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Market Conditions and Recommendations 2015 03 29

Updated on April 28, 2015

Market Indexes

The S&P (2,061.02) and the DOW (17,713) both closed higher FRI, but down for the week. The S&P failed to clear a new high in the latest wave, and is nearing the latest low (2,040). Breaking below that would confirm the start of a down trend. S&P has had 3 straight closes below it’s 50 day moving average, a confirming indicator for a down trend. However, volume for every day during the week was below the 50 day mov avg for volume. So, there s still not a lot of conviction in this market.

The DOW did close below the previous low, and has 3 straight closes below it’s 50 day moving average. These are signals that the DOW is in a confirmed down trend.

Ratio of PUT premiums to CALL premiums (1.06 now vs. 0.84 last week) indicate option traders are pricing in more risk to the downside (ie. expect prices to fall).

P/E Ratio for the DOW is at 15.5.

Price-to-Book Value of DOW is at 4.96.

While the P/E ratio does not look overvalued to me from a long-term perspective, the combination of both of these reaching new 12 month highs indicates some overvaluation. Key would be whether earnings can continue to support these valuations. Any indication of a slowdown in earnings will have an outsized negative impact on the market.

Economic News and Commodity Prices

Oil is at $48.35, but was trading above $50 WED, THUR and FRI, before dropping 5% on FRI. Oil had been stabilizing around $50, but strengthening dollar (on news of interest rate rise) has lowered prices. We have seen increased volatility in oil prices, and global tensions could provide some support for oil prices.

Durable goods orders that were reported WED led to a drop in the markets. Durable Goods Orders (FEB) showed a decrease of 1.4% vs. expected increase of 0.4%.

Final GDP numbers for the 4th Qtr were reported FRI. Final 2.2% annualized growth vs. 2.4% expected. The markets did not react much to this news. The 2.2% was the same as the reported number 1 month ago, but some economists were expecting some revision upward.

Market Summary

Signs are pointing towards a correction. Slowing GDP growth (Durable Goods Orders, strengthening dollar, geopolitical tensions, etc…) could begin taking a toll on earnings. The technical are also starting to point to a down turn in the markets. However, volume remains light – which shows that there is little conviction in the market. This could lead to fickle markets (ones that react to news and bounce around – increased volatility).

P/E Valuations don’t look too overvalued in light of earnings. However, any macroeconomic changes that could impact earnings could derail this uptrend and put tremendous downward pressure on the markets.

The shift in the Put premium vs. Call premium (1.06 vs 0.84 last week) shows that traders have begun to see more downside risk than upside potential. While a 1.0 is equal risk for either direction, and 1.06 is not too far off that mark, the shift from a positive basis (0.84) shows that sentiment is turning.

There will be more of a shift in the coming months out of stocks that will be most affected by interest rates. Another area to look at for downside risk is oil drillers. Oil drillers are required to report the value of their oil reserves each quarter. The value is based on a weighted average of oil prices for the period. For this past reporting quarter, the avg price for oil used to valuate reserves was around $93/barrel. Oil has traded well below that for all of this quarter, so there will be a lot of negative valuations being reported in the upcoming earnings season.

There is a definite short-term BEARISH bias here, and would look to take advantage of that. However, because of the lack of conviction (low volume), the markets could change quickly.

Technical Analysis

MSFT Stock Price $40.97 Trading below 20 and 50 day moving averages, A/D Calculation is negative and growing more negative, 5 day money flow index went negative.

XOM Stock Price $83.58 Trading below 20 and 50 day moving averages, 9 Day RSI went below 50 and is about to cross below 14 day RSI, A/D Calculation is negative, 5 day money flow index went negative.

FB Stock Price $83.30 Trading above 20 and 50 day moving averages, 9 and 14 day RSI both above 50, both increasing and 9 day is above 14 day.

BA Stock Price $148.85 Testing it’s 50 day moving average, 9 day and 14 day RSI are below 50 and 9 day is below 14 day (Crossed 3/26).

Option Recommendations - 2015 03 29 (Goal is for 50% increase)

BA PUT MAY $150 – Current Option Price $5.90

MSFT PUT MAY $41 – Current Option Price $1.33

XOM PUT MAY $85 – Current Option Price $3.41


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