Are Stocks Cheap?

Are stocks cheap? If you are a fundamental trader you cannot say, companies have been cutting or just not giving any guidance for the simple fact the global economic slowdown has occurred with unprecedented speed. Stocks look cheap, a lot of them trading at option prices, and the market looks to have formed a short-term V bottom ( in a 5 minute time frame on the S&P (^GSPC)) and could be poised, after testing lows earlier today(741 on the S&P), for a quick short-term turn-around.

But, (there is always a “but”) this move is short-term. Do not get sucked in to an investment when you should be looking at a trade because the market still looks like it wants more downside (low 700’s to upper 600’s in the S&P) before longer term buyers’ appetite will be heightened enough to get into this market. With a lack of transparency and with the continued debate if “cheap” stocks are going to “get cheaper,” I think that you should take this weekend to study some charts and wrap your mind around the technical perspective. Please note that we have a ton of education in the new Education Center. Plus we have tools like Chart Patterns to help you do this analysis. No real big economic events on the board next week. See you Monday Midday, have a good weekend.

After Hours

Stocks staged a rally attempt beginning around Noon Central Time, but the rally was met with another wave of selling and, by the end of the day, the Dow Jones Industrial Average (^DJI) was down 100 points. The Dow lost 6 percent on the week. Citi (C) and BofA (BAC) were once again the Dow’s biggest loser on concerns that the two banks might be prone to a government takeover as part of the financial rescue package. While the White House played down the idea of nationalization Friday, skittish investors sent shares of both banks lower anyway. General Motors (GM) was also among the biggest losers in the industrial average after the automaker said its Saab unit has filed for creditor protection. On the economic front, investors only had one stat to work with. A report released pre-market showed consumer prices increasing by .3 percent last month, which was in-line with economist estimates. In the options market, the tone of trading was cautious and volume was heavy due to the options expiration. The CBOE Volatility Index (^VIX) rose 2.22 to 43.90. Approximately 9.5 million calls and 10.4 million puts traded across the exchanges.

Bullish

Ebay (EBAY) calls were actively traded. Shares rose 2 cents to $12.18 and 31,000 January 2011 calls at the $17.5 strike traded on the day. The activity included two large blocks of 10,000 contracts (20,000 total) hitting on the bid-side of the bid-ask spread for $1.50. Those trades happened within minutes of a block of 1.2 million Ebay shares that traded for $12.10. Taken together, the activity looked like a substantial covered call strategy, where the investor bought shares and sold deep out-of-the-money calls. If so (assuming 1 call sold for every 100 shares and excluding commissions), they paid $10.60 per eBay share and have upside to $17.50 (call strike price), or 65 percent, through the January 2011 options expiration. Bullish trading was also seen in Tivo (TIVO), Kraft (KFT), and Quicksilver (KWK).

Bearish

McGraw Hills (MHP) shares fell $1.17 to $21.16 and total options volume rose to six times the average daily levels Friday. 12,000 puts traded, or about four times the number of call options. Sentiment seemed bearish, as traders stepped in and bought March puts at the 20, 17.5 and 15 strikes. There was no news on the stock Friday. The company presents at a Jefferies & Co. Internet & Media Conference on February 26. Bearish trading was also seen in Kohl’s (KSS), Monster Worldwide (MWW), and Moody’s (MCO).

Index Trading

The CBOE Volatility Index (^VIX) rallied to a high of 52.04 and closed up 2.22 to 49.30 Friday. Bullish trading in the index surfaced early when a strategist bought 20,000 March 55/65 call spreads on the Chicago Board Options Exchange [CBOE]. It looked like they bought the 55s and sold the 65s. If so, they paid $1.25 (excluding commissions) for the spread and stand to make $8.75 if VIX rallies back above 65 by the March options expiration (25 days). Active trading was also seen in the S&P 500 Index (^GSPC), the Dow Jones Industrial Index, and the S&P 100 (^OEX). Approximately 530,000 puts and 573,000 calls traded across all index products Friday.

ETF Trading

The SPDR Gold Trust (GLD) saw a lot of activity after gold made a move above $1000 an ounce midday Friday. GLD, which is an exchange-traded fund that holds gold stored in bank vaults, finished up $2.03 to $97.80. One of the more interesting trades was early in the day when an investor apparently bought a substantial butterfly spread in the January 100-150-200 calls. To be specific, they sold 20000 Jan 150 calls to create the body of the fly and bought 10000 of Jan 100s and 200s to create the wings. The spread has a strong directional bias to the upside and makes its best profits if GLD closes at $150 at the January options expiration. Elsewhere in the ETF market, the SPDR Trust (SPY), the Powershares QQQ (QQQQ), and the Select Sector Financials (XLF) had among the more actively traded contracts. Approximately 4.4 million puts and 3.3 million calls traded across all exchange traded funds.

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