Thinking Small? Someone Is

Dear Slingshot Trader Subscribers,

The average investor today is probably not anxiously looking around to buy up small-cap companies right now. But it is possible that some larger-scale investors may be thinking exactly that way. To be certain, the traders that were heavily short the Russell 2000 index earlier this week probably had a burning desire to cover their positions in the last hour of Tuesday’s session; however, somebody may be thinking more than that. Wednesday’s early gains showed a sign of continuation in a rally started after the disappointment of the Fed’s announcement has worn off.

We like the idea of being profitable regardless of whether or not we are right about our outlook for the markets. That’s why we trade the way we do. But it is good to remind oneself that there is no point in arguing with obvious evidence in the charts. A good technician knows that charts can imply trends that can’t be explained by fundamental reasons, because those reasons have yet to materialize anywhere outside of the more aggressive investors’ suspicions.

Perhaps it may be that way with the current market conditions. The stubborn support shown on Tuesday and the subsequent mild move upward was led by the Russell 2000. The small cap index outpaced the Nasdaq 100, the S&P 500 and the Dow Industrials intraday. Wednesday’s follow-up move was again led by the Russell. When the more risky index leads the others, it may be an indication that investors have increased their appetite for risk. When such a move becomes a trend, it is bullish for markets.

While we are skeptical that any meaningful bull market can be established from a couple days of small-cap buying, we are equally skeptical that the market will push strongly lower in the near term. The action on the Russell is a small reason why.

A second reason comes from the action on the VIX. This index’s behavior tends to lead out in a trend reversal, and right now it has hit resistance and is dropping.  This evidence is a long way from signaling a new bullish market, but it is enough to keep us wary of becoming overconfident in one direction or the other. This evidence in these indices shows that the bearish move is weakened for the time being. 

Whether we agree with the fundamental logic, the evidence in the chart remains clear that some investors are in a buying mood. It’s part of the reason we are out of so many of our bearish trades at the moment.

Bottom Line for Next Week

The big guys will be positioning themselves for earnings season. It’s a good time to be cautious and watchful with a wary eye on trades that favor the upside. As stealth accumulation occurs and cash-raising distributions happen, short-move opportunities could occur in either direction.

What to Watch Next Week

The next few trading sessions are likely to be very active. The Eurozone summit could be a game changer for bulls or bears depending on whether direct bond buying (or increased bond buying) is approved for the ECB. Spanish and Italian yields are on the rise, and the need for extreme measures may be justified. This could drive stock higher temporarily.

We are also very concerned about the impact of the Supreme Court’s decision about healthcare legislation. There are a few possible outcomes that could be very disruptive for the entire healthcare sector, which could drag other groups down with it. The potential for push and pull from external factors this week is likely to keep trading ranges wide.

–          June 28: Expected Healthcare legislation ruling.

–          June 28: Eurozone summit starts

–          June 28: Family Dollar (FDO) quarterly earnings report – before market open

–          June 28: Research in Motion (RIMM) quarterly earnings report – after market close

–          June 29: KB Homes (KBH) quarterly earnings report – before market open

–          July 2: U.S. Manufacturing ISM – Before market open

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here.

Open Positions

These are the SlingShot Trader positions we opened during the past two weeks of trading that we have not yet closed.

KB Home (KBH) – On June 27, we recommended you to “buy to open” the July 9 calls for $0.47 or less. We still like this trade and recommend entries at our maximum price or less.

Research in Motion (RIMM) – On June 25, we recommended you to “buy to open” the August 9 Puts for $0.85 or less. We still like this trade and recommend entries at our maximum price or less.

Family Dollar Stores (FDO) – on June 26, we recommended you to “buy to open” the July 72.50 calls for $1.55 or less. We like this trade but would not recommend new entries at this point because earnings are imminent.

Positions Closed

These are the SlingShot Trader positions we closed during the past week of trading.

Red Hat (RHT) – On Jun 21, we recommended you to “sell to close” the July 57.50 calls. We closed the position for $0.70 per share for a loss of 74%.

Apollo Group (APOL) – On June 25, we recommended you to “sell to close” the July 31 puts. We closed the position for $1.44 for a gain of 53%.

Goldcorp (GG) – On June 25, we recommended you to “sell to close” the July 37 Puts. We closed the position for $1.03 per share for a loss of 57%.

General Mills (GIS) – On June 26, we recommended you to “sell to close” the August 38 puts. We closed the position for $1.17 per share for a gain of 52%.

H&R Block (HRB) – On June 26, we recommended you to “sell to close” the August 15 puts. We closed the position for $0.45 per share for a loss of 34%.

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com.

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.

Sincerely,

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader