Today’s chart is yet another example of how when things go wrong at a one-trick pony company, shareholders suffer. The pony in question is GenVec (Nasdaq: GNVC) and yes, Virginia, it is a biotech. Late yesterday the company halted clinical trials of its major cancer-fighting drug, TNFerade, because studies were showing that the drug didn’t work much better than a placebo. This sent the stock tumbling from its recent $3.30 high to around 77 cents–over a 75% drop–prompting an analyst downgrade. Ouch!

In an article appearing today in The Street.com, Adam Feuerstein figures the company to now be worth about 30 cents mostly comprised of cash-on-hand. Strictly speaking, the company isn’t a one-trick pony as it does have a small pipeline of very early-stage vaccines, but today’s blow might just be Genvec’s death knell.

Note: Major support levels are at $0.70 and $0.40.

World Heart (Nasdaq: WHRT) makes innovative heart-pump devices. Last week, a fourth device was successfully implanted at the University of Utah as part of a 160 patient clinical trial. This news cheered investors as the stock staged a dramatic turnaround on huge volume (see chart below). Sharing in that frenzy was one company director who purchased a large chunk of the company’s stock.

The prevailing theory is that insiders know more about what’s going on in their company and it’s considered a bullish sign if they’re buying their own stock. Currently, the stock is trading near $3.50, up from its $2 low yet still half of its all-time closing high near $7. Major support/resistance levels can be found at the 50 cent increments (e.g., $3.00, $3.50, $4.00, etc.) with minor levels at the 25 cent values (e.g., $4.25, $4.75, etc.). Note that this stock is not optionable.

The market has been steadily advancing which is not an unusual occurrence. What makes it different this time around is that it’s doing so without much help from the institutions.  Not only do I keep bringing up this subject in my daily *Blue Plate Specials*, but so do CNBC anchors and contributors.  Bob Pisani has been gnawing on this bone for quite some time, scratching his head while noting the massive amount of dough sitting on the sidelines.   

Today,  Jon Najarian noted the same thing when he said that although trading volume has been light, options volume has been exploding especially in the farther out months.  His conclusion is that institutions are hedging their long positions.

What I’m wondering is do they actually have ANY long positions to hedge?  I say this based on observation of several internal market indicators that I’ve been using every trading day for the past 10+ years.  According to these indicators, the major players walked away, or rather, they ran away, from the gaming table around the middle of last November and they haven’t been seen since. 

Besides the fact that trading volume has been inordinately light, there are two other commonly used indicators that also highlight their lack of participation.  If you have a good charting program, you can use these indicators to draw your own conclusions.

Indications of institutional absence
VWAP: The Volume-Weighted Average Price is a fancy term which shows the degree of bullishness or bearishness in an equity.  VWAPs can be either positive or negative.  Positive values show that folks are willing to pay a premium for a stock; negative values show the opposite.  The higher the absolute value, the more the institutional involvement.

My charting program includes a niftly feature called Hot Lists.  There’s a Hot List that shows the top 100 stocks with the highest positive VWAPs and another which lists the bottom 100 ranked according to descending absolute value.  In the past, extremely bullish VWAPs would be +175 and up on the positive side and less than -10 on the negative side.  Many times, under these conditions, the negative VWAP list might only be partially populated.

Moderately bullish values used to range between +75 to +150, but now all of the VWAP values are much, much lower.  Rallies in the +200 range are now in the +70 range–that’s a HUGE disparity!

Tick: Another and more subtle indicator that’s showing lack of institutional participation is the Tick.  This is a dynamic indicator that normally ranges between -1000 and +1000.  An abnormally high or low Tick value (above +2200 or below -2000) typically indicates that a market reversal is imminent which is its most powerful use.  

It can also be used as a measure of market sentiment.  For example, during strong rallies, high Tick values are the norm (ranging between +1000 and +2000) but lately the Tick has been occupying much lower levels. 

Why are the institutions shying away?
This is the $64K question.  The credit crisis caused a massive hemorrhaging from hedge funds and it’s only been very recently that more money is flowing into them rather than out.   If that’s the case, then we should expect to see volume pick up.  But what if there are other factors at work?

Here are a few reasons that I’ve come up with that might explain the institutions’ conspicuous  lack of participation:

1.  They don’t want to make any major commitments until after the government finishes its meddling in the financial arena. 

2.  Mortgage foreclosures due to ARM defaults are expected to peak late this summer and will surpass the number of foreclosures resulting from subprime mortgages.  Assuming this to be the case, rising foreclosures will add to the unemployment figures. 

This point is a strong argument against further market upside but I think that this scenario (which has been kicked around everywhere in the financial media for well  over a year) is already priced into the market.  I mean, look at the tear the homebuilders have been on lately!

3. Fear of more foreign defaults and the potential ripple effect.  I can’t debate this conjecture since I’m not a global economist (or even a domestic one).  But is this fear factor scary enough to keep the big boys away from their game? 

The real answer is probably none of the above but whatever it is, I’d sure like to be let in on the secret.

There’s a couple of topics I’d like to briefly cover today. The first hails from the “I told ‘ya so” department and the second tries to answer the “Now what?” question.

1. A SKIL-ful illustration of misplaced hope
And yet another example of “How to lose money in the market” (see 2/19/10 & 3/9/10 blogs), takeover candidate SkillSoft (SKIL) today dropped 5% because no higher bidder stepped up during it’s “Go Shop” period despite the fact that it was presented to 45 potential acquirers. Now it appears that the original deal with private equity will proceed at the previously offered bid of $10.80 per share.

Moral of the story: Hope is not an investment plan!

2. The market is continuing to advance…what should I do?
The following indices have recently made new highs: Dow Transports (DTX), Nasdaq Composite (typically denoted by COMPX), Russell 1000 (RUI), and the Russell 2000 (RUT). Of these, the Dow Transports are typically viewed as a leading indicator of market movement, and the indication is that it’s heading higher.

The big question now is this: How can one take advantage of this rally in the face of less than propitious economic indicators?

To answer this question, here are a few suggested plays depending on your risk tolerance and trading expertise.

Conservative plays
Conservative investors should consider adding to their buy lists. Now would be a good time to capture dividend-paying stocks in sectors that still have significant upside potential. Although regional banks (KBE, KRE, XLF), insurance (KIE), and defense companies (PPA) have enjoyed a nice rise, they’re still a long way from their peak values. Another tasty feature is that they all have just recently broken resistance and stand to rally a lot further. The cherry on top is that they pay a dividend, albeit a small one (1% – 2% dividend yields).

One way to take advantage of this situation is to check out the major holdings of the sector ETFs to find specific value plays. Perusing the top ten holdings in each one, I like the following stocks for their combination of dividend yield (D/Y) and growth potential (based on technicals):

KBE: M&T Bankcorp (MTB), 3.5% D/Y; BB&T (BBT), 2% D/Y
KRE: CVB Financial (FFBC), 2% D/Y
XLF: There wasn’t much to shout about here except for the Bank of NY Mellon (BK). It’s been channeling between $26 and $31 and as such would make a good covered call candidate near the top of its range.
KIE: This group has been especially beaten down and the charts of its top 10 candidates look pretty good. Their dividend yields are also higher than the others, on average. My picks of the group are the following: Allstate (ALL), D/Y 2.5%; Aflac (AFL), D/Y 2.1%, Metlife (MET), D/Y 1.8%.
PPA: There’s a lot to like in this group, especially: Lockheed-Martin (LMT), D/Y 3%; Goodrich (GR), D/Y 1.5%; Honeywell (HON), D/Y 2.8%; Boeing (BA), D/Y 2.4%.

Note that many of the above picks would make good covered call candidates (discussed further below).

Since volatility as measured by the VIX is at a relative low, now is the time to pick up some cheap portfolio insurance. Here, being selective pays. If your portfolio is tech-heavy, buy put options on the Q’s (QQQQ); if it’s weighted towards only a few specific sectors, considering buying puts on the corresponding ETFs.

Mad money plays
Those with more tolerance to risk should consider playing the market to the upside. Index ETFs (SPY, DIA, QQQQ, etc.) offer fairly conservative exposure to upward momentum.

Riskier plays include the 2x and 3x ETFs; the QLD and the TQQQ are examples of double long and triple long Q-based ETFs. Options players may find call debit spreads to be attractive. Front-month put credit spreads can also bring in cash (at the expense of margin), but remember that this is a very fragile recovery and the market could move against you at any moment. I’d prefer to sell out-of-the-money bull-put spreads during a market retracement, not during a rally, and then I’d only take half positions, at least until economic factors (housing, employment) begin to firm up.

Considering that this market’s recovery will probably be slower rather than faster, covered calls might be an ideal way to generate income especially in retirement accounts. Best-of-breed stocks in rising sectors with liquid options is a winning recipe.

Bon appetit!

In my February 19th blog: “How to lose a lot of money in the market,” we looked at how investing in companies that are the target of unsolicited takeovers could be detrimental to the health of one’s portfolio. To illustrate this point I chose scientific equipment maker Zygo (NASDAQ: ZIGO) as my posterchild.

A brief history of the proposed merger
Briefly, II-VI (Nasdaq: IIVI) made an unsolicited offer for Zygo in January for $10 per share, well over the current $7 per share price. Hoping for a bidding war, investors were willing to pay up to $11 for the stock, but Zygo’s board threw cold water on that notion by rejecting the deal. The stock instantly shed a buck in value.

As the saying goes, hope springs eternal, especially in the minds of traders. Still hoping that Zygo’s board would come to their senses, investors again bid up the price of the stock.

But alas, they got another kick in the shins today when II-VI formally withdrew its offer. Zygo shares shed 15% of their value, closing the day at $8.49. The real head-scratcher here is that it seems as if investors still believe there’s some chance that a takeover might happen as the stock is trading 9% above its pre-takeover high.

It’s not over ’til it’s over
It appears that the final chapter in this saga has yet to be written. We’ll find out if it will be a happy ending or a sad one for the shareholders.

Our age of technology has ushered in more ways of investing money and hedging bets. Futures products, along with ETFs and ETNs, have exploded. Lately, it seems as if there’s an investment vehicle for pretty much everything—everything, that is, except movies.

A brief history of movie futures
Enter the Hollywood Stock Exchange, aka HSX (not a ticker symbol). Launched in 1998 by two Wall Street ex-pats turned Hollywood deal-makers, Max Keiser and Michael Burns, HSX provided a virtual trading platform for at-home movie moguls to trade the expected profits of movie openings.

Keiser is referenced  as saying, “I suddenly looked at the movie industry like Michael Milken viewed the bond market. The original business plan of HSX was an exchange for predictive products that would lead to re-monetizing the industry and breaking up the Hollywood cartel. Using this platform we would allow many, many, many more people to have access to funds.”

The pair heavily promoted the platform, burning through tens of millions in venture capital, but they couldn’t realize their goal of actually turning it into something that traded real dollars, not just imaginary ones. They faced one big problem that at the time seemed insurmountable: the lack of transparency in studio accounting made it impossible to execute the strategy.

Still believing that the strategy could be made to work, the two pitched the product as a virtual economy and spent millions in promoting it. Their efforts did in fact pay off, at least in one respect. Web traffic was brisk and trading volume zoomed to over 2 billion contracts per day. But Blue Sky laws and lack of CFTC (Commodities Futures Trading Commission) approval hampered their efforts to turn the model into a real exchange.

Despite online ad sales, the company was rapidly losing money. After a failed merger attempt with another fantasy market company, HSX was eventually sold in 2001 to Cantor Fitzgerald, a company that owns a profitable spread-betting business in the UK. [Note: Michael Burns went on to become Vice Chair of Lionsgate Entertainment (LGF) and Max Keiser hosts The Keiser Report.]

Virtuality to reality
It’s taken nearly nine years for Cantor to jump through the necessary hoops in order to turn Pinocchio into a real boy. The company recently announced that it expects CFTC approval by April 20th after which it will commence trading its contract futures.

Termed Domestic Box Office Receipts (DBOR), movie futures contracts will be offered approximately six months before a project is set to be released. Contracts will be introduced for trading via a preliminary auction and will continue trading until four weeks after the movie has opened whereupon the contract will be closed and trading will cease.

Each contract is valued at one one-millionth (1/1,000,000) of the total gross box-office receipts expected for the first four weeks of a movie’s general release. At the end of the four week period, trading accounts will automatically be cash-settled in the contract holder’s account.  (As an incentive to begin trading “for real,” Cantor is offering current HSX account holders $10 in hard currency per every $1000 in virtual profit (up to $100) before March 31st. )

DBOR trading will be on a 24/7 basis. Account holders will be charged a monthly $2 maintenance fee plus a 25 cent per contract commission fee. Unlike other commodity futures which only require a relatively small percentage of the contract value to be present in one’s account, DBOR account holders must post 100% of a contract’s value for long positions and 50% or more for short positions. (Check out the Cantor website for account details.)

The upside
Cantor CEO Andrew Wing (formerly an exec at Nielsen) says that his company’s movie futures will create liquidity and provide studios with a hedging mechanism besides making the little guy an active participant. “The Cantor Exchange will provide a new component into the film finance formula to combat the uncertainties of the home video market and the growing 3D marketplace,” says Wing.

Looking further down the road, Cantor is hoping that movie futures will provide a direct link to the financing of new film projects. The idea is that producers will be able to come to them and if their projects meet certain standards, they would become part of an Intial Contract Offering.

Another potential industry bonus is that DBOR futures may affect how deals get done. Perhaps instead of stars taking a piece of the back-end in exchange for a large upfront fee (which happens on projects with smaller budgets), they’ll opt for a futures position. Hollywood agents now have one more bargaining chip at their disposal; they’ll just have to learn how to use it.

Potential risks
According to Cantor, movie execs with early access to box office data will be barred from making trades, but what’s to stop other insider activity?

Specifically, who will be considered an insider? Actors? Directors? Movie critics? They all have the privilege of viewing the final product before it’s released as do test audiences and others at pre-release viewing events. It’s clear (at least to me) that some type of oversight is necessary. The next question is who will conduct it?

Besides the problem of insider trading, what happens if a movie ceases production or if production is stalled? Also, it’s not unusual for a studio to push back a movie’s release date months or even years into the future. For example, the release date of the last Harry Potter film (Harry Potter and the Half-Blood Prince) was pushed back from November, 2008 to July of 2009. It’s unclear what would happen to futures trading positions under these circumstances.

Summary
These are some big questions that anyone interested in trading movie futures should be asking and I’ve not found any place that addresses them. One thing is for sure, though, movie futures will be an exciting addition to the futures markets—maybe even more interesting than the underlying commodity!