Option Investor

Markets Expire With Options

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The Dow and S&P failed to reach new highs and tech stocks can't find a bid. The post earnings depression has appeared and investors are trying to decide if they should sit out the next couple of weeks before the Q1 guidance updates begin to appear.

If you read my market wrap this weekend I suggested that there might be a chance for a rebound next week based on the Nasdaq resting on strong support on the 100-day average. Volume has been weak on down days and stronger on up days. Internals have not been that bad overall. There is a good chance this week's slump was option related profit taking ahead of expiration and a long three-day weekend.

I am not prepared to take that bet with real money. Late February has never been a particularly strong period for rallies to start. We are in that twilight zone between Q4/Q1 earnings and without a major catalyst to get us out the current rut. I believe the economy is doing fine but fine is not very inspiring. Conditions are ripe for a range bound market and we have been seeing exactly that on the Nasdaq. If the Dow and S&P follow the Nasdaq lead then we are destined to have a boring couple of weeks. If we do hold over the Nasdaq support levels there is no guarantee that we will move higher until that catalyst appears. It could come in the form of the Intel mid quarter update on March 10th. Until then we could wander aimlessly in a range.

The only sector that really appeals to me besides energy is the homebuilders. I was hoping the Greenspan testimony would rile the bond market a little more than it did and give us an entry on Toll Brothers at $79. Instead it appears to have built a base over the last couple of weeks and readying for another blast off. am going to bite the bullet ahead of the spring selling season and take the entry at the current level.

I can't get a break on energy stocks and they just keep powering ahead despite a seasonal demand lull ahead. I am beginning to wonder if the lull will just give producers a chance to catch up and not really impact prices. I remember when we were stopped out on COP back in December after a really great run and very strong gains. Since Jan-5th COP has run from $83 to $106 and has only shown one really down day for the entire year. Regardless of how bad you want to go long you just can't justify buying a stock that is up +23 in the last 45 days. Eventually it has to fade and we know from experience that profit taking after that kind of gain can be very sharp. At least I keep reminding myself of that fact at least once a day. Until it happens we will continue to root for our lone energy position the XLE and its new highs every day.

Until a trend develops the markets are playing havoc with the portfolio. I am sure hoping for a Nasdaq bounce off that 100-day average or we will be a lot lighter next week. 

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