decreased spending in the Retail sector, and therefore, drive the stock market down.
The Outlook Ahead …
With the broader market still within a sideways trading range, our evaluation this week will be whether or not the buyers have the momentum to break into a new high on the S&P500 and Russell2000 indexes. This would denote a continuation of the long-term upwards trend, with the last month and a half then denoted as a Consolidation pattern.
Technology stocks are leading the way, and there are no signs that the NASDAQ index is beginning to slow down just yet. We might find that these sectors lead the broader market into the next couple of weeks until investors are more focused on watching earnings announcements.
Option Writers are not likely to find reasonable premium returns on July contracts due to decreasing volatility and time (only 2 weeks until expiration). It is still a little too far out to be considering the August contracts to write, therefore, investors should patiently be monitoring and evaluating conditions for the time being.
Short-term traders would be more inclined to be approaching Bullish strategies. However, FMR Analysts are concerned that the broader market might maintain the medium-term consolidation pattern, and that might lead to a slow week that could stall at resistance levels. Trading ranges are not suitable for short-term trading as market movements are typically smaller and less volatile. Therefore, it is more suitable to be holding and monitoring market conditions for now.
Investors should still be maintaining a cautious market outlook. If the consolidation continues, especially holding resistance, then that could spell the end to the Bullish markets. Adopt defensive strategies on current positions, especially profitable current positions, and ensure that any new positions entered have protection legs on entry.