Options Trader: Wednesday Morning Ideas

by: Philip Davis

Today we will see how real that rally was. All the indices made huge positive moves yesterday, and we will be looking for some follow through as we challenge another set of psychological barriers.

  • We’ll be looking for the Dow to break out over 11,500 and to hold 11,440 (last Wednesday’s high).
  • The Nasdaq similarly needs to hold 2,180 to stay positive but 2,200 will be a sign of real strength.
  • The S&P can safely drop to 1,305 and will be the one to watch as it moves between 1,310 and 1,315.
  • The NYSE needs to stay positive as it is lagging the other indices short-term.

Over the past 5 years, the NYSE has outpaced the Dow and the S&P by 20% and the Nasdaq by 10%. We need continued leadership to confirm S&P direction.

Asia was up across the board, with India posting a 2% gain on the production numbers we discussed earlier in the week. Of note in Japan is Sumco, who gained 5% as profits grew 500% on strong demand for silicon wafers. Sumco is the World’s second largest maker of semiconductor wafers and this confirms news we heard from #3, Wacker Cemie, back in early August. #1 is, of course, Shin-etsu, who gave a good outlook in July that was largely ignored by the markets, but I think a trifecta is too much evidence for the bears to counter.

Europe is up marginally, fearful of a US pullback but oil and gold continue to trend down in the zone. Truck maker Man is possibly buying Scania, which should boost Volvo (VOLV), which may ignite Caterpillar Inc. (NYSE:CAT). Although CAT doesn’t do trucks, it’s the same kind of rubber-band effect we see between Motorola Inc. (MOT) and Nokia Corp. (NYSE:NOK). VOLV has pulled over 100% ahead of CAT over the past 12 months, although they serve very similar global markets on the very same planet:

Speaking of the globe—is it just me or is money getting cheaper? Here’s a 30 year chart of the 30 year note, you tell me why HB’s are rallying:

Maybe the global markets have gotten so efficient that money can be profitably marketed for just 4% interest. If we think of money as a product and think of Central Banks, the IMF and, of course computers as devices we use to increase manufacturing and distribution efficiency, it’s not so hard to see that maybe the cost of money has simply declined over the years.

Citibank certainly seems to be able to squeeze out a living in this environment:

If Stockholm calls, tell them I need 4 tickets!

Oil companies have also been able to scratch out a living (change the symbol on that chart to ExxonMobil Corp. (NYSE:XOM) and you’ll see what I mean), but I think they’ve gotten about 30% ahead of themselves and, like the builders—who also befitted from a runaway commodity—will experience a slight pullback.

Oil itself looks like it is having more than just a slight pullback. But if we assign a nominal high of $77, we find a normal Fibonacci Retracement value of $52 can be reached without setting off any alarms.

Whether or not the powers that be let things fall that far remains to be seen, but doing so would allow for a good healthy (globally) consolidation, and allow oil to continue up towards $100 in an economy that can well afford it.

For some reason “analysts” expect a 1.5m barrel drawdown in crude with a 1.5m barrel rise in gasoline, which makes you wonder what orifice they pull these numbers out of. Let’s keep in mind we often get a head fake after the inventory reports, so follow the Valero Rule, with less emphasis on Valero Energy Corp. (NYSE:VLO) itself, as they are counting on lower prices to spur demand, although a rational person would worry about margins…

Gold is being bought up in Asia and sold off in the states but it is resting very sadly just below the 200 DMA of $591:

Someone asked me if we are still shorting gold, and my answer was that $591 is still a hell of a lot of money for shiny rocks they pull out of the dirt for $200 an ounce, so if you have any mines you want to sell me at 2004 prices, when gold was $400, please let me know. AngloGold Ashanti Limited (NYSE:AU) comes to mind:

While it may look like a falling knife, it’s one I will catch willingly in the low $30s, and I will be happy to have it stuck in me for a couple of years, because I don’t see gold going that low...

I’m looking for any excuse to take profits today. Hardly anything has pulled back enough to let us out, and I’m sure there are better horses to ride than some of ours, which should be getting tired by now.

I have an early meeting so not too many picks, but I will check in later when I have some time to get a handle on the market. Be careful out there today, and watch our levels.

I’m keeping an eye on Apple Computer Inc. (NASDAQ:AAPL), General Electric Co. (NYSE:GE), Texas Instruments Inc. (NYSE:TXN), Microsoft Corp. (NASDAQ:MSFT), Google Inc. (NASDAQ:GOOG) and MOT for sentiment indicators. If we don’t get a pullback soon, there may be a screaming capitulation rally as the bears head for the exits (the put/call ratio is still neutral):

I take it back, I have no time for picks at all today but, like I said, today is a good day to accumulate some more cash or go after some of our laggard picks.

The above interest rate chart has soured me on shorting any type of builder, so I’m out of those except for my cheap Toll Brothers Inc. (NYSE:TOL) puts as a shot of bad news can send them back down.

In yesterday’s comments we looked at these VERY RISKY oil plays I still think may work:

  • Suncor Energy Inc. (NYSE:SU) Oct $65 puts for $2.35
  • ConocoPhillips (NYSE:COP) Oct $55s for .80
  • Royal Dutch Shell (NYSE:RDS.A) Oct $65 puts for $1.20
  • BP PLC (NYSE:BP) (who spilled again) Oct $65 puts for $1.55
  • ExxonMobil Corp. (XOM) Oct $62.50s for .90

As usual, I will be looking for ones that go the wrong way (we can expect a rise pre-inventory), and I will pick up “bargains” with tight initial stops in case the inventories go against us, but watch out for the head fake that is specifically meant to get rid of hard stops after inventory data is released.