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Market Conditions and Recommendations 2015 04 22

Updated on April 28, 2015

Overall Market/Indexes:

The S&P (2,100) and the DOW (18,034) both closed higher MON, after their big drop on FRI (which

was an options expiration day - which leads to higher volumes and more volatility). FRI's close for both

the S&P and the DOW brought them below their 20 and 50 Day Moving Averages. MON's action lifted

both back above those averages. FRI's volume was above average, while MON's volume was below or just at the 50 Day Moving Average for Volume. Ordinarily I would take this to mean that more people are selling. However, as FRI was an options expiration day, we cannot read too much into that volume. TUE showed a little retreat for both indexes (S&P 2,097 DOW 17,950), with the DOW crossing below it’s 50 Day Moving Average. Volume was still below the average volume.

Both the S&P and the DOW have formed wedges on their daily charts. Now, a wedge pattern can break out to either direction. It usually means that there is uncertainty in the market, as traders are waiting to decide if they see more potential in the market or more risk. So, once we break out (Above 2,120 or Below 2,039 on the S&P and Above 18,200 or Below 17,580 on the DOW) we should see a large move in the direction of the breakout.

Ratio of PUT premiums to CALL premiums (0.83 now vs. 0.89 two weeks ago) indicate option traders are pricing in slightly more risk to the upside (ie. expect prices to rise).

P/E Ratio for the DOW is at 16.7.

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

P/E ratio and Price-to-Book Value of DOW are both near 12 month highs. 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.

News/Commodities:

Oil is at $57.45 and has been trending higher since mid-March.

Retail Sales (Mar) came in lower than expected at 0.9% vs. 1.0% expected.

Housing starts came in lower than expected (MAR).

Initial Jobless Claims came in higher than expected (APR 10) at 294k vs. 280k expected.

Continuing Jobless Claims (APR 3) were lower than expected at 2.268m.

Economic News/Events:

Durable Goods Orders (MAR) to be reported FRI expected 0.8% increase.

Earnings:

IBM was up 3.4% on their earnings announcement. They reported declining revenues, mainly due to currency exchange.

AXP was down 4% on their announcement. Their profits were up 6%, but they also took a large hit due to currency impact.

GS and JPM were both upi about 2% after reporting their earnings.

SNDK was lower after their EPS came in lower than expected.

BA announced today (4/22 Pre-Market) and missed on revenues, but beat on earnings and was up 0.5% in Pre-Market.

Overall, earnings has been fairly robust. Through last week, 38 of the S&P 500 had reported earnings. The combined results were: Revenues up 3.7%, Profits up 17% and 76% of companies beat estimates. This is an early indicator that earnings estimates have been lowered significantly, which may lessen downside risk for now.

Interesting article from StockMarketWatch.com on Earnings for this week.

http://www.marketwatch.com/story/peak-earnings-week-to-follow-big-global-selloff-2015-04-19

OVERALL 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. Expectations for earnings and for GDP have been revised lower recently.

Earnings so far are showing that estimates may have been lowered too far. More companies are beating estimates. This may help the markets in the short-term, but continued concern about global economic conditions may have a greater impact on the markets. The Durable Goods Report due out FRI will provide some guidance and will have a large impact on the short-term direction for the markets.

Stock Screening Results:

No stocks appeared in my screens based on volume.

Chart Info/Pattern Recognition on Screening Results:

No stocks appeared in my selection screens.

Chart Info/Pattern Recognition alone (OptionsXpress – Lg Cap, Above $50, Short-Term Horizon):

No Lg Cap Stocks above $50 with avg daily volume above 1 million shares appeared in this screen.

Technical Analysis: (Currently doing several technical evaluations for 16 Lg Cap Stocks)

AXP Stock Price $77.28 Trading below 20 and 50 day moving averages, MACD is getting larger, 5 day money flow remains negative.

SUMMARY: None of the technicals (other than AXP which is now retreating after it’s earnings announcement) are giving any clear direction.

Recommendations (Looking for 50% gain on option value):

AAPL CALL MAY $130 – Current Option Price $2.62 (AAPL reports earnings 4/27. I expect another strong quarter from iPhone sales, especially with sales growth in China so strong).

Previous Recommendations Open (Closed - Removed from list: 5 Success, 1 Fails):

4/5/2015 MSFT $40.29 at time. PUT MAY $40 was $1.18. MSFT now at $42.64. PUT MAY $40 is now at $0.31.

4/5/2015 XOM $84.30 at time. PUT MAY $85 was $2.81. XOM now at $86.88. PUT MAY $85 is now at $1.08.

4/2/2015 JPM $60.52 at time. CALL MAY $60 was $1.96. APR 14 JPM traded at $62.27, CALL MAY $60 was worth $3.00. **SUCCESS

3/28/15 BA $148.85 at time. PUT MAY $150 was $5.90. BA now at $153.33. PUT MAY $150 is now at $2.42.

3/28/15 MSFT $40.97 at the time. PUT MAY $41 was $1.33. MSFT now at $42.64. PUT MAY $41 is now at $0.51.

3/28/15 XOM $83.58 at the time. PUT MAY $85 was 3.41. XOM now at $86.88. PUT MAY $85 is now at $1.08.

3/23/15 FB $85.62 at the time. CALL APR $85 was $2.45. CALL APR $85 Expired. **FAIL

3/9/15 TWC $159.02 at the time. CALL APR $160 was $6.20. CALL APR TWC Expired. **FAIL

3/2/15 ADSK $64.42 at the time. CALL APR $65 was $1.80. CALL APR $65 Expired. **FAIL

Conclusion:

Overall volume remains muted, which means that investors are waiting for a signal to either jump in or get out of stocks. Because stocks have been trading in a range, many of the technical indicators I track aren’t giving a clear direction. Earnings is giving some momentum for individual companies, but not the broader market.

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