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MORNING WATCH, Aug. 8
By Frederic Ruffy, Optionetics.com
8/8/2003 5:45:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=8855

Stocks could show early strength in what is expected to be a relatively quiet day of trading. Early Friday, index futures were indicating modest gains for both the Dow Jones Industrial Average ($INDU) and the Nasdaq Composite Index ($COMPQ). Yesterday, the industrial average added 65 points, but the Nasdaq moved fractionally lower. That type of mixed trading could continue today due to the fact that there are no major economic or earnings reports scheduled in the immediate future.

Nvidia (NVDA) may face some selling pressure after the maker of computer graphics chips warned that gross margins would be “flat to slightly down” due to higher-than-expected technology costs. Pixar Animation Studios (PIXR) may also fall despite posting strong second quarter profits. Pixar Chief Financial Officer Ann Mather warned that earnings for the year will be $1.60, which was below Wall Street estimates of $1.63. Meanwhile, Teva Pharmaceutical Industries (TEVA) is expected to see strength on news that the US Food and Drug Administration has issued tentative approval of the company’s generic form of the epilepsy treatment Neurontin.

Outside of a few reports here and there, the earnings reporting season is winding down. According to Thomson First Call, only 25 S&P 500 companies reported second quarter profit results this week. 17 are scheduled to release earnings results next week. Therefore, the economic data is likely to be the main driver of market action going forward.

The economic calendar is light during the next few days. There are no major reports on tap for today or Monday. The next key event will likely be the Federal Reserve Open Market Committee [FOMC] meeting on Tuesday. While most market watchers do not anticipate the Fed to change interest rates, traders will be anxious to hear the post FOMC statement, which can provide clues regarding the next direction for interest rate policy. The statement will be released at 2:15 p.m. ET next Tuesday.

In the options market, there are signs that traders are getting a bit more defensive. For example, the CBOE put-to-call ratio, which is used to measure put activity compared to call volume on the Chicago Board Options Exchange [CBOE], spiked up to 1.02 yesterday. This tells us that there was slightly more put buying than call volume, which happens infrequently. In fact, readings of 1.00 or more are often a sign of excessive bearishness or negativity among options traders.

Going forward, options traders will want to keep in mind that expiration comes relatively early this month and the last day to trade August options is just a week away. Therefore, strategists may want to begin thinking about rolling forward or closing out any positions involving August options soon, because there are only six trading days left until these contracts expire.

Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site