Option Investor
Market Updates

Bullish tone builds to best levels of year

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The major indexes are challenging their 2003 highs after the regional Empire State Index jumped to a reading of 26.8 in June, the highest level in the two-year history of the survey, which was well ahead of the 9.6 forecast of regional economists. While the Empire State survey is not considered a "key" economic report, it was one of the first economic reports released in recent weeks that showed a substantial gain in manufacturing activity for a regional index.

The news sparked an early morning rise in stock futures and when cash markets opened for trading, gains have been building steady with the Dow Industrials (INDU) 9,257 +1.54% currently at its best levels of the session and holding at 141.82 point gain. Trading curbs would be in place should the Dow gain 150-points.

Sector action is broadly positive with only the Oil Service Index (OSX.X) 94.86 -1.56% showing a loss. The broader S&P 500 Index (SPX.X) 1,005 +1.67% looks to break free of the psychological 1,000 level with the Biotechnology Index (BTK.X) 484.55 +3.29%, Dow Jones Home Construction Index (DJUSHB) 480.69 +3.07% leading sector gains. Multiple sectors post gains greater than 2%, with the Airlines Index (XAL.X) 52.26 +2.89% boosted higher by component Frontier Airlines (NASDAQ:FRNT) $8.60 +12.71% triggering a tiple-top buy signal at $8.50 after a morning upgrade from Morgan Stanley to "overweight" from "equal-weight" based on airfare data which suggests pricing in FRNT's top markets stabilizing and moving higher. Morgan Stanley has a price target of $12. As noted in this morning's market monitor, today's trade at $8.50 has FRNT generating a new buy signal on its PnF chart with initial bullish vertical count currently building to $14. I like 1/2 bullish positions in the FRNT November $7.50 calls (FUOKU) ($1.90 x $2.10) with the stock still below its bearish resistance trend of $13.50.

Gain in biotechs and a reversal from early losses in the Semiconductor Index (SOX.X) 367 +1.63% has helped boost the NASDAQ-100 Index (NDX.X) 1,230 +2.16% to its best levels of the session. The NASDAQ-100 Tracking Stock (AMEX:QQQ) $30.59 +2.1% shows a $0.63 gain. In Friday's 11:00 AM EST update, we profiled a bullish trade for naked put or covered put sellers in the June $29 puts for $0.20. I've had several e-mail questions from traders that took the trade, looking for some premium deterioration over the weekend and now wondering if we should be bidding the contract for $0.10 to capture gains. I'm thinking today's gains help reduce the possibility that the QQQ trade $29.00 on or before Friday expiration and would do nothing at this time.

Jeff Bailey

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