Stocks are modestly higher today, after a period of morning strength is now fading. All eyes are on the round-number 1700 level overhead on the S&P 500, and a rally into it would mark yet another milestone level to the upside. During the cash session, the index actually came about two and a half points from achieving that level, but was promptly rejected and sent lower. Stocks are trading near flat on the day at the present time, as the Russell 2000 is leading, higher by only about 0.1% on the session. The big news of the day is in metals markets, as election results from Japan over the weekend are sending prices significantly higher. At current levels, gold is up by 3%, silver is nearly 5% higher, and miners are ripping, up 6% on the session. These assets have seen a very nice bounce off their recent lows after a prolonged downtrend.
CHART OF THE DAY
Apple Computer (AAPL) – The technology behemoth is set to report earnings after the close tomorrow, but the options market is anticipating a very “ho hum” report, as implied volatilities are very low. Based upon the weekly series set to expire this Friday, the market is only looking for about a 4.5% move on their quarterly numbers. I believe this to be entirely understated, and this offers a nice opportunity for a long volatility play into the report.
While most option players will focus on the front month(or week in this case), you can often times get more “bang for your buck” by buying the next series past earnings, and allow more time for the move to fully complete itself. For this reason, I like buying the AAPL August 2nd expiration 425-strike straddle at about $22.50. This is only about $2 more than this week’s expiration, and allows a full five more days for any sort of momentum continuation from tomorrow’s report. Additionally, should AAPL not move much tomorrow, the embedded time premium in this straddle will cushion the blow a bit more. This trade will be profitable above $447.50 and below $402.50 by August 2nd.
WHAT I’M EXPECTING
Given that everyone was looking for 1700 to be tagged on the S&P 500 and we came very close to that number today, I would expect some profit taking here and now, and likely lower prices in the near future. While I’m not looking for a major correction from here, indexes remain very overbought and need to calm through either price digestion over time or lower prices. My first support level to start reloading on long positions is at 1670, with 1650 and 1635 serving as the next two layers of support underneath there.