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Apr 24, 2006 - Issue #004



Vantage Point



From my vantage point, it is difficult to see committing fresh money to the long side of the market at this time. While it is perhaps too early to call a bear market, cracks seem to be appearing.

One gets the impression of watching a car racing uphill as it's running out of fuel.

Breakouts, both up and down, have no follow-through. One doubts this can continue; something has to give. The phrase, "Sell in May and go away", keeps popping into mind.

Hewlett-Packard (HPQ) $32.96 is an example of what I'm referring to. It's had a good ride up, so far. One would not be blamed for reducing long positions on a scale up.

In fact, if one were inclined to begin establishing bearish positions, I could see selling the SSF's (single-stock-futures) in the front months (for liquidity) while simultaneously buying the nearest in the money equity call options as insurance to control risk.

When trading futures, it is generally advisable to operate in the front month contracts, where the action is, with a view to rolling out to the next series as the floor traders roll their positions. One always wants to operate in the most liquid markets to better facilitate the establishing or unwinding of positions.

That being said, always keep in mind we are in a market of stocks rather than a stock market.

Some stocks have already sold off and may qualify for intial purchase.

Intel (INTC) $19.06 comes to mind. Buying the stock while simultaneously buying the nearest in-the-money put options (married-put strategy) provides a low risk scenario.

When using derivatives as part of one's tactics, the use of an option pricing model can not be over emphasized.





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