Option Investor

What a Difference a Week Makes

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In only a week the market has turned our lemons into lemonade and it is a very refreshing drink after four weeks of selling. We have no drops this week and several of our current long positions are either at new highs or very close. Even the laggard Symantec has finally started to attract some buying interest.

Unfortunately after four weeks of selling our watch list was very sparse while we waited for the market to confirm a direction from last weeks support. The two watch list entries were homebuilders RYL and TOL and the combination of the "measured pace" language from the Fed and the tame but steady jobs numbers knocked interest rates to two month lows. This propelled homebuilders to new highs and left us in the dust just wishing we had an entry. Each week I hesitate to bite the bullet and go long at a new builder high and the next week I kick myself for missing out on another $5 gain. Still, patience is the key to profit and we will continue to practice that virtue.

For next week we are going to face some new resistance if the markets continue higher. The Dow could test the 2004 high at 10850 and the S&P at 1220. Given the gains for this week we could see a bit of profit taking before an actual breakout. We have some nice gains again in our current portfolio and I want to be cautious about loading up on new positions after a very strong rally. Option premiums for LEAP calls will be very high despite a multiyear low for the VIX at 10.90.

The best plan here is to find a stock that has been beaten up and limit our risk in hopes of it finding favor once again. Buying winners today has a slim chance of success. I considered EBAY again with a split in two weeks but there are still no buyers even at support at $75. It lost $1.34 on Friday despite the positive market. AMZN and GOOG were also weak with GOOG down -6. I considered a two-week put play on GOOG in advance of the massive 187 million share lockup release on Feb-16th but a two-three week play is not really a scenario we should be playing in this newsletter. I like it for a short-term play and mention it here for those who are interested.

I still like oil stocks but despite falling oil prices the oil stocks continue to move higher. I expect a dip in March and we will get long when that appears.

I found two stocks that fit my low risk profile this weekend and that will bring us back to eleven in the portfolio. Once the initial bounce is over fund managers will begin looking for those stocks missed in the first wave. Hopefully these will fill the bill. I would like to keep us in the 8-12 position range in anticipation of the April decline. If the current rally has legs past the 2004 resistance highs then we will watch our profits grow on the current plays and add to them selectively in anticipation of an end of quarter exit. Sell in May and go away my actually work this year but we will let the market make that decision for us.

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