Russell’s Round Up – Weekend Review

This weekend we expected two rainy days and lots of inside activity. I write this on Sunday morning and it appears to be a “Ferris Bueller” day outside without a cloud in the sky.

Barron’s –

There was a bearish article on something everyone was talking about from last week, the LinkedIn (LNKD) IPO. Word is later this week options should be trading on LNKD so regardless of your outlook for the stock, you will not be able to use option contracts to trade that opinion. If you missed it, I made a few comments on this last Friday –

http://www.cboeoptionshub.com/2011/05/20/a-new-internet-bubble-or-this-time-its-different-by-russell-rhoads-2011-05-20-6-48/

The Striking Price column was more of a macro discussion focusing on how the stock market appears to have ‘stalled out’ as of late. After offering some evidence of the slowing progress of stock prices, it is noted that when the economy and stock market slows that technology stocks often lead the move to the downside. Taking this thought down to the next level, semiconductor stocks tend to lead the direction of tech stocks. Considering this directional leadership from the semiconductors along with a downgrade of Intel (INTC) by Goldman Sachslast week there’s a bear spread recommendation at the end of the column.

Options Action –

The guys started out with a market overview and outlook and the outlook is bearish. The focus was on specific stocks and their underperformance this past week. Also, the upside move in the VIX on Friday, usually a tame VIX day regardless of what is going on in the underlying market, was also cited for their bearishness.

The first stock specific recommendation was on JP Morgan (JPM) and was bearish to mirror the outlook for the overall market. A bearish put spread using July options was suggested as this time frame will incorporate an earnings release from JPM. The outlook is for a 10% drop in JPM based on the overall market getting “slammed” to use their term this summer. Wasn’t Summer Slam a WWE PPV event?

The second stock discussed was Costco (COST). The recommendation starts out showing the sector returns for Consumer Staples which has strongly outperformed the overall market. I found this particularly interesting as I often share with classes that the market and industry influence the majority of the price action for stocks. The
recommendation is bearish for COST as well, mostly based on the high valuation of shares, especially relative to competitors (WalMart specifically). The recommendation is pretty straight forward for when a trader as a bearish outlook – buy a put.

As far as the unpredictable Chicago weather, I’m happy they (they being the weathermen) got things wrong. The question that pops in my mind, “Is the stock market more difficult to predict than Chicago weather?” Personally I think this is a tie.