Philadelphia Stock Exchange March 12, 2010 REPORT Analysis by Dorsey Wright & Associates MARKET COMMENT: MARCH 2010 TRIPLE OR QUADRUPLE WITCHING Bullish Percents in O's and Quadruple Witching week This week is the first Quadruple Witching for that year (2007) was down 1.13%. The past two Week. Quadruple Witching occurs when stock options, years, Quadruple Witching finished the week on a index options, index futures, and single stock futures all positive note, up 3.61% and 1.58%, respectively. This th expire on the same day. This Friday, March 19 will be year, we enter Quadruple Witching week having just the first quadruple witching of 2010; the others coming seen the NYSE Bullish Percent, S&P 500 Bullish, and in June, September, and December. These weeks can Nasdaq 100 Bullish Percent all reverse back into a often bring with it a lot of volatility -- not that we column of X’s and domestic equities continuing to be haven’t already seen a lot of volatility in the markets favored over cash and fixed income. recently! For 2008 and 2009 volatility has come to be We don’t know how the first Quadruple seen as a four letter word to many, and this, I presume, Witching of 2010 will play out, or whether it will prove is a word that many investors just don’t want to hear to be a pivotal point in the markets, but as a general rule anymore. Volatility has become somewhat of a norm we say that these weeks bring with them volatility. To over the past couple of years; however, 2010 has seen a get an idea of how past Triple Witchings in March have great reduction in volatility compared to the last couple played out historically, we went back and pulled data on of the years. One of the most common measures of the S&P 500 during the week with Triple Witching volatility, the CBOE SPX Volatility Index [VIX], is all culminating on that Friday. The S&P 500 has seen the way back down in the teens after reaching a high of trading ranges as large as 8.6% and as small as 1.18%, 89. Suffice to say that volatility has contracted for an average over the past twenty years of 3.48%. substantially over the past year. Nonetheless, the week Fourteen out of the last twenty March Triple Witching of quadruple witching, even in less volatile years, has a weeks have been positive weeks. And, in eleven out of tendency to bring heightened volatility. those fourteen up weeks, the S&P has been up 1% or While the word volatility, in and of itself, more for the week (1990, 1992, 1994-96, 1998, 2000, generally brings with it negative connotations, this does 2003, 2006, 2008, and 2009). In four of the weeks there not necessary mean the market must go down. As a was no significant change (1991, 1993, 1999, and 2002). matter of fact, going back to 1990 there have been 20 There were five years where the S&P was down 1% or March Triple Witching weeks, and 14 of those 20 have more (1997, 2001, 2004, 2005 and 2007). The biggest finished in the black for the for the week, only six gaining year was 2003, up 7.5% followed by 2000, up experienced a loss. The largest down week for a Triple 4.97% and 2008, which was up 3.6%. Witching (what it use to be before the introduction of It’s important to note that just within the last single stock futures) was March 2001 when the S&P 500 two weeks, we have witnessed steady improvements in was down 6.72%. The largest gaining week was March various indicators, beginning with a slew of momentum 2003 which showed the SPX up 7.50%. That week in changes, then bullish percent reversals from sectors, 2003 marked an important turning point in the smaller indexes (i.e. NDX, OEX, SPX, etc.) and indicators. On March 17th 2003 the short term ultimately the NYSE universe. Change has been afoot indicators began to reverse up from low levels and the for the past few weeks and today we can now use the NYSE Bullish Percent followed on April 2nd. This was term "offense" to describe the risk status of the US also shortly before the bond versus equity relative equity markets. What this means is quite simply that strength chart switched back to favoring equities. That enough new demand has entered the equity markets to trend of favoring equities stayed in effect until produce a statistically significant number of new buy November 2007. Interestingly enough in 2004 and signals on a net basis. The impaired driving conditions 2005, the week around Triple Witching was also a that we have operated within for the past 5 weeks have pivotal point in the markets with the NYSE Bullish given way to better conditions, and thus a lower risk Percent reversing down into O’s on March 16th 2004 status. With that said, in the “Trading Ideas” section, and into O’s on March 23rd 2005. In 2007, we went below, we will take a look at some strategies that make into Quadruple Witching Week with all of the major sense in this week, given the Triple Witching Week. TRADING IDEAS: A STRATEGY FOR weeks ago, which is a clear sign of strengthening on a EXPIRATION short term basis. Additionally, when we examine COF’s relative strength, it turns out that it is on a buy signal As you are aware, the first triple witching and in X’s versus the overall market and its peers. There expiration of the year is now upon us. March options is plenty of room to the upside as the initial price expire this Friday so we will see what happens. However, objective if 51. Our recommendation this week on COF we did want to present a strategy for expiration. This is September 35 Call with a Stop at 34, a potential triple strategy will possibly allow you to buy stocks at a better bottom sell signal. Below you can see both our price or sell at a higher price. Let's take a look at the recommendation and the Point & Figure picture of COF strategy. showing the latest double top breakout. As we said earlier, triple witching expirations are often volatile and we see movement in the market both to CAPITAL ONE FINANCIAL CORPORATION the upside and to the downside. For those who are trying (COF) POINT AND FIGURE CHART to buy a particular stock, here is what you can do. You 47 | simply place an order to buy that stock a couple of points 46 | 45 -----------------------------|----------------- below its current price. If the market declines sharply, 44 | then your stock may fall and hit the price at which you 43 X 42 X X O want to purchase it. If so, you have bought a stock you 41 X O X 1 O wanted to own at a better price, at a lower price. 40 -----------------X-O-X---X-O-X-O-----X--------- 39 X X O B O X O X O 3 Conversely, you have a stock in your portfolio 38 9 O X O X O X O | O 2 X that you want to sell, not at the current price, but a couple 37 X O X O X C | O X O X 36 X O X O | O X O X of points higher. In this case, you place an order to sell 35 -------------X-O-X-----------|-O---O----------- the stock a couple of points above the current price. If the 34 X A X | 33 X O | market rallies strongly, then you may sell that stock at the 32 8 | desired price. 31 X X | 30 -X-O---------X---------------|----------------- Of course, you won't get these trades executed 29 X O X | every time. You may set your prices too high or too low 28 X O X | • 27 X O X | • and not get any executed. But it is an interesting strategy 26 X O X X | • 25 -X-O-X-O-6---X---------------|-•--------------- to use to take advantage of volatility that is often in the 24 X O X O X O X • market during expiration. You may want to try this 23 X O O X O X • | 22 X O O X • | strategy now and see what happens this week. 21 X O X • | 20.0 -X---------7---------•-------|----------------- 19.5 X • | PHLX FOCUS: CAPITAL ONE FINANCIAL 19.0 X • | CORPORATION (COF) 18.5 X • | 18.0 X • | One way to take advantage of this new 17.5 -X---------•-----------------|----------------- offensive posture is to use calls in one’s portfolio. When 17.0 • | 16.5 • | looking for possible ideas, we first want to start with a 1 technically sound name. A name which catches our 0 attention is the Capital One Financial Corporation (COF). This stock was able to put together a positive Call Recommendation : Stock: Capital One Financial Corporation chart pattern for much of last Fall. Along with overall Symbol: COF market in late January and early February, it corrected Price: $ 40.03 but managed to hold support at $35. Just within the Option to Buy: Sept 35 Call Price: $ 7.35 month of March, COF broke a double top buy signal at Exchange: Philadelphia 39. Its weekly momentum just turned positive two This publication contains materials that discuss, analyze and evaluate securities performance and investment strategies regarding certain securities traded on the Philadelphia Stock Exchange, Inc.