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Finally, after a long wait the jobs picture improves. March shows the first solid growth in jobs since recession began. The U.S. economy gained more jobs in March than any other month in the last three years, according to a Bureau of Labor Statistics report released Friday. Employers added 162,000 jobs last month, and employment numbers in the previous two months were revised upward. How much of the improvement is already in equity prices is hard to tell, but we offer some ideas in the market review below followed by a new takeover trade plan.
Market Review S&P 500 Index (SPX) 1178.10. In the last two weeks, SPX continued working its way higher with little indication of retesting support at the breakout high of 1150.45. A retest is still likely, but it appears it will come from a higher level, perhaps not until reaching our Head & Shoulders Bottom upside measuring objective at 1233.29 detailed in Digest Issue 1, dated January 11, 2010. The SPX put- call ratio at 3.5 suggests a high level of put volume most likely from hedging. On the previous two most recent occasions when it reached this level, the first in late October and the second in late December, SPX continued higher as the ratio declined back toward the 1.5 - 2.0 equilibrium range.    E-mini S&P 500 Future (ESM0) 1173.75. The June E-mini futures contract continued higher without indication of retesting the breakout above the 1143.00 high made on January 11, 2010. For the past two weeks, trading volume has been low at fewer than 2.5 million contracts, the level set for defining high volume, while open interest remains at just under 2.5 million contracts.    S&P 500 Index Implied Volatility (IVXM). Since our last market review based upon data at March 19, 2010, the Implied Volatility Index Mean increased from 14.66 to 15.13. For the VIX the increase was from 16.97 17.47.  The table below shows the VIX Cash compared to the next two futures contracts as well as our calculation of Larry McMillan’s day-weighted average between the first and second months. When there is a premium over cash, it is a sell signal indicating the degree of professional hedging, and this week at 14.31% is lower than our last report at 20.09 %. Some analysts are highlighting the unusually large spread between the VIX cash at 17.47 and the 20-day Historical Volatility of the SPX at 7.70 suggesting the VIX at 17.47 is actually high from this perspective.  With a current Historical Volatility of 52.84, the next table shows the adjusted Implied Volatility (IV) of the at-the-money (17) VIX calls and puts based upon Friday’s closing mid prices for the options along with the respective month’s futures price. US Dollar Index (DX) 80.78. The net change of +.06 in the last two weeks does not tell the whole story since DX reached 82.24 on March 25, 2010 and then declined 1.52 in the last five trading sessions as the euro rebounded on news that a European solution with International Monetary Fund participation for the Greece problem may be possible. For now, it appears the euro at 135.51 is headed to 137.50. The resulting dollar weakness is supporting crude oil, raw material and the emerging markets as the risk trades come alive.  iShares Barclays 20+ Year Treasury Bond (TLT) 88.95. Since the last review, long bonds as measured by TLT dropped below the previous range between 89 and 92 as long-term interest rates increased to 4.72 suggesting risk trades were increasing as the dollar declined. Based upon TLT the next test will come at the lows of 87.56 and 87.69 made last June 10th and 11th. The big news in the interest rate markets came by the breakdown of the historical relationship between US government bonds and the 10-year swap rate as the swap rate went negative, below the 10-year yield.  NYSE McClellan Summation Index 1221.43. Our market breadth indicator for the NYSE Composite Index declined 42.73 points since our last review as the NYSE Composite and many other market indices continued higher increasing the divergence based upon this indicator. Unless the number of advancing issues compared to declining issues increases, the pressure will keep building for a correction. Baltic Capesize Index (BCI) 3429. The two-week loss in the Baltic dry-bulk shipping rate index for the larger ships was 93 points and below the previously estimated range with a 3500 low. The Capital Link Tanker Index declined 23.62 points, now at 2335.29. The shipping industry is facing serious overcapacity issues that will keep pressuring freight rates.
Strategy In our last strategy review, we noted the iShares FTSE/Xinhua China 25 Index (FXI) 42.37 was still below its previous high on November 16, 2010 of 46.66. Since then it has gained momentum having advanced from 40 in the last five trading sessions as the risk trades return. The iShares MSCI Emerging Markets Index (EEM) 43.22 has turned higher and is now just below its previous January 11, 2010 high of 43.47. iShares MSCI Japan Index (EWJ) 10.60. As the yen weakened along with the US dollar the NIKKEI 225 11,286.09, advanced to a new high from the March 2009 low. The declining yen is further evidence carry trades are being opened using yen while adding support to the Nikkei 225. As further support for the many indices, the World Trade Organization said they are expecting world trade to volume to increase by 9.5% this year as demand and access to trade credit finance improves. They expect emerging market exporters to increase trade by 11% followed by the developed economies at 7.5%. They say, “The story is of a recovery in global demand.” Long option strategies using emerging markets ETFs is one way to participate in the continuation of this trend. Here are three examples using EEM.  iShares MSCI Emerging Markets Index (EEM) 43.22. With a current Historical Volatility of 17.97 and with an Implied Volatility Index Mean of 22.60 and with substantial options volume and open interest consider long call spreads and call ratio backspreads. Long call spread.
Since the is no edge in this trade in terms of the IV/HV ratio (23.15/17.97) or the IV of the bought leg compared to the sold leg (23.25/20.79) consider one of these call ratio backspread alternatives. Call Ratio Backspreads.
Use a close back under 41 as the SU (stop/unwind).
IVOLopps™
Takeover Down Under Lihir Gold (LIHR) 35.61. Last Thursday Australian miner Lihir Gold rejected a takeover proposal from Newcrest Mining Australia‘s largest gold miner to create the world’s fourth largest gold producer. Lihir with operations in Papua New Guinea, Australia and Africa said there were merits in a combination and they had been in private talks with Newcrest for six weeks, but said they rejected the offer of 35% over the closing price (25.56) on February 12, 2010 or 34.51, because it was too low.    An offer with a 35% premium would seem to be full value and the declining options implied volatility from 46.60 to 38.60 indicates low expectations for a higher bid. However, since the offer was made before a holiday weekend it may not yet be completely evaluated and Lihir may release details to justify a higher offer. The current Historical Volatility is 76.77 and the Implied Volatility Mean Index is 38.60. Here is a conditional risk reversal or synthetic long suggestion for Monday based upon the prices remaining stable or close to the indicated debit below.
Use a close back below 35 as the SU (stop/unwind). Also, watch the implied volatility over the next two weeks for clues to see if the options begin pricing in a higher offer. Summary The improving employment situation in the US along with a forecast of improving world trade helped by a declining dollar and yen boosted the emerging markets and commodity prices providing evidence that the risk trades active once again. Although a retest of the SPX breakout is overdue, many equity markets appear to be in steady climb higher.
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In next week’s issue, we will offer more specific options trading suggestions.

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