To save time on reading we are cutting back on the archived letters of this expiration cycle by taking out the Economic effects, Next Weeks economic effects sections as they are very large.  We also took out the track records section as you can find it in another part of the site.  This expiration cycle contains 5 letters.  

                                                                    June Expiration                   May 22nd. 1998

Davidson’s View
With the S & P 500 puts being so hard to fill I’m suspicious that the specialists don’t want to have to cover the trades as they too feel there may be a rally in the short term. June is the strongest up month of the year for expiration cycles. Since 1983 the market has been up 75% of the time. This would cover the time from last Friday's close into June 19th. The 25% that have seen lower markets have only seen a maximum of 3% declines. Option specialists know this and are likely uncomfortable in covering the puts. I have a feeling that this sideways action is going to move to the upside also. As you look at the info above you can see there is definitely more of a chance for an up month. Because the S & P is already up quite a bit for this year already I don’t expect the move to be very strong but we could see a higher high. The technical picture is confirming that the market wouldn’t have that much of an upside. If we do move up, the market will become overbought quickly since it will mostly consist of the big cap stocks as there is no indication that the breadth will get any better in the near term. Valuation levels in stocks are also starting to have an effect on the overall market so this will help in holding it back.

Technically
The market continues to hold at these levels but there are some troubling signs now surfacing, as the market must choose a direction. The S&P 500 is holding its own from a momentum standpoint short term. On a longer term point is has now peaked and turned down, although ever so marginally. Weekly stochastics are showing a bearish divergence as well. Looking just at the S&P and Dow, the stock market looks decent as they are oversold short term but weekly and monthly stochastics are still heading lower. The McClellan Summation Index continues to move lower. Don't expect the market to more significantly higher until after this indicator reverses. Overall, the short-term pattern suggests a final selloff will end the correction for now but there may be a bigger one to come. If we get above Dow 9225, we’ll be on our way but any strong drop below Dow 8850, or Spx 1075 does not sit well. I don't think we will get there, but those levels are significant. We will end the triangle pattern this week no matter what happens and that will reveal which way we’re headed.

Mclellan Oscillator: -94 -100 oversold +100 overbought
Summation Index: 564

Five day arms: 1.00 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .98 .80 and below, overbought 1.00 and above, oversold

Bulls: 47.5 previous week 45.5 50% plus overbought/bearish
Bears: 25.0 previous week 25.2 50% plus oversold /bullish
Correction: 27.5 previous week 29.3

Five day Qvix: 20.36 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9096.00

9113.94

+17.94

0.1

S & P 500

1108.73

1110.47

+1.74

.01

S & P 100

538.46

539.03

+.57

0.1

Nasdaq

1846.82

1805.00

-41.82

2.2

30 Year bond

5.97%

5.89%

 Program Trades

This past week we were successful in getting filled on the long trades for calls on the SPX and the puts on the OEX. Premiums have gone down considerably already, as the market remains flat. Premiums on all options will likely pick up once again as there are 19 trading days still left on this expiration cycle. Volatility will probably pick up this week too, since holiday trading will be finished. We hope to fill the rest of our long trades and the ultra trades this coming week. We may have an opportunity to make extra profits on the long SPX call trades if the market does move up. Watch for ALERTS!!

Current Trades

Average Entry price

Bid

ask

last

505 sold OEX Put $3.00

Long trade

2.50

2.63

2.56

500 bought OEX Put $2.00

$1.00 spread

2.13

2.25

2.25

1165 sold SPX Call $5.00

Long trade

1.75

2.25

2.00

1170 bought SPX Call $4.00

$.93 spread

1.44

1.63

1.50

565 sold OEX Call $2.88

Long trade

1.25

1.38

1.32

570 bought OEX Call $1.88

$1.00 spread

.68

.75

.75

995 sold SPX Put $4.00

Outright sell $4.00

1.88

2.00

2.00

 

                                                                   June Expiration             May 29th. 1998

Davidson’s View
My opinion of the market this coming week is quite mixed. Technically, the market is becoming quite oversold but fundamentally, the market is still overvalued on a p/e ratio and earnings are, appear that they will continue falling because of the Asian problems. Pakistan has now nuked 2 more bombs so tensions are also rising in the Middle East. On the other hand, as we start June, we’re also faced with the history of June being the most up month of the year. There is definitely a world of uncertainties facing traders this coming week. In addition to the myriad of problems in international markets, traders will have to deal with a heavy slate of economic data while a rush of profit warnings is also feared. Should Asian markets continue to waver or India and Pakistan continue to play "chicken" with nuclear weapons, economic reports will likely lose significance take a back seat. The threat of economic and nuclear meltdown in those regions will likely continue to drive international investors to the relative security of dollar denominated assets, namely the U.S. dollar and bonds. But as this past week proved, big gains for bonds and the dollar don’t mean that stocks will go up. If the dollar goes over 140 yen, it will be good for bonds, but bad for the equity market because it will make it all the more difficult for U.S. multinationals, Dow & S & P 500 stocks. While the bond market moved to its best level in two months in the past week, the Nasdaq and S&P 500 each shed 1.4% and saw the month lose 1.8%. The Dow fell 1.25% this week and ended the month of May down 0.7%. It doesn’t seem like the stock market will be unable to make any headway until all of the international problems come to a satisfactory end, regardless of how well bonds and the dollar perform. Bonds will face some difficulty improving on this week’s gains so stocks won’t get much support there either. The National Association of Purchasing Management report Monday and the employment report on Friday are the two big economic reports of the coming week. The consensus estimate calls for a NAPM reading of 52.5%, down slightly from April’s 52.9%. Economists are predicting non-farm payrolls will rise 230,000, the unemployment rate will tick up to 4.5% and average hourly earnings will climb 0.3%. The market could remain in a corrective phase until the release of second quarter earnings. After the close, Intel said it would delay its next generation microprocessor Merced from 1999 to mid-2000. The chip giant said they underestimated the time needed for testing the chip before shipping it to customers. In after hours trading Intel shares were down another -$2.00 after losing -2 1/16 on Friday. There are so many things affecting the market it seems that it won’t matter which way we go but the tug of war will keep things volatile and with little direction, ideal for our trades!

Technically

The S&P 500 has broke through both its 50-day moving average and the 1100 support level. This could mean more downside action before it finds support around the 1070 level. The McClellan Summation Index has now moved into negative territory. Don't expect the market to move significantly higher until after this indicator reverses course.

Both the Dow and Nasdaq are close to respective support levels. For the Dow, near-term support is around 8850 but a close below could push the index down to 8500. Slow stochastics on the Dow has dropped into solid bearish territory and daily Relative strength is in the low 30s. The Arms index is extremely oversold and it in itself justifies some type of a bounce as this indicator has been so accurate in the past. The scariest technical matter is the breakdown of the Dow around its 50-day average. If we don’t see a close above it next week we could be in for a stronger correction.

Mclellan Oscillator: -62 -100 oversold +100 overbought
Summation Index: 61

Five day arms: 1.27 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.16 .80 and below, overbought 1.00 and above, oversold

Bulls: 44.8 previous week 47.5 50% plus overbought/bearish
Bears: 27.6 previous week 25.0 50% plus oversold /bullish
Correction: 27.6 previous week 27.5

Five day Qvix: 22.06 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9113.94

8899.95

-214.49

2.4

S & P 500

1110.47

1090.82

-19.65

1.8

S & P 100

539.03

529.04

-9.99

1.6

Nasdaq

1805.00

1788.88

-26.12

1.4

30 Year bond

5.89%

5.79%

 

 

 

 

 

 

 

 

 

Program Trades 

This past week we were successful in finishing off these months’ trades by getting filled on the Long put trades for the SPX. We also had fills on the ultra put trade. Premiums have gone down considerably because the market has been whipsawing back and forth. Volatility did pick up this week since holiday trading was finished. This coming week should see more price deterioration with continued volatility.

Current Trades

Average Entry price

Bid

ask

last

505 sold OEX Put $3.00

Long trade

3.50

3.63

3.50

500 bought OEX Put $2.00

$1.00 spread

2.75

2.88

2.75

1055 sold SPX Put $13.00

Long trade

8.00

9.00

5.88

1050 bought SPX Put $12.00

$1.00

7.50

8.00

7.50

1165 sold SPX Call $5.00

Long trade

.18

.68

.75

1170 bought SPX Call $4.00

$.93 spread

.50

.63

.63

565 sold OEX Call $2.88

Long trade

.32

.38

.38

570 bought OEX Call $1.88

$1.00 spread

.18

.25

.25

1040 sold SPX put 1040 $7.00

Ultra trade

5.50

6.25

6.00

1035 bought SPX put $6.50

$.50 spread

5.25

5.63

5.38

995 sold SPX Put $4.00

Outright sell $4.00

2.63

3.13

2.63

                                                                  June Expiration               June 5th. 1998

Davidson’s View

In a move that took financial analysts by surprise, the Bank of England raised its repo rate, Britain’s key short-term interest rate, to 7.50% Thursday from 7.25%. Most analysts expected the central bank to leave interest rates unchanged. England’s stock market fell immediately. Just before the announcement, it was down around 13 points, but then fell to a 45-point loss on news of the rate increase. Economists were near astounded by the central bank’s decision. U.K. interest rates were last changed on Nov. 6, 1997, when the base-lending rate was raised to 7.25% from 7.00%. So what would happen if our Federal Reserve raised interest rates here? My first thought is that the market would tumble but would recover quickly as it did in 1994. Currently the market is expecting a rate increase. In 1994 when the Fed originally raised rates it caught the market off guard and we saw a sizable correction. When the market realized that it was a good thing, it actually rallied. The Fed raised interest rates 7 times in that period. It probably would be a good thing for the economy as a whole to raise interest rates. The market would likely react negatively at first but then move up once again. The Federal Reserve's next meeting is on June 30th and the market will probably get more and more edgy as we get closer to that date. Even if this rally continues we may see a new high but I don’t expect a blow off rally from this level. The thing to watch is earnings warnings that so far are rampant in the broader averages. If second quarter earnings turn out to be as poor as 1st quarter earnings were, investors may start pulling their money out of the market and we may see bigger problems down the road. This is what makes trading spreads great. We don’t have to worry about that. We’re just concerned with the overall moves!

Technically

The big rally that closed the week was contained within the declining trend from the market peak. Stocks have been extremely oversold after two weeks of downside pressure. A rebound from support levels is possible, as we saw on Thursday and Friday. The quality of the rebound is important in indicating if the averages can take out resistance. Concern over June quarter earnings will continue and may keep many investors on the sideline. The Dow moved up over 250 points in two days to finish the week back above both 9000 and its 50-day moving average. Volume was slightly below average all week, another reason to doubt the strength of Friday's move. The McClellan Summation Index might be reversing but it may take another few days to have it confirmed. All day Friday the Arms index was trading around .45, which is not sustainable at all. It reveals that most of the rally was due to the big caps pushing the market up and the poor showing in the advance decline confirmed that. If the 5-day Arms index becomes overbought once again the market may correct again. It will be important for the market to continue this rally on Monday to show that the move is for real. If we do head lower again we’ll know that it was just a short covering move.

Mclellan Oscillator: -35 -100 oversold +100 overbought
Summation Index: -120

Five day arms: .90 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.09 .80 and below, overbought 1.00 and above, oversold

Bulls: 42.8 previous week 44.8 50% plus overbought/bearish
Bears: 28.6 previous week 27.6 50% plus oversold /bullish
Correction: 28.6 previous week 27.6

Five day Qvix: 22.53 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8899.95

9037.71

+137.76

1.5

S & P 500

1090.82

1113.86

+23.04

2.1

S & P 100

529.04

539.78

+10.73

2.0

Nasdaq

1788.88

1782.91

-5.97

0.3

30 Year bond

5.79%

5.79%

 

 

 

 

 

 

 

 

 Program Trades

The S & P 100 & 500 made it back to the May expiration close this week. It always gives us great pleasure to see the market return to a previous level and watch how low the premiums have gone down in the options we have on. There are 10 days left in the June option cycle and so far were looking great for another successful expiration. We ran the numbers and the Long trades 1165/1175 SPX and the 565/570 OEX calls show that there is a 91% chance of success for those levels to not be reached by June 19th. For the Long put trades the 1055/1050 SPX & the 505/500 OEX puts levels being reached the numbers are even higher. There is a 93% chance those levels will not be reached by June 19th. The Ultra 1040/1035 puts only have 5% of being hit and the 995 outright sell is only 2%.

Current Trades

Average Entry price

Bid

ask

last

505 sold OEX Put $3.00

Long trade

.75

.88

.88

500 bought OEX Put $2.00

$1.00 spread

.56

.63

.56

1055 sold SPX Put $13.00

Long trade

1.50

2.00

2.75

1050 bought SPX Put $12.00

$1.00

1.50

1.63

1.50

1165 sold SPX Call $5.00

Long trade

.32

.82

.25

1170 bought SPX Call $4.00

$.93 spread

.44

.50

.44

565 sold OEX Call $2.88

Long trade

.32

.38

.32

570 bought OEX Call $1.88

$1.00 spread

.13

.18

.18

1040 sold SPX put 1040 $7.00

Ultra trade

1.25

1.32

1.25

1035 bought SPX put $6.50

$.50 spread

.68

1.32

1.50

995 sold SPX Put $4.00

Outright sell $4.00

.32

.68

.62

 

                                                                   June Expiration              June 12th. 1998

Davidson’s View

The market rejoiced following the famous "nothing" speech Allan Greenspan gave on Wednesday but was shaken up at the end of the week by remarks from Treasury Secretary Robert Rubin regarding the Japanese Yen. Mr. Greenspan said the Fed had not yet seen any reason to raise interest rates and that despite the financial turmoil in Asia, our economic expansion, now in its eighth year, had so far not been threatened. "The current economic performance, with its combination of strong growth and low inflation, is as impressive as any I have witnessed in my near half-century of daily observation of the American economy," Greenspan said. He said that even with unemployment falling to its lowest level in 28 years and growth at a 4.8% rate in the first quarter, inflation had actually declined this year. Although there were signs consumer prices were beginning to rise at a slightly faster pace in recent months, Greenspan termed the pickup "quite moderate overall," and hinted that there was no need to raise interest rates in the near term to beat inflationary pressures. After the initial relief rallies people became concerned about how the Asian markets and currencies were affecting the market and sold off. When Robert Rubin's statement came out on Thursday seen as ruling out the possibility of concerted foreign exchange intervention to support the yen this sent the Japanese currency way down and started the sell big off in stocks. The dollar is at its highest level against the yen since September 1990. The higher it goes the more we may see pressure on the big cap stocks. The problem is that most of the big cap stocks in the Dow and the S & P 500 are all international companies and a strong U.S. dollar hampers their growth overseas, thus creating lower profits. The run up in the dollar against the yen has helped to boost the 30-year bond to a new high of 5.65%. This has created a strong overbought situation in bonds so we should see some kind of pullback in both the dollar and bond market, which should help to support the market. The turnaround rally on Friday from a –120 point loss on the Dow was an important turnaround but did not have the markings of capitulation selling. Volume was not that strong and there were still many more decliners than advancers. It will be very important to see if the market continues moving higher at the start of next week or not to see if the rally has any solid footing.

On another subject, this past week’s Barron’s wrote about how the big boy’s are starting to be talked about on what they do to bring in that extra cash for their trading house. I have been saying it for years and this is the first time I have heard it publicly.

"Salomon was recommending last week that it was a good time to buy some insurance to shield stock portfolios from a possible downturn. The firm is, after all, there in the business of selling the stuff." Another guy that is out there trading a hedge fund outright selling puts is Max Ansbacher. He has made a lot of money recently. He exclusively sells out-of-the-money S&P 500 options according to a system that determines which ones are most overvalued. Sound familiar? He is mostly known for his indicator that reveals if options on the OEX are in a bullish, bearish or a neutral mode. Unfortunately, a person needs a lot of money to be able to get into his hedge fund but we’ll continue to do it for you as we believe that the public should also have the opportunity to trade like the big houses!

Technically
The big rally at the close of the week helped to contain the declining trend from the market peak. It’s hard to deny the bullish nature of the move on Friday. The sentiment indicators are slowly improving, as bullish sentiment is on a decline and bearish sentiment is on the rise. Investor's Intelligence reported that 41.7% of investment advisors were bullish last week versus almost 55% few weeks ago, while bearish sentiment was at 31.7%. High bearish sentiment indicates that there may be lots of money on the sideline, which could be invested in the stock market if there are positive developments. If the weakness persists over the coming weeks, the bearish sentiment may increase, indicating a temporary bottom in the market. Slow stochastics hit an overbought situation early in the week, but with this fall have returned to a neutral position. The McClellan Summation Index started to head lower again, with the two day correction but deserves to be watched closely as it is strongly oversold now. From these levels strong rallies have started in the past. The Arms index is not really oversold at these levels considering the movement in the market. This is because the advance decline line movement is so poor only a few stocks are pushing the market up. The overall market will likely remain mixed until we see a selling climax but for now with the big turnaround on Friday, we’ll probably see the Dow and S & P 500 slightly higher next week. Support for the Dow is at 8675-8680. The S&P has support in the 1080 area.

Mclellan Oscillator: -101 -100 oversold +100 overbought
Summation Index: -581

Five day arms: 1.00 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .95 .80 and below, overbought 1.00 and above, oversold

Bulls: 41.7 previous week 42.8 50% plus overbought/bearish
Bears: 31.7 previous week 28.6 50% plus oversold /bullish
Correction: 26.6 previous week 28.6

Five day Qvix: 22.11 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9037.71

8834.94

-202.77

2.2

S & P 500

1113.86

1098.84

-15.02

1.3

S & P 100

539.78

534.59

-5.19

1.0

Nasdaq

1782.91

1745.08

-37.83

2.1

30 Year bond

5.79%

5.65%

 

 

 

 

 

 

 

Program Trades

The turn around on Friday put the S & P 100 and 500 right in the middle of where our put and call trades are. With 5 days left in the June option cycle were looking great for another successful expiration. We ran the numbers and the Long trades 1165/1175 SPX and the 565/570 OEX calls show that there is a 97% chance of success for those levels to not be reached by June 19th. For the Long put trades the 1055/1050 SPX & the 505/500 OEX puts levels being reached the numbers reveal there is only a 94% chance those levels will be reached by June 19th. The Ultra 1040/1035 puts only have 2% of being hit and the 995 outright sell is only 0.5%.

Current Trades

New prices are unavailable this week.

Average Entry price

Bid

ask

last

505 sold OEX Put $3.00

Long trade

.75

.88

.88

500 bought OEX Put $2.00

$1.00 spread

.56

.63

.56

1055 sold SPX Put $13.00

Long trade

1.50

2.00

2.75

1050 bought SPX Put $12.00

$1.00

1.50

1.63

1.50

1165 sold SPX Call $5.00

Long trade

.32

.82

.25

1170 bought SPX Call $4.00

$.93 spread

.44

.50

.44

565 sold OEX Call $2.88

Long trade

.32

.38

.32

570 bought OEX Call $1.88

$1.00 spread

.13

.18

.18

1040 sold SPX put 1040 $7.00

Ultra trade

1.25

1.32

1.25

1035 bought SPX put $6.50

$.50 spread

.68

1.32

1.50

995 sold SPX Put $4.00

Outright sell $4.00

.32

.68

.62

                                                            June Expiration             June 19th. 1998

Davidson’s View
This weeks commentary was e-mailed out instead of being put in the letter as it was the end of expiration.

Judging from the Trim Tabs Mutual Fund inflow figures out yesterday, investors have been socking it in once again during the corrective phase. The tracking service estimates about $8 billion flowed into the hands of money managers over the past week and, with five trading sessions left in the second quarter, the window-dressing decisions are being made. The crucial question is whether to show above-average cash or be fully committed to stocks. And we get the feeling the answer will be more commitment than cash.

Technically
The overall market continues to be mixed within indicators. Slow stochastics are very close to giving an overbought signal once again whereas the Mclellan Osicillator is still deeply oversold. The Arms indicator gave interesting intraday readings this week revealing that we are still seeing more selling than buying when the market rallies. The only thing that kept the indicator in an oversold position was that the market tended to sell off at the close each day. The divergence between bonds and stocks may help to lift stocks next week as bonds are quite overbought at these levels and need to pull back before they can move higher once again. A new range may have been established with bonds this week and this could be a good thing for stocks in time. The range is 5.50% on the high side and 5.75% on the low end. Until the idea of bonds being a safe haven from erratic stock markets all around the world, stocks will continue to fall if bonds go up in price. The market will likely remain choppy until we see a key downside reversal day with heavy volume, otherwise we will remain in a lower sloping trading range between 1120 and 1060.

Elaine Garzerelli told CNBC this past week that the most downside the market could have is 4%-7% from its original high. That would be about 8600 on the Dow and 1055 on the S & P 500. She also said that the 30-year bond could move to 4.50% later in the year as long as we continue to see overall trade surpluses instead of deficits. That level would see stocks fly for sure.

Mclellan Oscillator: -51 -100 oversold +100 overbought
Summation Index: -876

Five day arms: 1.02 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.01 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 41.7 50% plus overbought/bearish
Bears: n/a previous week 31.7 50% plus oversold /bullish
Correction: n/a previous week 26.6

Five day Qvix: 23.87 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8834.94

8712.87

-122.07

1.4

S & P 500

1098.84

1100.65

+1.81

0.2

S & P 100

534.59

535.48

+.89

0.2

Nasdaq

1745.08

1781.29

+36.21

2.1

30 Year bond

5.65%

5.67%

S&P 100 Expiration 535.48 May Expiration 538.46 Change = -2.98 points, 0.5%
S&P 500 Expiration 1107.84 May Expiration 1118.15 Change = -10.31 points, 0.9%

 

 

 

 

 

 

 

Program Trades

We made it through the June expiration with full profits once again. In total we made 58% this month on our trades. Every now and then we like to stop and explain how we calculate out our trades so here it is. Last September some subscribers were actually complaining about how we calculated it so we decided to change from calculating out the profits on a total basis to breaking them down. The problem was that not everyone did all the trades and that is why they wanted us to break them down. Since they are separate trades and because we do both the call and put trades each month we thought it would be better. For example, on the OEX put spread the margin needed is $5.00 multiplied by however many contracts and the credit gained was $1.00 multiplied by the amount of contracts. This means $1.00/$5.00=20%.

Current Trades

Average Entry price

Bid

ask

last

505 sold OEX Put $3.00

Long trade

0

0

0

500 bought OEX Put $2.00

$1.00 spread

0

0

0

1055 sold SPX Put $13.00

Long trade

0

0

0

1050 bought SPX Put $12.00

$1.00

0

0

0

1165 sold SPX Call $5.00

Long trade

0

0

0

1170 bought SPX Call $4.00

$1.00 spread

0

0

0

565 sold OEX Call $2.88

Long trade

0

0

0

570 bought OEX Call $1.88

$1.00 spread

0

0

0

1040 sold SPX put 1040 $7.00

Ultra trade

0

0

0

1035 bought SPX put $6.50

$.50 spread

0

0

0

995 sold SPX Put $4.00

Outright sell $4.00

0

0

0

Copyright 1998. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.