Lower Opening, Pullback Or…?

Overseas, stocks were slightly higher, with the FTSE up 0.2% at 5223, and
the DAX up 0.1% at 5236. The Nikkei rose 0.1% to 11,359, and the Hang Seng was
up 0.2% to close at 11,003.

We have been monitoring the relationship between the DJI and the COMP for some
time, and it is giving indications of topping out, meaning that the COMP might
start to outperform the DJI in the short term. The weakness in the storage
sector will provide a test this morning.

We have been looking at Gilead Sciences (GILD) for a possible long position in
the biotech sector. We missed our first chance at a pullback last week, and we
will be monitoring its behavior on today’s downgrade for signs of strength and
possible entry.

We are still looking to buy dips in the oil, oil service and natural gas
sectors. The oil service sector is on a nice run, and oil is not far
behind. Natural gas looks like it is just starting. These stocks could be
damaged by an outbreak of peace in the Mideast, and the Saudi initiative seems
to be gaining momentum, but the surging economy should support these sectors,
even if peace is made.

With volatility so low, most positions will probably take the form of vertical
spreads to the upside, long puts to the downside, straddles or calendar spreads.

At 10:00 a.m. EST, January factory orders data will be released, with a
consensus expectation of + 1.0%. With the recent "knockout" numbers we
have had, look for disappointment if this number is not exceeded.

Once again, I would like to note that I find the imposition of steel tariffs
very disturbing, and we will have to see how that plays out.

Volatility

The VIX closed down .27 at 21.81, its lowest close since late January.
Oddly enough, the VXN and the QQV were both higher yesterday, even though those
markets were higher. Granted, they rallied from extremely low levels. The
VXN closed up 1.49 at 42.28, and the QQV closed up .61 at 36.74.

Do I need to say it? Volatility is very low and investors should seek to use
options to protect their positions. (Yes, I sound like your mother.)

(
XOM |
Quote |
Chart |
News |
PowerRating) — We were unable to purchase more July 40 calls at $3.50. We will be
re-enter the order tomorrow.

(
AZO |
Quote |
Chart |
News |
PowerRating) — We sold 25% of the March 55/65 put spread at $3.00 and just missed
selling an additional 25% at $4.00. Re-enter the order to sell another 25% at
$4.00 today.

Current Recommendations

Rolls/Adjustments

Disney
(
DIS |
Quote |
Chart |
News |
PowerRating) — Investors long the April 22.5/25 reverse collar
(long the April 25 calls, short the April 22.5 puts) at a $1.15 credit (75%) may
want to consider the following roll: Buy the Disney April 22.5 put/April 27.5
collar (buy the April 22.5 puts, sell the April 27.5 calls) for zero. This will
"roll" you into the DIS April 25/27.5 bull call spread at a $1.15
credit.

Schlumberger
(
SLB |
Quote |
Chart |
News |
PowerRating) — Investors long the SLB May 55/60 call spread at $1.50
may sell the spread at $3.25 and use the proceeds to purchase the May 65 calls
at $1.75, effectively leaving you long the May 65 calls for free. This entire
transaction may be entered as a spread where one would sell the May 55 calls,
buy the May 60 calls and buy the May 65 calls for $1.50 credit.

(
AHC |
Quote |
Chart |
News |
PowerRating) — Long the May 70 calls at $3.50 (25%).

(
DYN |
Quote |
Chart |
News |
PowerRating) — Long the March 30/40 1:2 call ratio spread @ $1.50.

(
SLB |
Quote |
Chart |
News |
PowerRating) — Long May 55/60 call spread at $1.50 (50%).

(
QCOM |
Quote |
Chart |
News |
PowerRating) — Long the April 40/50 call spread at $2.50 (100%).

(
TLAB |
Quote |
Chart |
News |
PowerRating) — Long the March 17.5/22.5 call spread at $.80 credit average (50%).

Note: This spread is a result of a reverse collar roll.

Put Positions

Put Spread Positions