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Sunday, October 23, 2005
Market Recap
It was a mixed market on Friday's option expiration day as the Dow was down 65 points while the Nasdaq was up 14 points and the S&P gained 2 points. For the week, the Dow lost 72 points to close at 10215. The Nasdaq gained 17 points for the week. Do not let the Dow's move down distract you from what is really going on. The Dow is a “price weighted” index so if one or two components have a big down day, then the Dow will be down a lot more than the rest of the indices. On Friday, CAT was the big drag on the Dow. The Nasdaq faired very well on the good earnings news from SNDK and GOOG.
The Week That Was
It was a very volatile five days of trading for the market last week. In our trading, we were stopped out of all the new entries we took last week with small losses. This is what will happen if you maintain tight stops in a volatile market. There is no way to stay in a trade when the market swings back and forth like it did last week. Much of this volatility stemmed from more hawkish Fed comments from the San Francisco Fed Governor and worries over Hurricane Wilma. Also, over 25% of the S&P stocks reported earnings last week and that added to the volatility as investors poured through all those earnings releases. The major trend we have noticed and reported here previously continues to be a rotation out of energy stocks into technology stocks and this became very clear over the last week.
Oh No, GOOG Again
Friday, bulletin stock SNDK announced monster earnings and was up 20%. This stock is now a market leader along with AAPL and GOOG. GOOG gapped up $40.00 (or 11%) on Friday with super earnings and has jolted back into the ranks of a market leader once again. Some members maybe tired of hearing about GOOG, but I have to mention GOOG's great earnings. GOOG beat earnings estimates this time by 15 cents and everyone thought that was great so the stock soars on the news. Well, if you remember the last earnings fiasco, they released their earnings as GAAP instead of Pro-forma. The street estimate was on a pro-forma basis so the GAAP number looked like a miss. The earnings were erroneously reported by CNBC's Joe Kernan as Pro-forma instead of the way GOOG intended for them to be reported (GAAP).
In actuality when the numbers were sorted out, they beat the street estimate by 19 cents last quarter and the stock rebounded from the major after hours sell off it suffered on the initial blunder by CNBC. This error cost many including myself a lot of money. Had it been reported correctly, I think the stock would have had the same reaction as it had Friday and would have gapped up big instead of selling off.
You have to wonder if it was some sort of manipulation to keep the price down for the secondary offering that was about to be announced. Nothing is too low for some of these crooks on Wall Street. You never know what they will conspire to do. I am not saying it happened that way but the circumstances following that announcement are very suspicious to say the least.
Put/Call Disparity
I think because of the incident last quarter, many were reluctant to hold the stock or the options through earnings this time. Even if you believe in the company, you never know when the crooks on Wall Street will pull a stunt like last quarter. Anyone holding call options last quarter before earnings found the entire premium sucked out of the option the day after earnings, yet the put options did not move up as much as the call options moved down.
If you noticed, this was the same exact action in the options chain this time after earnings were released; only it was in the opposite direction. The call options did not go up as much as the put options went down. Anyone holding GOOG puts lost 90% or more on the short term puts but anyone holding calls did not get an equivalent move to the upside. I did well on my calls but the point here is the seller of the puts made a lot more than the buyer of the calls this time. And last quarter the seller of the calls made a lot more than the buyer of the puts.
This is why, I have always said, when playing options, the seller is the winner most of the time and the buyer loses on the majority of their option purchases. Who is the seller of the options? It is the Wall Street professional trader who has the capital to sell covered calls. You do not find many Main Street investors or traders selling options. The selling is done by the pros, so that should tell you who is going to be the big winner in the options game the majority of the time. It will not be the little guy who is buying the options from the professional option seller.
It will be very interesting to see what the next earnings report for GOOG will be. I believe they will blowout the estimates again but the spin Wall Street puts on them is what will drive the stock and options pricing.
Stockcharts listing
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STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts we have annotated for each stock listed in the past.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings you can either use this link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
For New Members:
For all the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
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