 The ETF Authority for Monday, March 3rd, 2003 Volume 2, Issue #9 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
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MARKET SUMMARY If the pendulum starts to swing and more countries come on board to the American thinking on Iraq, then the court of world opinion will quickly move away from the countries that are trying to mollify Iraq. Oddly enough that could, in the end, help peace have a chance, as Hussein may feel cornered enough to give up the ghost. As soon as stocks, bonds and the dollar really start to believe that peace has a chance, watch out! For the week, stocks were little changed. Improving economic data was overshadowed by the war front. Ultimately, the stock market will have to make a move, but unfortunately, it is unlikely to manage anything of real significance until either the shooting starts or Hussein actually gives in (Hint: don't hold your breath). ECONOMIC ANALYSIS Economic data were largely mixed last week. Consumer Confidence from the Conference Board, which I thought might even tick up, collapsed last week (later in the week, the University of Michigan's consumer confidence measure actually showed some improvement). Stock prices fell following the announcement, but as I've said many times recently, the stock and bond markets are currently trading off the geopolitical outlook more than the economic outlook. So, why should you care about the economic data then? That is really simple. First of all, the economic numbers do reflect what is happening in reaction to the constant give-and-take regarding the situation in the Middle East (not to mention North Korea). Furthermore, knowing where we are now, economically, will be important in surveying the fundamental landscape once we're able to get any major geopolitical events -- good or bad -- behind us. Back to the data: Secondary data released last week included existing home sales, which were much stronger than expected, new home sales, which had their worst result in a year, and the weekly unemployment claims data, which were worse than expected. On the positive side was a very strong durable goods report. Although the December figure was revised lower, to -0.4% from -0.2%, January saw a surge of 3.3%. This was the best result since the figure soared 8.5% in July 2002. I had warned that economists were forecasting a far too weak release, but even I did not expect the kind of across-the-board strength evident in the January 2003 data. The numbers jive well with recent anecdotal reports from some parts of the technology sector, where we are hearing that some spending is finally taking place (and could increase even more if the global geopolitical situation clears up). Although my long-term charts show risk of another leg in the bear, once we bottom in the next month or so, these kinds of data points are indicative of my bigger-picture expectation that 2003 will be an excellent year for the longs in the stock market. Friday saw three other pieces of information. Q4 gross domestic product (GDP) was revised higher, to 1.4%, doubling last month's 0.7% estimate. Most of the change came via inventory building, which is a good thing short-term, as long as there are sales this quarter to match last quarter's inventory gains. Otherwise, businesses will just allow those newly created inventories to wind down again. The data also showed a stronger-than-previously-reported consumer, which I just don't see. Either way, 1.4% growth is meager at best, though Q1 2003 does not look to be all that bad right now. The University of Michigan's Consumer Confidence numbers came out, and they were revised slightly higher. This puts into question the validity of the Conference Board's very weak release earlier in the week. The better numbers provided a brief further bid to stocks, although those gains really did not hold. Finally, the Chicago Purchasing Managers report was above 50 again at 54.9, which was near estimates, but still implied that the economy was expanding. Looking ahead, this coming week will be a busy one on the economic front. We start the week out with personal income and spending for January. Consensus estimates are for the rarest of things: stronger income (+0.4%) than spending (+0.2%). I am not sure what earth the economists coming up with these numbers are on. Look for spending to surge, aided by higher prices and crazy seasonals, which will have more of an affect on spending than earnings. Add to that some nasty bonus cuts this year, and the earnings data are likely to come in weaker than expected, while spending should be stronger than forecast. The ISM releases its National Purchasing Managers survey at 10:00 AM on Monday. Expectations are for a small slip, towards the low/mid 52 area from 53.9 in January. This will be the second consecutive cooling in the numbers. The market will look for continued strong orders data and will be hoping for improvement in the jobs portion of the survey. From the "who really cares" department, construction spending is also due for release (10:00 AM). It is forecast to move ahead by about 0.5% compared with December's 1.2% surge. On Tuesday we rest. Wednesday begets the ISM's services poll. Expectations are for a small dip from the 54.5 reading recorded in January. Thursday sees two releases: productivity (a revision of the Q4 number) and factory orders, which just expands on last week's durable goods report. In the past, productivity has been closely watched because Alan Greenspan said it was important in controlling inflation and thus allowing the Fed to keep interest rates lower than would otherwise be possible. However, the Fed clearly is more worried about deflation than inflation, making productivity less of an issue as far as interest rate policy is concerned. Both are due out at 10:00 AM. Friday, March 7th will provide us with all of our fireworks. The monthly non-farm payrolls and unemployment report is due. February will be the first month since October in which seasonal factors will not be a big deal. We might see some small negative affects caused by the huge mid-month snowstorm that shut down the northeast over the President's Day holiday, but if they exist, the Bureau of Labor Statistics will tell us about it. The consensus forecast is for a gain of around 25,000 to 50,000 jobs, compared to January's surprising burst of 143,000 (surprising to Wall Street, but not to readers of this newsletter). The military build-up, plus evidence of some spending in the tech sector, coupled with decent retailer numbers leads to me expect a number a bit above the consensus. My forecast is for a gain of 75,000 jobs and an increase in the work week of 0.1 to 0.2 hours. However, the unemployment rate will probably tick up to 5.8%. The net result of the numbers will probably be quite bullish for stocks and bearish for the bond market. If geopolitical events permit, the stock market could very well put in a bottom sometime between the end of this week and the end of next week that could hold for six months or longer. WHERE DO WE GO FROM HERE? Friday's gains were actually a bit disappointing given that the economic data were all better than forecast. Price patterns continue to permit a run past 850 in the S&P 500 (841.15), but as long as 868+ remains inviolate, the larger trend is down and calls for sales on rallies. A move much above 868+ would turn at least the medium-term trend bullish, although shorter-term patterns would probably leave the market at risk of a corrective drop. Look for a gain of 1-2% from Friday's close before stocks begin a sharp decline in earnest by late Monday. Failure for that to happen may force me to revise my expectations regarding the long-term outlook for equities. Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
TRADE #1: SELL SHORT THE S&P MID-CAP SPDR (MDY, $74.61) AFTER A RALLY I continue to believe that this will prove to be a profitable trade when the conditions are met.
MDY has still not rallied enough for me to get my short trade off. However, another 1-2% gain is seen possible to start the week. With the move back into the old down channel, a rally past last week's high, set on Friday at $75.12, could permit enough short-covering to take prices up to our sale area. Stops remain near the 50% retracement of labeled wave-3. Note that RSI remains mired below 50, as this market is in
a classic three-wave correction. A fall below $74.35 would be damaging from
a short-term perspective, but trading a breakdown in the middle of a range
is usually asking for trouble. TARGET: $71.73
Most of you probably know all about the covered call strategy. The idea is to buy a stock and sell a call on it. A call option gives the buyer the right to purchase a particular stock at a certain strike price. If you are called -- meaning that the buyer exercises his right to buy your shares -- then you simply pocket your premium and sell the stock at the exercise price. If you are not called, then you keep the premium and your stock. A covered put is essentially the same thing, except the underlying position is a short play in the asset under consideration. For this trade, you should sell the QQQ short on Monday as long as it opens between $25.50 and $24.75 and simultaneously write (sell) a March $25.00 put (QAVOY, $0.90). What does this position mean? Well, if you held the position until expiration, which is on March 21, 2003, then your breakeven on the upside is $26.06 (not including commissions). That is because you make $0.90 on the option, which would expire worthless and would lose the same amount on the stock. Your maximum gain occurs at $25.00 or less. You would get exercised on your put at $25.00 (regardless of how low the QQQ is trading) and still get to keep the $0.90 from your put option. So, you make $1.06 on your position and your net outlay is $24.26 ($25.16 less the $0.90 you received for the put). Not bad money for three weeks work! Of course, if the QQQ rallies sharply, then you will lose
money. I do need to set a stop, and since I am aiming for a gain of $1.06, I
really do not want to risk more than about $0.50. The vagaries of options
pricing mean that for every cent that the QQQ rises, the position will lose
about 0.6 to 0.8 cents. This means you can initially place your stops near
$25.90 (assuming you enter the trade at $25.16). Also, because the time
value of the option will fall quickly, you can raise your stop by $0.04 per
day. Write a $25.00 March QQQ put (symbol QAVOY) at the same time. Close at expiry on March 21, 2002. Stop by buying back the put and QQQ on a move of $0.74
cents above where you shorted the QQQ. Raise the
stop level $0.04 cents every day. For example, on Tuesday, the stop for the
QQQ should be $25.94.
As I noted in my intro section, the bond market is due to get annihilated. Debt markets had one of their best months in recent memory and are approaching overbought levels. If you are an aficionado of the futures markets, you will know that open interest levels are very high and that commercials are net short these markets. Commercials are supposed to represent the "smart money", and they are expecting prices to drop. With price targets so nearby, and with TLT having just hit two channel resistances, we are in real danger of reversing lower. You will recall, however, that I have a severe allergy to
picking tops and bottoms. As of now, this ETF has done nothing wrong. Rather
than trying to sell short now (especially with a dividend upcoming) and
trying to make up a decent stop level, I'd rather sell on a break below
trendline support and use whatever high has been made at that time as a
stop. As of Monday morning, the trendline will be at $89.87. It will be at
$90.15 on Tuesday. DO NOT SELL TLT AFTER
TUESDAY, AS THIS VERY STEEP TRENDLINE WILL BE MEANINGLESS BY THAT TIME. TARGET: $86.70 STOP is whatever the high is prior to the trendline break.
If TLT does not make a new high on Monday or Tuesday, then set your stop at
Friday's $90.54 peak. If you're currently a Free
Trial subscriber to The ETF Authority, then your subscription
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recommended trades... 4. CONTINUED GUIDANCE ON PREVIOUS TRADES Stocks have gone no place fast over the past few weeks. Although the trades I had recommended previously may still work, I've decided to cancel all but the MDY short trade and find more current ideas for you. TRADE #1: WRITE A DOW DIAMONDS (DIA, $80.24) OUT-OF-THE-MONEY PUT AND USE IT TO FINANCE THE PURCHASE OF AN OUT-OF-THE-MONEY CALL This trade never hit my initial entry parameters. I've decided to cancel it.
RECOMMENDATION: This trade never hit my initial entry parameters. I've
decided to cancel it.
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