Goldilocks, where are your bears?
The jobs report came in at a very favorable +46,000 new jobs compared with estimates of +166,000. The market will like that but the unemployment rate dropped to a level not seen since Feb 1970 of 4.2%. This would concern the Fed except that the average hourly wage increased only +.03 per hour. The tight labor market is still not putting pressure on wages which would prompt a Fed rate hike to stop wage inflation. The Fed has to like this economy. Good unemployment, no wage pressures, increasing earnings, better production from improved technology and increased competition on the Internet holding prices in check. They are on automatic pilot until something changes drastically. The recently released FOMC minutes showed no worry over interest rates for the near future.
If the Fed is happy then the markets should be happy and we should be happy. The Goldilocks economy is alive and well. Asia is improving and manufacturing is ramping up again. The NAPM report on Thursday came in at 54.3 compared to 52.4 in Feb. Any number over 50 is considered an expanding manufacturing sector. The earnings estimates for earnings this quarter are now +6.4% and +9 to +12% for the next quarter. With earnings increasing and the Fed on hold, the market should continue to move upward for several weeks unless we get earnings surprises to the downside.
Now that we are moving into the heavy earnings reporting season we could see some new cash coming into the market. There is nothing visible on the horizon to cause market turmoil. The focus should be clearly on the earnings announcements and the pre-earnings runs. This could be a good two to three weeks for call buyers.
The market internals are still not good but could improve in the short term. Even though the market was up on Friday the decliners still beat the advancers but only by a slim margin. Currently the advance has been limited to the large caps and blue chip stocks. 70% of the stocks on the NYSE are trading below their 200 day moving averages. Only 30% are advancing above the average. This is either a warning of things to come or an opportunity for the 70% to start gaining ground in a broad market advance. While my market view is bearish for the second half of the year due to Y2K cautions, my immediate view is for the blue chip and tech leaders to move upward through this earnings period. This will continue to be a stock pickers market. Stocks making new highs should continue to do well and the tech sector (Nasdaq) should be making new highs as well.
The chances of a positive trending market over the next three weeks provides a good opportunity for call buyers to enter and exit several new sequential positions. While call buyers can make good profits when a stock is moving up there is another strategy which can be profitable for two of the three directions a stock can take. Stocks either go up, go down or stay the same. While call buyers only make money when a stock goes up, put sellers make money when the stock goes up, stays the same or only goes down slightly. The coming week is the ideal week to sell puts in the current monthly cycle. Options expire on April 16th, only two weeks away. Puts still have value and the market is expected to trend up. Selling naked puts requires a margin account and is similar to doing covered calls. When you sell naked puts you do not actually buy the stock. Your sell is covered by cash in the account. This cash still accrues interest during the play. The only risk is that the stock will fall below the strike price you sold and the stock will be put to you by the buyer.
For example: If you sold a $25 put on XYZ with XYZ @ $27.50 you would receive $1.13 per share. The rough margin requirements for this play would be around $9.50 for a return on investment of 12% for two weeks. The stock must drop to less than $23.88 for you to lose money. ($25 strike - $1.13 premium received) If the stock remains above $25 the option would expire worthless and you keep the entire $1.13 per share.
This is just another way to make a bullish play on a stock without having to be exactly right about the stock direction to make money. It is slower and more conservative but a technique you could add to your play book. See the Naked Put section for some stocks to play.
Jim Brown Editor