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Market May Stall Amid Lower Earnings Expectations

Earnings estimates, problems in the eurozone, and more could keep markets range-bound


Stop sign ahead, market stallingThe SPDR Dow Jones Industrial Average ETF (NYSE:DIA) seeks to replicate, net of expenses, the Dow Jones Industrial Average (DJIA). The fund holds the portfolio and cash, and consists of as many index securities as is practical.

Maybe bad news is bad news, as the liquidity-driven ramp up in equity prices appears to have stalled, if not been staunched, for the time being. The CBOE Market Volatility Index (NYSE:VIX) has risen sharply back to the 20 area, which certainly makes sense, given all the market issues still being sorted through.

Earnings expectations have been ratcheted down, with many expecting a tepid earnings season at best. The multiple expansion that drove share prices higher now seems somewhat misguided, especially given that corporate margins are at historic highs.

Additional QE (quantitative easing) plans appear to have been sidelined for a while, especially given the dramatic effect on food prices that the free-money party has created. Spain and Italy are also poised to be added to the list of PIIGS that need some German funding.

Given these headwinds, the recent rally did seem more than a little artificial, especially the unrelenting aspect of it. Now that the momentum has been broken, I look for the DIA to remain range-bound for the next several months, with a price target of 128 on the DIA by June expiration.

Based on DIA’s closing market price of $127.01 for April 10, 2012, and using a target price of $128.00, a target date of June 15, 2012, and $10,000 of investment capital, option strategies to consider include buying a June put butterfly, selling an iron butterfly, selling an iron condor, or using another options strategy that best fits your trading style and risk-return objectives.

For the full details on this trade, visit, create a free Instant Login and try the TradeBuilder feature, where you’ll see several ways to trade this name. Best of all, you can see a potential profit-and-loss outline for each strategy. Create your free login, and get access to the details about these DIA options trading strategies by visiting TradeBuilder here. 

As of this writing, Tim Biggam does not own any shares mentioned here.


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