Options Trader Friday Outlook: Up, Up and Away

And away we go!

We have finally broken through all of our breakout levels and no one is more surprised than I am to see this coming without a pullback (perhaps David Fry - see chart above). We will, of course, remain cautious through the weekend but we’re already preparing to throw caution to the wind (sort of) as I’ve posted a primer for our Buy/Write Strategy, so we can start picking up the stocks we want at roughly 15-20% discounts. This is why we can afford to be patient as we wait for our breakout levels - WE DON’T MISS ANYTHING! At PSW, we can STILL buy Bank of America (BAC) for $14.41 (16% off) and Citi (C) for $3.43 (27% off) and Poniard Pharmaceuticals (PARD) for $3.79 (51% off) and now that we have made our tops, we feel a lot more comfortable working in at those prices than we would have when the market was 20% lower in early July.

Hopefully that floor holds (Dow 8,000). We’re looking good so far as our breakout levels have been Dow 9,600, S&P 1,030, Nasdaq 2,038, NYSE 6,700 and Russell 577 and now they form a floor we will be able to watch so we’ll know when to be worried that the rally is running out of steam.

We are also well-protected with our disaster hedges from the Aug 24th post and, if you don’t have any - it’s still a good idea to get some (and cheaper now too!). Only 2 33% (off the top) levels remain and that’s 1,056 on the S&P and 6,959 on the NYSE and we will be officially raising our mid-point from Dow 8,650 to 9,500 if we can take those out and hold them for a day or two, which will make 9,000 our new expected floor on the Dow, and that means we should be buying here! There’s no point in having watch levels if we don’t act on them.

The dollar continues to fall and that’s supporting oil and gold but not the Nikkei, which fell 100 points off their open and finished down .666% for the day as the dollar failed to hold 91 Yen against the world’s mightiest currency. Even a 50-point "stick save" into the Nikkei close couldn’t paint a positive close for the day. A 100-point boost into the close was enough to give the Hang Seng a 91 point gain on the day, capping off a 700-point week (3.5%) and exactly 10% off the September 2nd low at 19,500, matching the Aug 4th high for the year. The Nikkei hasn’t matched their high for the year yet (10,639) and we’ll need to see confirming moves up next week to keep this global party going. The Shanghai Composite rose 2.2%, erasing their losses for the week as China reported a 12.3% rise in Industrial Production.

Europe is also having a nice morning, led by commodity pushers Total (TOT) and BHP Billiton (BHP) as China’s production report and the weak dollar boosted commodity prices. This is interesting because, just yesterday, I pointed out to members that, if you look at a chart of the S&P 500 adjusted against the price of a barrel of oil over the same period - we aren’t really looking all that hot:

That paints a slightly different picture of our recovery, doesn’t it? This is a fine illustration of how rising oil prices destroy our economy, and it’s a pretty reasonable indicator that we will NOT be able to sustain a recovery if oil prices keep climbing above $70. In fact, you can mark the beginning of the great decline in our markets right around July of 2007, when oil first crossed $70. At that time, that spring, the S&P 500 had crossed 1,500 for the first time as well but that party ended in October of 2007, as oil broke $80 and began to bankrupt the global consumer at the rate of $25Bn per month per $10 per barrel increase. The rise in oil prices to $147 a year later cost the global economy $2.5Tn of discretionary income, half went for crude itself and the other half went to pay for mark-ups refined products and, of course, trading fees for Goldman Sachs (GS) et al.

That party had the XLE up 70% from where it is now and the OIH up 100% from where it is now and XLF (who were trading all the commodities) was up 200% from where it is now and XHB was up 200% from where it is now as people who thought they were rich (based on stocks in their portfolios) ran out and bought multiple homes as "investments." It wasn’t just oil and the fee-mongers who were doing so well - Agriculture (DBA) was up 75% and Materials (XLB) were up 50%. Will we be rallying back on the same house of cards that took us to the last collapse or are we going to build a better base this time. That’s something I intend to examine in the conclusion of our ongoing "Stock Market Crash - Year One Review" series.

We’ll get a much better picture with next week’s data beginning with PPI, Retail Sales, NY Manufacturing and Business Inventories on Tuesday. Wednesday we’ll get CPI, TIC Flows, Industrial Production and Utilization plus Crude Inventories. Thursday is Building Permits, Housing Starts and another 550,000 jobs lost in September along with the Philly Fed Report so lots of fun data to chew on and we will be taking a bearish stance into the weekend - just in case not everything is as great as it seems but we’ll also be enjoying the rally while we can as there’s still plenty of good things to BUYBUYBUY.

Have a great weekend - Phil

Comments

[Warm_Paw:]

I'm of the opinion we'd be in free fall right now if the public was allowed to know the truth. Delinquincies are easing only because mortgage resets are easing. Next summer will be the next wave of downturn as Option ARMS reset at a pace close to the sub prime resets we've just worked through.
Banks have been allowed some accounting rule changes which don't truly reflect where they really are.
When mortgages were lent, the banks booked real time value on mortgage backed securities that weren't really of the quality the banks were lead to believe. With each foreclosure, banks are learning what exactly their mbs is really worth.The banks haven't had to show the public what their market value is at this point. They're still showing book value as if the foreclosures were a non event. Like someone soon will repurchase the property and pay the outstanding mortgage, giving value back to their mbs. Banks would like to write off losses if they could only realize them. As each foreclosure occurs, the bank truly holds less money. It would be interesting to know where the banks are in losses. The part that closes the bank is the fact they need X amount of capitalization to what they lend the public.
If we learned what their losses were, they'd have to find cash to recapitalize and there's nowhere to find that cash. Everyone else is hurting too. The Fed won't have enough to give again.
Fractional Reserve Banking reuses money deposited so banks usually actually own probably 1/5 of the actual dollars they circulate.
The FDIC is almost broke so the depositor is going to get a 1929 feel to this downturn.
America is out of gas and if manic efforts to rally this market fail - it's going to be a fire sale to people who have no money.
Ironic how the whole house of cards is built on faith and the value of anything is only what someone else will pay for it at any given moment.
If people knew the truth not only would they not invest, they'd keep deposits to a minnimum.
I pick September 17 2009 as the day someone points out the emporer isn't wearing any clothes.
It's the beginning of the next wave of resets.

Sep 11 10:45 AM

[predictorma...:]

Market is near breaking. Any bump/blip will send it markedly lower. I would not chase at this point.

Sep 11 01:29 PM

[David Zanoni:]

I don't think your end of the world sentiment is reality. Many economic indicators are improving, although slowly. We're past the armegedon stage.


On Sep 11 10:45 AM Warm_Paw wrote:

> I'm of the opinion we'd be in free fall right now if the public was
> allowed to know the truth. Delinquincies are easing only because
> mortgage resets are easing. Next summer will be the next wave of
> downturn as Option ARMS reset at a pace close to the sub prime resets
> we've just worked through.
> Banks have been allowed some accounting rule changes which don't
> truly reflect where they really are.
> When mortgages were lent, the banks booked real time value on mortgage
> backed securities that weren't really of the quality the banks were
> lead to believe. With each foreclosure, banks are learning what exactly
> their mbs is really worth.The banks haven't had to show the public
> what their market value is at this point. They're still showing book
> value as if the foreclosures were a non event. Like someone soon
> will repurchase the property and pay the outstanding mortgage, giving
> value back to their mbs. Banks would like to write off losses if
> they could only realize them. As each foreclosure occurs, the bank
> truly holds less money. It would be interesting to know where the
> banks are in losses. The part that closes the bank is the fact they
> need X amount of capitalization to what they lend the public.
> If we learned what their losses were, they'd have to find cash to
> recapitalize and there's nowhere to find that cash. Everyone else
> is hurting too. The Fed won't have enough to give again.
> Fractional Reserve Banking reuses money deposited so banks usually
> actually own probably 1/5 of the actual dollars they circulate.<br/>The
> FDIC is almost broke so the depositor is going to get a 1929 feel
> to this downturn.
> America is out of gas and if manic efforts to rally this market fail
> - it's going to be a fire sale to people who have no money.
> Ironic how the whole house of cards is built on faith and the value
> of anything is only what someone else will pay for it at any given
> moment.
> If people knew the truth not only would they not invest, they'd keep
> deposits to a minnimum.
> I pick September 17 2009 as the day someone points out the emporer
> isn't wearing any clothes.
> It's the beginning of the next wave of resets.

Sep 11 10:13 PM

[Novice Trader:]

I disagree with your doom & gloom prediction. I’ve researched nothing to base my disagreement with you on; I'm a novice and am simply inclined to ride the current momentum upward until we get a correction tantamount to March or July.

However, I sincerely applaud you for having the balls to pick an actual date for when you think everything will go south. You're the first naysayer to pick one. I applaud you.


On Sep 11 10:45 AM Warm_Paw wrote:

> I'm of the opinion we'd be in free fall right now if the public was
> allowed to know the truth. Delinquincies are easing only because
> mortgage resets are easing. Next summer will be the next wave of
> downturn as Option ARMS reset at a pace close to the sub prime resets
> we've just worked through.
> Banks have been allowed some accounting rule changes which don't
> truly reflect where they really are.
> When mortgages were lent, the banks booked real time value on mortgage
> backed securities that weren't really of the quality the banks were
> lead to believe. With each foreclosure, banks are learning what exactly
> their mbs is really worth.The banks haven't had to show the public
> what their market value is at this point. They're still showing book
> value as if the foreclosures were a non event. Like someone soon
> will repurchase the property and pay the outstanding mortgage, giving
> value back to their mbs. Banks would like to write off losses if
> they could only realize them. As each foreclosure occurs, the bank
> truly holds less money. It would be interesting to know where the
> banks are in losses. The part that closes the bank is the fact they
> need X amount of capitalization to what they lend the public.
> If we learned what their losses were, they'd have to find cash to
> recapitalize and there's nowhere to find that cash. Everyone else
> is hurting too. The Fed won't have enough to give again.
> Fractional Reserve Banking reuses money deposited so banks usually
> actually own probably 1/5 of the actual dollars they circulate.<br/>The
> FDIC is almost broke so the depositor is going to get a 1929 feel
> to this downturn.
> America is out of gas and if manic efforts to rally this market fail
> - it's going to be a fire sale to people who have no money.
> Ironic how the whole house of cards is built on faith and the value
> of anything is only what someone else will pay for it at any given
> moment.
> If people knew the truth not only would they not invest, they'd keep
> deposits to a minnimum.
> I pick September 17 2009 as the day someone points out the emporer
> isn't wearing any clothes.
> It's the beginning of the next wave of resets.

Sep 12 09:50 AM

[David Lentz:]

There is a chasm between those who apparently believe that the turbulence of the recent past was a "random storm", turbulence in the dynamics of market capitalism, and those who believe that there were specific practices (mostly corrupt, all insanely risky) followed by the larger players in our markets. Whichever is correct, there are consequences.

The United States of Bananamerica is now saddled with a mountain of debt that is simply unbelievable to those who understand what numbers with 12 zeroes before the decimal point imply. Unemployment seems to be fixed at the current levels for several years to come -- no one can truthfully point to a date when the number of jobs will increase, as a declining number of jobs has been our national trend for many years now.

And IF it should be the case that this recent turbulence was due to specific causes, and NOT "just a random fluctuation in the markets", what has changed to prevent the exact same thing from occurring next year, next month, next week, or on Monday? Have the banksters pulled back from the brink and are now using smaller amounts of leverage? Nope. Are they shying away from the ultra-high-leverage CDS casino? Not a chance -- they are rolling the dice to gamble their way out of their pit of toxic losses. Have they at least brought compensation in line with performance? (Don't make me laugh)

In a consumer-driven economy, how does it manage to grow when unemployment seems anchored at the current levels for as far as the eye can see? When residential mortgages continue to be devoured in a firestorm of foreclosures, that the goobermint seems to have not the slightest inclination to address? And how are small businesses, the bedrock of our commercial economy, to survive when CRE has a problem similar to the residential real estate markets, and they are unable to pry operating capital loose from the grip of the banksters?

None of this indicates in any what, shape or form that traders cannot manage a decent living. Just don't expect a rip-roaring bull market that has any degree of momentum or underlying substance to it. Things can and will turn on a dime.

Sep 12 10:40 AM

[Alphameister:]

Through quantitative easing, the US bought some time to devise optimal approaches to short-term and long-term problems that seem almost insurmountable. Instead, the boneheads in Washington are devising the worst imaginable approaches to resolving these problems. The easy money has been made in this relief rally; from here onward, it's going to be a long hard slog (and that's the most optimistic of possible outcomes).

Sep 12 11:33 AM

[secmaven:]

The market will head south when Goldman Sachs says it shall head south, not before.

Sep 12 12:41 PM

[macthefloorguy:]

I've noticed on most every financial blog, the Chicken Little "sky is falling" crowd" dominates the comments.
I am a small business owner but sell primarily big ticket items.
Here are a few facts based on my own experiences:
1. I've made more money in the stock market in the 9 months since Obama won the election than under 8 years of Bush. I had about 40% of my portfolio liquid in October, and at every pullback have bought some great companies at fire sale prices. At the same time when the Dow was at 6,500, you nay sayers were predicting a drop to 3,000 or below. I bought a Ford Bond Fund (KVU) at $4.25 that was paying a 49% dividend, and it's trading about $16.50 now, with a paltry dividend of about 15%. I bought GE at $9.00 (wanted to buy it at $6.00, but my broker wanted to be cautious. I have moved my energy portfolio into companies poised to explode as we move toward national energy independence. One in particular, Clean Energy, was trading about $6.00 and it's now about $13.00 in a 5 month span.
I would bet a small fortune that all of you "doom and gloomers" voted republican in the last election, and, deep down, you want to see Obama fail (because that's what Rush said he wants). You know in your heart of hearts that if this recession ends soon (which it is), that the republicans are going to get their butts kicked in the next election cycle just like in the past two. Obama is doing exactly the opposite of what Herbert Hoover did in the 1930's, and I'm damned glad of it. Your "trickle down" theory is nothing but a cruel scam which the American people have fallen for too many times, only to be smacked with the effects of recession, falling wages, job losses, huge deficits and resulting high inflation. Since Hoover's depression, there have been 10 recessions during republican administrations, Eisenhower had 2, Nixon had 2, Ford 1, Reagan 2, Daddy Bush 1, and "W" Bush 2. At the same time, by the end of "W" Bush's era, over 80 PERCENT OF THE NATIONAL DEBT was generated during republican administratrions.
If Obama had followed Hoover's brilliant strategy, we would have suffered another depression.
The republicans should just go ahead and change their name to the SLOP (scary lying old party), because that seems to be the only way they can survive. Examples are :
1932 "social security will bankrupt America and is communistic."
1950 Truman's Fair Deal including health care reform is communistic
1964 Medicare and Medicaid "are socialized medicine" and will lead to a communist takeover.
1992 "Hillary Care" is "socialized medicine" and communistic
2009 Now it's "Obamacare" (another very deeply thought out nomenclature) that is going to bury us.
Do you think there might be some relationship between insurance companies, drug companies, etc. being threatened by a reduction in outrageous profits and the Scary LYING old Party?
HINT -----IT'S ALL ABOUT MONEY, FORGET THE OTHER BULLS...T.
I
If any of you "Wet Blanket" posters voted for Obama, please reply and I'll apologize to you.

Sep 13 01:46 AM

[macthefloorguy:]

I also forgot to mention that my business is doing great these days. In March, when the market crashed, business fell off sharply and was slow until mid summer. Immediately after the "cash for clunkers" program was announced, my business took off like a rocket, and I've noticed more "paper" temporary car tags in the last couple of months than I've seen in about 15 years. That alone is an indicator to me that the economy is improving, along with new home sales and construction, rise in consumer confidence, the dramatic increases in the stock market, and, the one factor which would have surely killed a recovery hasn't happened- a huge surge in oil prices above $70 per barrel. At this per barrel price, every country in the world is still making money on oil. Some, like Kuwait, have a cost per barrel of about $22. Exxon and other Big Oil companies are still making very handsome profits. The only drawback to oil stabilizing is that it may delay some forms of clean alternative energy due to start up costs compared to reasonable oil prices.
Bush and the republican congressinal candidates were "blessed" with $450 million in " campaign contributions", (could this be construed as bribery)?

So why should they interfere when oil was trading at $145 per barrel? When 85% of Big OIL and Gas PAC money goes to republicans, you wouldn't expect them to vote against their "sponsors", would you ?

Sep 13 02:02 AM

[The-Stock-M...:]

I would also like to believe that recession is over, but the stock market has probably reached levels that it should've reached only when the economy was growing on a year-over-year basis, as measured by metric like GDP. GDP is still negative. Some day this fall, the market would realize this and undergo a correction, otherwise, I think it is not healthy for long term prospects of the market.

Sep 13 04:24 AM

[chistletoe:]

okay mac.
I voted for Gore, I voted for Kerry, I publicly predicted Obama would win the white house in june, 2006.
I put all my portfolio in oil before the Iraq war because I understood the lies.
I took it out and shorted the market last year because ... I understood the lies.
I fervently hope that Obama is being fooled by people like Bernanke, Gensler and Geithner, I hope he really believes in what he is doing. I'm not fooled.
I cannot call the short term ups and downs. But I am as sure that the USA will never, ever recover the wealth of the last 20 years as I am that the sun will set tonight.

Sep 14 01:49 PM