• Daily Game Plan – Expiration Lull

    by  • January 18, 2013 2:01 pm • Broad Market Analysis, Bryan Sapp’s Daily Game Plan, Charts to Watch

    MARKET CHECK

    Today marks the expiration of January equity options, and like many recent expiration days, the action leaves much to be desired.  Volumes are light across the board, and markets are digesting yesterday’s breakouts.  After some weakness this morning, buyers have stepped in to bring indexes back near their opening price levels.  Presently, both the S&P 500 and Russell 2000 are flat on the day, while the Nasdaq is weak, down about 0.3%.  Bonds have a decent bid, up about 0.7% despite equities being flat, and metals are up slightly.

     

    CHART OF THE DAY

    Hovanian Enterprises (HOV) – Homebuilders have been extremely strong over the past year, and HOV is no exception.  Since the beginning of 2012, HOV is up a whopping 330%.  Even though the stock has been an absolute monster, there have yet to be any signs of optimism creeping in.  Currently, short interest on HOV is at an all-time high.  These shorts account for 36% of HOV’s float, and the total amount of short interest has increased by 29% over the past two weeks alone.  These new bears could begin to feel some heat should HOV rally back above its 52-week highs, and that break could spark a whole new wave of short covering.  An entry here with a stop on a close below the 50-day moving average(currently 5.76) offers a great risk/reward entry.  I would initially target the 52-week highs of about 7.30 to take some profits, and the leave some exposure on for a potential longer-term run back to the 10 level.

    courtesy of stockcharts.com

     

    WHAT I’M EXPECTING

    Until the S&P 500 can break back below the previous highs of 1474, I expect more upward price action.  There don’t appear to be any major market catalysts on the near horizon, so the present low-volatility environment should persist into the forseeable future.   Next week is only a four-day trading week, as markets are closed Monday in observance of Martin Luther King Day.  There is little economic data to be released as well.   Opportunities do still exist in individual names, however.  Enjoy the long weekend, and be sure to only take your best setups next week.  Overtrading in this environment is a surefire way to vaporize an account in a hurry.

    About

    Bryan Sapp is a Senior Trading Analyst at Schaeffer’s Investment Research, where he has specialized in volatility-based options trading since early 2010. With Bryan at the helm, Schaeffer’s Volatility Trader generated a 2012 portfolio return of 70% for subscribers. This real-time option recommendation service exclusively trades short-term straddles. Prior to joining the research team at Schaeffer’s, Bryan honed his skills as a speculator by trading his own account, and playing poker professionally to pay his way through college. Bryan attended the University of Louisville, where he received his Bachelors in Economics and an MBA with an Entrepreneurship focus.

    http://www.schaeffersresearch.com/

    • akabeachguy

      I have to admit my call of a short term top turned out to be very short term. The day looked to be playing out as I expected. Drop in the morning was followed by the usual lift but rather than fall back as you would think, markets miraculously rallied into the close. Seems IMO that there is an agenda at work here. It is a rare Friday that closes in the red. Will leave that alone for now.

      All that said, I see the SPY hit 143.49 just before the close clearing my called top of 143.42 so I stand here to accept your, “I told you so!!”

      Have a good weekend.

    • Mike

      I would be interested in any input you have concerning VIX and UVXY.

      • Brysapp

        UVXY is similar to VXX, in that it is “designed” to go to zero. These products are meant to mimic the short-term futures contracts in VIX, but whenever the front-month contract expires, there’s what’s known as a roll cost to enter the next expiration. The VIX futures curve typically has a very steep slope(meaning the further out months are usually priced at a big premium to the near-term months), so “rolling” into that next contract comes with a serious cost. This, coupled with the fact that volatility is imploding, are the primary reasons why you’ve seen such a huge meltdown in those two ETFs.

        As far as VIX is concerned, although it continues to make new five-year lows seemingly every day, near-term volatility is still overpriced. If you look at historical volatility compared to the VIX, you’ll notice a big discrepancy. In my opinion, the primary reason for this is that market bears continue to expect volatility to explode, and they continue to buy VIX futures and call options on the VIX as a way to play the potential spike. This demand overstates the price, and using the VIX as a way to hedge a portfolio has been a disaster over the past year or so.

        There have been some really good articles written on here by my co-workers over the past couple weeks. I’d be sure to take a look at those, too. VIX is one of the most misunderstood vehicles in the market.