Options Trader: Wednesday Morning Ideas

by: Philip Davis

I want to be very clear that I am being bullish from a technical standpoint, but I have a funny feeling in my gut that is keeping me in cash. The last few days have let us take some great gainers off the table but I’m not thrilled with the performance of the remaining picks (54 positions - up 27% over 11 days average) and maintain very tight stops. There will be an updated spreadsheet tracking all picks today for your viewing pleasure.

So holding time increased 25% and profits decreased 12% (from 94% to 83%) on recently closed positions; nothing to panic about but, coupled with the weakness in open positions you can see why I am concerned. Only 14 out of 54 open items are puts, so it’s not me being overly pessimistic -- but my Morgan Stanley (NYSE:MS)/Public Service Enterprise Group Inc. (NYSE:PEG) play did produce 2 of my 4 worst picks (-50%)!

There are a lot less doubles (8) and no triples, although I do have to admit I did cash a few positions out a little early that would have made it but, like I said -- funny feeling...

Stephen Roach has a funny feeling about the commodity market! He says that US and Chinese demand may surprise to the downside, and warns of danger ahead as funds (his is MS) follow Ibbotson recommendations to increase commodity holdings. He says:

For my money, there is far too much talk about the globalization-led commodity super-cycle. It gives the false impression of a one-way market, where every dip is buying opportunity. Yet commodities as a financial asset are as bubble-prone as any other investment. As is always the case in every bubble I have lived through, denial is deepest when asset values go to excess. That’s very much the case today. After three years of extraordinary outperformance, denial over the possibility of a sustained downside adjustment in commodity prices is very much in evidence -- underscoring the time-honored sociology of an asset class that has gone to excess. Meanwhile, China and U.S.-housing-related fundamentals are going the other way -- setting up increasingly tender commodity markets for unpleasant downside surprises on the demand side of the global economy.


There are no funny feelings in Asia as the Hang Seng snapped back 213 points and the Nikkei picked up 390 -- now those guys know how to rally! Japan was excited about the election of business friendly PM Shinzo Abe. Europe is, as usual, waiting to see what we do, and the EU voted to add Romania and Bulgaria as member countries (we’re going to need more states to catch up!).

I expect a drop today, but I’ve been expecting one for 3 days -- so what do I know? To remain in bull mode, let’s look for that Dow 11,700 mark and bear (oops, don’t say bear! Oh no, I said it again...) in mind that, just a month ago, we were looking to break 11,400 as a rally confirmation, so even a dip below 11,600 will be no reason to panic -- well, more so than I already am...

It will be very interesting to see how the Dow handles a poor durable goods report today. Why will there be a bad report? Because the Philly Fed already said so! Yesterday the market got all excited by the Richmond Fed report but none of the 500 analysts I read bothered to mention that, if they were countries, the Philly Fed is like the US while the Richmond Fed is like Mexico -- you can’t weight them evenly!

The S&P would like to establish 1,330 as a floor, but why not go for 1,340 while we’re at it -- it seems to have the juice for it. Below 1,315 is trouble.

The NYSE is our go-to indicator, having had trouble at 8,450 early in the month and well below its high of 8.651 in late April (before pulling back to 7,708 in just 5 following weeks):

We absolutely need Nasdaq leadership to build a sustainable rally as this index is still 115 points below April an May levels and, of course, miles below the all-time high.

The SOX are right between the inverted 50 DMA at 435 and the very steady 200 DMA at 480. If the rally is real the SOX must take out 470 this week and break 480 next week:

We also need to check on the TRANQ, who had a very strong finish yesterday. If they get off to a good start, then game on, but watch them for the first sign of market weakness -- especially at the 2,500 mark.

Oil will make another run at $62, but let’s keep watching my closing target of $61.69 for danger signs. We not only ignore the morning rally but short into it if I can find some overbought oils. We will be hoping for a crude drawdown of less than 1M barrels and distillate and gasoline builds of 3M combined barrels or more to take the air out of the oil stocks.

The Oil Service HOLDRs ETF (NYSEARCA:OIH) is up from $120.05, where we dumped the sector on Monday, to $126.50 in just 2 days, but needs to break back over $130 to reassert itself.

Bank of America Corp. (NYSE:BAC) and Citigroup Inc. (NYSE:C) upgraded Tesoro Corp. (NYSE:TSO), Valero Energy Corp. (NYSE:VLO), Frontier Oil Corp. (NYSE:FTO), Marathon Oil Corp. (NYSE:MRO) and Sunoco Inc. (NYSE:SUN), while Phil Dodge was on CNBC talking up XTO Energy Inc. (XTO), so we can expect a full court press to $62 this morning.

Unfortunately, because of these upgrades (and the suspicious timing of them) it will be tricky to gauge the Valero Rule today so let’s think about this during comments. We have until 10:30 for things to resolve themselves!

For those of you who don’t think hedge funds would manipulate markets -- check this out! And here comes the SEC!

China will be raising the yuan, putting pressure on the dollar and the euro, which may benefit gold. There are already a lot of big bets placed that gold will break back over $600, but a failure at $595 will chase a lot of people out of the miners.

It’s a fun market -- let’s enjoy it with tight stops (20% of the profits)!

Today's Picks:

  • Cramer is right about Walgreen Comp. (WAG) and, as I said last night, DivX Inc. (DIVX). I’m not chasing DIVX, and they don’t have options, but WAG is a very solid performer taking a nice bounce off the 200 DMA at $45 over the Wal-Mart news last week. I like the Oct $45s for $1.25 as long as the stock holds $45, but a very slow entry as it may still have some sellers waiting to trigger.
  • Monday I said “I’m hoping General Motors Corp. (NYSE:GM) has a little rally this week ahead of a get together with Nissan in Paris as I firmly believe there is nothing that can save this company, and I will be looking to go very negative on them near $33. Risk/reward on puts at the current price $30.62 is not worth it. “ Darn, we missed it! I was too greedy with my short target with GM hitting just $31.70 (up 2.6%), as I didn’t think they could screw up the talks this quickly... but they did it!
  • McDonald's Corp. (NYSE:MCD), one of my favorite companies anyway, just upped their dividend to $1 per share, returning 2.6% against today’s price. That makes owning the stock so attractive I like the $40s for .65 (only if the markets hold up!).


  • Oil Plays -- very scary, watch the tricky Valero Rule today (if it holds up today, just send me to Stockholm) and stop by comments for updates. We expect a big run-up into inventory, where it will be pot luck after -- no matter what the results. Watch out for the 10:45 headfake, but we should get a clue by around then.
  • Devon Energy Corp. (NYSE:DVN) is so far behind its peers in the rebound that I have to say I like the $60s for $3.20, following the Valero Rule, the inventory numbers, and staying above the 200 DMA at $61.19. If you can follow all those rules -- it makes a great hedge against oil puts!
  • Cramer fave Nabors Industries Ltd. (NYSE:NBR) is also suffering as “Nabors of Arabia ” is going to get creamed by an OPEC cutback. At $31 I will be very interested in the $30 puts.
  • As usual, Schlumberger Ltd. (NYSE:SLB) is my favorite put, now 52% of Halliburton Co. (NYSE:HAL) for the year. While Halliburton deserves every bad thing that happens to them, SLB is in the same industry... The $55 puts have been very reliable payers under $1.
  • Chevron Corp. (NYSE:CVX), ExxonMobil Corp. (NYSE:XOM) and Occidental Petroleum Corp. (NYSE:OXY) are also shorts on my short list but we have to wait and see what entries we get.

Read all of Phil Davis' articles on Seeking Alpha.