1. Commentary
2. What the VIX is Telling Us
3. IPO’s Showing Signs of Life
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts

**************************************************

1. Commentary

The market started off strong last week as the Dow hit a high of 8,645 by Wednesday while the Nasdaq was challenging 1,800. That enthusiasm quickly faded once we got the housing numbers and the unemployment report.

Let’s start with the housing numbers. Before we got the report, I had mentioned that we had been seeing some “green shoots” in the housing sector but I also reminded you that Lennar (LEN, $9.43, down $0.02) just lost a worse-than-expected 98 cents a share for the quarter. Lennar was over $10 on Tuesday and was getting ahead of itself after an analyst upgrade and I mentioned not to chase it.

The whole world knows the housing industry remains weak and that notion was confirmed as both housing starts and building permits fell to record laws. Housing starts which is the number of projects started, dropped nearly 13% from March to an annualized rate of 458,000 units versus a consensus estimate of 520,000 units.

Building permits fell 3.3% to an annualized rate of 494,000 versus calls for 530,000. Since building permits are not required in all states before beginning construction, Wall Street paid more attention to the Housing Starts and that got the bears back in the game.

Famous last words…”One rule of thumb before believing any sector is out of the woods is to wait for back-to-back profitable quarters”. Signed, Yours Truly…

Meanwhile, another thorn in the market’s side remains the weekly unemployment numbers. Here is a vote to post the data bi-weekly or monthly. I mean, do we need to rehash the bad news every single week? I guess we do…initial unemployment claims for the week totaled 631,000 which was above the 625,000 number the Street was looking for. Continuing claims jumped by 75,000 to nearly 6.7 million, which brought the 4-week moving average to 6.48 million from 6.35 million.

The bottom line is the job market ain’t getting no better and all these “shovel ready” projects we were promised have failed to make a dent in the numbers.

Despite those two bombs, you will probably be surprised to learn that the market actually ended the week higher. Yeap, that’s right. The Dow added 9 points to finish at 8,277 while the Nasdaq gained 12 to close at 1,692. The S&P 500 added 4 ticks and wound up at 887.

A win is a win, and the bulls will be happy to take it. With the market closed on Monday, we only have four trading days this week and there will be plenty of news to digest. YTD, the Dow is down 5.7%, the S&P has lost 1.8%. The Nasdaq is up 7.3%.

**************************************************

2. What the VIX is Telling Us

I mention the Volatility Index (^VIX, 32.63, up 1.28) a lot in the blog and I often use it to help me get a feel for the market. On Wednesday, the VIX got down to 26. Why is this important?

Remember, historically if the VIX is at 30 or more then it means the market is nervous. If the VIX is under 20, the market is confident. It’s not clear what the “new” standards should be for the VIX because the volatility has been “so historic” but techically speaking the market is still nervous. And we are seeing that. However, let’s look at where the VIX was during key levels on the Dow.

Sept 11, 2008, the VIX closed at 24.39 and the Dow stood at 11,433. The next month would be brutal for the market and on October 24th, the VIX was at 90 while the Dow closed at 8,378. That day, the Dow traded between 8,088-8,683.

On March 9th,2009 the Dow hit a low 6,440, yet, the VIX was at 51. Six months ago, on November 21st, the Dow was at 7,400 while the VIX soared to 80.

The point that I’m trying to make is that we are still in a “bull” market. Everybody is calling for a “pullback” and people seem to feel we got one last week. Fact is, we didn’t.

I’m not saying the market is headed higher but the VIX is telling us that the market is somewhat less volatile than it was. The VIX has slowly trended lower over the past few months as volatility has somewhat relaxed. It also helps that the market has been in a bullish mood lately but a rising market brings the VIX down.

Trading volume was light before the holiday and the market stayed in a tight trading pattern. The good news for the bulls is that all three indexes have held major support and we could continue to see the VIX fall. However, if things start to get worse, keep an eye on the VIX to get a feel for what the bears could be up to.

**************************************************

3. IPO’s Showing Signs of Life

The IPO market has been dormant for quite some time now and there have only been a handful of companies brave enough to test the waters. Given the current credit environment, it has been tough to get deals done but that hasn’t stopped a few companies.

There were a couple names that came public last week and both did rather well. SolarWinds (SWI, $13.29, down $0.50) made its debut on Wednesday and online restaurant reservation company OpenTable (OPEN, $28.71, down $3.18) said “hello” to the world on Thursday.

OpenTable had an initial target of $12 to $14 per share but was raised to $20 on strong demand. That netted the company $60 million as 3 million shares were sold, but not all the proceeds went to the firm. Some of OpenTable’s existing stockholders wanted to cash out with the IPO and they received about half of that amount (minus commissions) by selling nearly 1.5 million shares.

SolarWinds raised over $150 million after it priced 12+ million shares at $12.50. This was above the range of $9.50 to $11.50 that had been expected. Solar Winds offered 9 million shares, while existing shareholders cashed out on the rest.

Taking a look back, the other IPO’s for 2009 include: Bridgepoint Education (BPI, $12.10, down $0.58), Changyou.com Limited (CYOU, $29.01, up $1.16), DigitalGlobal (DGI, $18.80, up $1.10), Mead Johnson Nutrition (MJN, $29.70, down $0.03) and Rosetta Stone (RST, $24.23, up $1.09).

Bridgepoint Education made its debut at $10.50, Changyou.com Limited was priced at $16.00, DigitalGlobal at $19.00, Mead Johnson Nutrition at $24.00 and Rosetta Stone was priced at $18.00. Out of 8, we only have 1 that is slightly down from its offering price. Impressive.

Another expected IPO, Changing World, was one I was looking forward to watching but that one has been delayed until 2010 it looks like. The company transforms waste from animal and food processing into renewable diesel and was going to go public, then it wasn’t, then it was, and now it isn’t.

The company was hoping to raise $100 million back when they first filed in August 2008. However, by January/ February the deal was lowered to $33 million with a stock price of $11 to $15 and was eventually pulled.

Changing World would have been the first cleantech startup to make its debut this year but it looks like we will have to wait for this one. Although it has been one of many companies that have withdrawn IPO filings, there are still 100+ US operating companies in the pipeline.

Others to keep an eye out for include: Alon Brands (7-11 stores), Avago Technologies (chipmaker), Emdeon (healthcare payment solutions) and Edgen Murray Limited (specialty steel product distributor).

**************************************************

4. Earnings

Tuesday: Bank Of Montreal (BMO, $36.57, unchanged), Borders Group (BGP, $2.31, up $0.06), Canadian Solar (CSIQ, $10.01, down $0.49) and Donaldson (DCI, $31.61, up $0.12).

Wednesday: American Eagle Outfitters (AEO, $13.59, unchanged), AutoZone (AZO, $155.65, up $1.11), Blue Coat Systems (BCSI, $15.87, down $0.04), Cracker Barrel Old Country Store (CBRL, $28.82, down $0.80), Dollar Tree Stores (DLTR, $ 42.67, up $0.22), Flowers Foods (FLO, $21.80, up $0.16), Sigma Designs (SIGM, $15.93, down $0.02), Staples (SPLS, $19.37, up $0.28), Star Bulk Carriers (SBLK, $5.02, up $0.05) and TiVo (TIVO, $6.91, down $0.14).

Thursday: Big Lots (BIG, $23.98, down $0.16), Costco Wholesale (COST, $48.30, down $0.01), Fred’s (FRED, $12.88, up $0.31), H.J. Heinz (HNZ, $35.97, up $0.58), J. Crew Group (JCG, $19.72, down $0.30), Marvell Technology Group (MRVL, $10.96, down $0.13) and Toronto Dominion Bank (TD, $42.87, up $0.16).

Friday: Graham (GHM, $14.32, up $0.21), Royal Bank Of Canada (RY, $37.65, up $0.14) and Tiffany & Co (TIF, $26.42, up $0.35).

**************************************************

5. Current Trades & Closed Trades

For over a year now, this has always been my favorite section to write about. When we first started the blog, it was a way for us to communicate with our readers on a daily basis and a way to show you the powerful ways to include options in your portfolio.

Since I started the blog, I have profiled nearly 270 trades. I covered 140 trades in 2008 and about 130 this year. Out of the 128 trades profiled this year, 100 have been profitable and 28 were negative. The average gain was 100% while the average loser was 50%.

So basically, I have shown you two or three trades a week in good, bad and sideways markets that have been right 7 out of 10 times. In 2008, my track record was closer to 80%. My goal as a trader is just that. To average a 70%-75% track record with 100% returns while limited losses to 50%.

There are always trades to make and that was my purpose to show you that no matter what the market is doing, there is always an opportunity to make money. The best part of doing the blog is hearing your success stories because that is what it is all about.

We are mentors and that is what makes our job enjoyable…teaching you how to trade. The students that we teach are doing some incredible trades in the current merket environment and I invite you to do the same.

Having said that, I will no longer be covering trades in the blog on a daily basis. I will cover some from time to time but it hasn’t been fair to the students who pay for our mentoring program. The best part of the mentoring program is that they now know how to look for these types of trades and the triple-digit return they provide.

I have often said that options are the most powerful investment tool on the planet because they provide you with so much leverage. And I have proven that over the course of a year you can trade these markets.

But now it’s time for you to take the next step. We want to teach you how trade for a lifetime and how to use options to enhance your returns. The mentoring program we offer is good for life. Think about that. A lifetime membership.

We offer classroom training four times a week and we have a toll-free number where you can actually talk to us on a daily basis.

I had mentioned last Thursday we were working on some changes and this is one of the major ones. I will still be doing the blog on a daily basis but I’m also going to be expanding my role here at OptionsMentoring.com. Eventually, I may be doing some of the classes but my goal is to work with some of you one-on-one. Stay tuned…

**************************************************

6. Monday Morning Playbook

Earnings are winding down but there are a few trades I like this week. I think there will be some action in American Eagle Outfitters, AutoZone and Dollar Tree Stores. I also think traders will be playing Big Lots and Costco Wholesale earnings announements but you have to do your homework when it comes to these types of plays. Some options are overpriced and picking the direction of some of these companies can be tricky.

It will also be interesting to see which sectors might gain strength and which ones will weaken. The Monday Morning Playbook was where I gave a lot of clues on what trades I’m looking at but again, I will be toning it down a little. Often times, Monday’s are an important start to the week and it’s a good way to get a jump on some of the trades you are looking at.

Of course, today is Monday and the market was closed in observance of Memorial Day. Tuesday will now carry that weight and it will be interesting to see which side comes out swinging first. The bulls still have the momentum but the bears are trying to take us lower.

**************************************************

7. Closing Thoughts

After a run from 6,400 to 8,600, in just over two months, the Dow looks tired but is still chugging along. The market is showing signs of hesitation but the month of May has been positive for all three indexes when it usually one of the weaker months of the trading calendar.

Another challenge for the bulls is that the Federal Reserve downgraded its economic forecasts for the year and gave a more cautious tone on the economy last week. The bulls have been riding the momentum of an improving economy but the road ahead could get bumpy.

It remains to be seen if we get a summer setback or a summertime rally and the economy will have the biggest say-so on which way the market is headed. I also think we have to watch for the money that has been sitting on the sidelines and the way the Dollar has been blowing up.

May through October has historically been “bearish” but we all know the market looks forward. The housing market will improve but we also have to watch the commercial real estate market. That could get worse before it gets better.

I’ve have been looking for a bottom in housing and judging by reals estate assesments we may be getting there. We are seeing a lot of home values fall to affordable levels and if mortgage rates can stay below 5%, we could see some nibbling. However, we also have to watch those mortgages that are due to reset later this year and next.

The adjustable rates mortgages (ARM’s) could cause another wave of hurt for the housing sector but the effort to keep people in their houses will reman strong.

Rick Rouse
Rick@OptionsMentoring.com