12/05/10 Weekend Update & Outlook - Slow Start, Big Finish

The markets were back to normal after the Holiday week last week.  A major push occurred Wednesday through Friday bringing the markets back tot their their highs of the year.  The VIX plummeted over 22% this week bringing it down to a recent support level of 18.  The rocket ride at the end of the week was on declining volume which isn't the most confidence inspiring setup approaching the highs of the year.  Let's see how the markets ended for the week:

 

Dow          +2.62%

S&P           +2.97%

Nasdaq    +1.73%

Russell    +3.23%

VIX             -22.20%

  

Santa took his sleigh out for a warm-up lap this week propelling the markets toward the highs of the year.  Black Friday and Cyber Monday sales were encouraging and the dollar got crushed in response to the ECB extending its liquidity program and continuing to acquire (aka: prop-up) Irish and Portuguese debt.  Thursday brought better than expected Jobless claims but Friday's monthly report missed the mark, and expectations, with the release of a increased rate of 9.8%.

 

For some more color to the unemployment situation: People unemployed for 27 weeks (6 months ) or more rose to 41.9%.  Additionally, the U6 rate, the rate which includes those who have stopped looking for work completely or are settling for part-time gig but seek full-time employment, rose to 17%.  39,000 jobs were added in November after 172,000 were added in October.  If the recovery maintains the November 39,000 job creation rate, it will only take 385 months (32 years!) to employ the roughly 15 million unemployed souls.  For contrast, if October's 172,000 rate were maintained, it would still take 87 months (7 years) to employ everyone.

 

The markets are approaching resistance at the yearly highs.  Volume is decreasing and the VIX is dropping which are indicative of a Santa Claus rally.  I would expect to see some resistance at the yearly highs but I expect the markets to move past them.  Beyond that, the next resistance is at S&P 1250 and solid support remains at S&P 1175.  It was a little early for a Santa Claus rally this week and the action created some BIG gaps on the charts.  So, as the the highs are met some backing and filling could occur before taking a run at S&P 1250 into year end.  Remember, ALL chart gaps get filled.  It is not a question of IF, but WHEN.

 

BookingAlpha clients opened and closed 3 SPY option spread trades this week for 6.25%, 8.47%, and 3.95% respectively.  It was a nice week to suck some premium out of the market with the plummeting VIX and the rally action.  A spread trade was also opened on Cisco (CSCO) this week using December options which is already showing a nice 2+% gain even with CSCO's lackluster performance this week. 

 

Unfortunately, one of the 3 plagued spreads from October's huge move that caught everyone (including me) by surprise was closed this week for a loss; 1 of the 3 trades was closed last month and 1 still remains open.  The loss isn't the worst part of the trade, the worst part is that I broke my own trading rule and paid for it dearly.  Earlier in the week the SPY spread was trading at much less of a loss than what I ended up exiting for.  My research, indicators, and gut told me to cut bait, take the marginal loss, and get out.  But, I broke my own trading rule and left the spread open.  Ultimately, the position was closed at larger loss than should have been; which is ALWAYS what happens when I break my trading rules.  STUPID, stupid move and apologize to this clients that get caught in the beating!!!!  But, as always, I will trade us out of this hole.  This week's profitable trades have already made up some of the loss. 

 

How many Advisors will admit a mistake like that!!!