Monday, mergermania and gold

Two big mergers are hitting the newslines. BJ Services (ticker: BJS) is being acquired by Baker Hughes and Marvel entertainment (ticker: MVL) is merging with Disney (ticker: DIS). Now look to DreamWorks Animation (ticker: DWA) for secondary action.

All major US Exchanges will be closed next Monday for Labor Day.

We’re looking to gold: since February the gold price has been squeezed in an ever tightening range. Sooner or later we will see action coming in this department. The perfect set up for a strangle.

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Bullish

Everybody is bullish. So who will push these markets higher?
When the majority of the crowd are buying call options, it’s time to start looking at the other trade. Sentiment is very one sided.

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More: overbought

According to report on Bloomberg today, traders are now betting that the rally is about to come to a screeching halt…

Aug. 10 (Bloomberg) -- Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities.
Traders were betting the VIX, a gauge of expected stock swings, would increase 13 percent in the next five weeks, according to futures prices at the end of last week compiled by Bloomberg. That’s the biggest spread since August 2008, before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.

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Expiration week

It is an expiration week. The fan club of the Max Pain theory (where pro’s try to let expire as many puts and call worthless) will be delighted to know that the inflection point for most indices in order to obtain this result is lower.
Will this result in a down week?

In the mean time we read a report from Ned Davis Research handling the question if stocks are cheap.
We report

“Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market’s P/E tends to climb by about 10 percent. And the multiple has traditionally expanded 22 percent in the first six months after a major market downturn.

But since March 9, when the recent rally began, the P/E of the S.& P. 500 has jumped nearly 40 percent. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it’s still unclear whether the recession and the bear market have ended.”

What’s the problem here? Earnings.
Nobody has a clue what earnings will be for this quarter and the remaining of 2009.

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