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The US Dollar Index (DX) cash 73.71 is the feature story once again. Over the course of the last year we featured it 6 times and included it in analysis sections another 13 times. We think it is one of the most important variables to measure changing terms of trade and inflationary expectations. Recently we suggested that the DX might be finding support at the 75 level once again in an effort to turn higher on better balance of trade numbers. This possibility was overcome by the reality of Ben Bernanke’s comments that the Federal Reserve is prepared to continue lowering interest rates despite clear signs that inflation is now rising. The result was a major dollar breakdown. We went back 38 years looking at the DX chart to find a lower low. Even during the inflationary 70’s the low was 82.07 on 10-21-78. We appear to be in uncharted dollar weakness territory. Here is the DX chart from Advanced Futures Options. Enter symbol DX and designate the exchange as NYBOT (New York Board of Trade).

“There is no subtler, or surer means of overturning the existing basis of society than to debase the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which only one man in a million is able to diagnose.” John Maynard Keynes

Is the Federal Reserve sowing the seeds of the next asset bubble? Will the next asset bubble be commodities? If so, then inflation is likely to go a lot higher as rising commodity prices are passed through into higher food and energy prices. In order to make this clear we will state it somewhat differently - this is a big deal.

Market Review

Last week in IVolatility Trading Digest™ Volume 8, Issue 8, Broken Triangle, dated February 25, 2008, we declared the symmetrical triangle downward continuation pattern in the S&P 500 Index (SPX), now 1330.63 was broken because it was not following the outline and continuing lower when predicted. In hindsight, we may have been a bit hasty, as the SPX appears to have confounded classical technical analysis once again by redefining reversal points 3 and 4 and then promptly breaking out to the downside on Friday February 29, 2008. We are going to let the validity of this pattern be debated by the classical technical analysts. For now we are content with the previously established downside measuring objective at 1225 from the Head & Shoulders Top. The equivalent measuring objective for the DJ Industrial Average (DJIA), now 12,226.39 would be down at 11,250.

Even though March expiration is now just three weeks away, we would stay with the previously suggested March IWM bear put spread and the March OID upside down bull call spread we suggested in IVolatility Trading Digest™ Volume 8, Issue 7, Symmetrical Triangle, dated February 18, 2008.

Strategy

Suggestions

PowerShares DB Agriculture Fund (DBA) 41.56. The PowerShares DB Agriculture Fund (Fund) is based on the Deutsche Bank Liquid Commodity Index – OptimumYield Agriculture™ and managed by DBCommodity Services LLC. The Index is rules-based and composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector.

Now trading at a slight discount to Net Asset Value of 41.65 we offer this suggestion. The current Historical Volatility is 31.38.

• Buy DBA Jul 40 call DBAGN 4.80 IV 36.25 Delta .6349
• Sell DBA Jul 45 call DBAGS 2.575 IV 35.86 Delta -.4276
  Debit 2.225 Position net delta .2073

SU: It would take a close below 37 ½ to cause sufficient concern to stop/unwind.

PowerShares DB Commodity Index Tracking Fund (DBC) 36.10. The PowerShares DB Commodity Index Tracking Fund is a commodity pool designed to track the performance of the Deutsche Bank Liquid Commodity Index - Excess Return Optimum Yield. The commodities included are Light Sweet Crude Oil, Heating Oil, Aluminum, Corn, Wheat and Gold.

With a Net Asset Value of 36.12 it is also trading at a slight discount. The current Historical Volatility is 23.05.

• Buy DBC Jul 35 call DBCGI 3.10 IV 25.92 Delta .6349
• Sell DBC Jul 40 call DBCGN 1.175 IV 27.04 Delta .-3238
  Debit 1.925 Position net delta .3111

SU: The stop/unwind level would be on a close below 34.

Yamana Gold Inc. (AUY) 17.99. Toronto based Yamana is a gold and copper miner with properties in Brazil, Argentina, Honduras, and Nicaragua. This is a growth mid-tier copper and gold producer that will be producing 1.5 million ounces of gold per year by 2009 and 2.2 million ounces by 2012. Although based in Canada all of its mining operations are in countries with significantly lower labor costs. With a current Historical Volatility of 47.83 consider this bull call spread.

• Buy AUY Jul 17 ½ call AUYGW 2.60 IV 51.18 Delta .6119
• Sell AUY Jul 20 call AUYGD 1.625 IV 51.61 Delta -.4474
  Debit .975 Position net delta .1645

We suggest using the July call in order to allow for sufficient time in the event of a pull back that may come with the new high price above 18.

SU: It would take a close below 14 to trigger the stop/unwind.

Goldcorp Inc. (GG) 43.21. Vancouver based Goldcorp engages in exploration and and development of gold, silver and copper with a long list of operations and projects in Canada, Australia and the Americas. With a current Historical Volatility of 44.95 consider this bull call spread.

• Buy GG Jul 42 ½ call GGGV 5.20 IV 43.80 Delta .5922
• Sell GG Jul 47 ½ call GGGT 3.15 IV 43.26 Delta -.4281
  Debit 2.05 Position net delta .1641

Again we are using the July calls to allow for sufficient time in the event of a pull back that may come with the new high price at 45.

SU: We would want to see a close below 35 before unwinding this one.

Hecla Mining Co. (HL) 11.50. Coeur d’Alene, Idaho based Hecla is primarily a silver producer with some gold and other metals as by-products. Established in 1891 in northern Idaho’s Silver Valley, Hecla Mining Company has rich mining history. HL mines and explores for silver and gold in the United States, Mexico and Venezuela. They currently produce silver from two mines, Greens Creek and Lucky Friday, as well as gold at the La Camorra in Venezuela.

In IVolatility Trading Digest™ Volume 7, Issue 39, Dud Dollar, dated November 12, 2007, we suggested a synthetic bull call spread with the stock at 11.48. Since the Jan 10 put expired in-the- money on expiration it would have been assigned presuming it had not been previously sold. The second part of that trade suggestion was long the Mar 10 call and short the Mar 12 ½ call. This spread in now worth 1.375, which is .25, more than the original cost. For those who were assigned the stock from the short put we now suggest a call sale. Consider this suggestion with the current Historical Volatility at 48.35.

• Sell HL Mar 10 call HLCB 1.65 IV 59.94 Delta .8547

With an adjusted basis of 9.40 (10.00 assignment cost -.60, the Jan 10 put sale proceeds) this will be a covered call sale position with three weeks to expiration.

Now for the bull call spread part of the original trade. Consider selling the Mar10/12 ½ bull call spread and replacing it with this suggestion.

• Buy HL Jun 12 ½ call HLFV 1.15 IV 58.82 Delta .4752
• Sell HL Jun 15 call HLFC .50 IV 57.59 Delta -.2613
  Debit .65 Position net delta .2139.

SU: The stop/unwind should be on a close below 10.

With this stock again approaching the previous high of 12 ½ we think it is prudent to give the spread more time as this stock along with many other mining stocks have a tendency to correct after making new highs.

Short Side

Every good portfolio should have a few shorts along with the longs. Currently we favor stocks in the consumer discretionary sector for the short side. With banks tightening credit conditions and canceling credit cards along with declining home values it seems likely that the consumer is going to continue being squeezed with higher food and energy costs. It follows that expensive fashionable merchandise would be vulnerable to sales declines along with rising raw material costs. Here are two shorts in this category to consider.

Deckers Outdoor Corp. (DECK) 110.64. DECK designs, produces and manages footwear brands for outdoor activities and casual lifestyle. It offers casual open-toe footwear, adventure travel shoes, trail running shoes, outdoor cross training shoes, amphibious footwear, sheepskin boots and slippers, shoes and bags, hiking boots, rugged closed-toe footwear, and sandals of various styles. This is the company behind UGGs, one of the few must-have items during the past holiday period. They just reported earnings and as some analysts were upgrading the stock it proceeded to sell off. There is something wrong with this picture and the something could be the high stock valuation. At somewhere between 24 and 40 times earnings, depending upon the source and with expected earning growth of 20% along with decreasing gross margins this stock looks like it is now going lower.

With a current Historical Volatility of 68.55 consider this bear put spread.

• Buy DECK Jun 120 put QUKRD 19.95 IV 60.45 Delta -.5226
• Sell DECK Jun 100 put QUKRT 10.10 IV 65.43 Delta .3154
  Debit 9.85 Position net delta -.2072

SU: We suggest a stop/unwind at 125.

Under Armour, Inc. (UA) 36.82. UA designs and markets performance apparel, footwear, and accessories for men, women, and children in the United States and Canada. Its products are made from moisture-wicking synthetic fabrics, which are designed to keep perspiration away from the skin, and regulate body temperature regardless of weather conditions. With a large short interest from recent put buying this stock is under pressure and appears to be in a defined downtrend. With a forward price-to-earnings ratio of 23 and a current Historical Volatility of 116.99 take a look at this bear put spread.

• Buy UA Jul 35 put UASG 5.60 IV 75.51 Delta -.3592
• Sell UA Jul 30 put UASF 3.35 IV 77.16 Delta .2460
  Debit 2.25 Position net delta -.1132

SU: Set the stop/unwind at 45.

One More Short

On the active options list, most all of which were all calls, we found one more for the short side. Once again we have a company confronting rising costs and declining demand.

Northwest Airlines Corp. (NWA) 13.43. NWA operates a passenger and cargo airline worldwide with approximately 1,400 daily departures, from hubs in Detroit, Minneapolis/St. Paul, Memphis, Tokyo, and Amsterdam.

This stock was bid higher on takeover talks with Delta Airlines, which now appear in serious jeopardy. This company needs combining in an effort to reduce costs, but pilot seniority issues may scuttle the deal. The domestic airline industry had too many airlines offering too many seats through too many expensive hub operations with ticket prices below their costs. A slowing US economy will further reduce domestic demand. The stock is now turning lower and could very well be on the way to zero without a merger agreement. With a current Historical Volatility of 59.43 consider this bear put spread.

• Buy NWA Jun 12 ½ put NWARV 2.35 IV 100.21 Delta -.3371
• Sell NWA Jun 10 put NWARB 1.225 IV 103.10 Delta .2074
  Debit 1.125 Position net delta -.1297

SU: Use 16 as the stop/unwind price level.

Reader Response Request

As usual we encourage you to let us know what you think about how we are doing and what you would like to see in futures issues. Send us your questions or comments, or if you would like for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website.

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