Options Trader: Friday Morning Ideas

by: Philip Davis

So we determined last night that this rally is fake(ish). Now we have to think about why? What would the motivation be? Given the non-stop market pump-fest this week, it is logical to assume that they are trying to get retail buyers to jump into the markets.

You could say that this is logical, as no one likes to invest alone and, if the market is such a good thing, of course fund managers want to share the joy with as many people as possible.

A pessimist might say that this is all window dressing ahead of the close of the quarter, and what fund managers really want to do is get you to take stocks off their hands, then wipe you out so you will give up managing your own money and invest in their funds (which should post some very impressive Q3 numbers). Perhaps they think a downturn is coming and this is their last chance to get you investors to hand them 1-2% of your money (per year) in exchange for their "expert" advice.

Having the S&P up 8% so far this year means your fund can return 10% and "beat" the S&P by 25%, especially if they cash out Monday and drop the S&P to assure you will outperform it for the year! But that would be wrong...

Anyway, there are plenty of other ways for big companies to make money.

So let's Party!!!

Asia is up, Europe is up, but who cares about them today -- 30 companies are about to break a new high! Forget about the fact that it's not the same 30 companies or 6 years of inflation mean this new high is not even close to break even or that the biggest gainer, ExxonMobil Corp. (NYSE:XOM), added $300b of Dow market cap (10%) by sucking it out of our wallets at grossly inflated, possibly manipulated prices.... Party time!!!

Dow 11,718 -- Woot, woot!!! Let's go!!! Yes, we may hit 11,722, a level we haven't seen since January 2000! Why haven't we seen it since January 2000? Well because it was an overbought peak and the market dropped 2,000 points by April 2000 and then continued a prolonged downtrend all the way back to 7,300 in early 2003 ----- but forget about that!

Party time -- woo hoo!

On a day like today I always turn to the USA Today (front page, not business) to see what people are really thinking. Here are the "Business headlines:"

Billionaire Investor Seeks 12% Stake in General Motors Corp. (NYSE:GM) -- forget the fact that he already has a big stake to protect. HP Execs Deny Spying in Snooping Scandal -- who needs facts when you hit an alliterative triple?

What? No headlines about Dow 11,700? How about the NY Times? Nope. Washington Post? Nope. But the Wall Street Journal rates it page one! The slant of the Journal article is that bearish fund managers have been caught flat-footed and now may be the time to jump in.

There's a very smart conventional wisdom that says once an investment story hits the cover of time magazine -- it's already over. I'm not sure if that still holds up in this hyper-speed information economy but I've never lost betting against it so I'm not going to now!

My super scientific headline sampling of 4 papers tells me we may have a little further to go with a margin of error of 60% or so ------- Party Time!!!

If I were an evil market manipulator I would want to hit the Saturday papers when people have time to read about it and also after Time and Newsweek go to print so I can assure a headline next week as well. This will bring in the maximum amount of suckers (I mean new clients), for me to dump (I mean share they joy of ownership of) my inflated (I mean valuable) shares on.

Of course we will watch the Dow, but I'm moving into 85-90% cash over the weekend. If I LOVE a position, I sell 80% of it -- so keep that in mind as we talk about open positions. If we confirm a real rally next week we still have a good 300 points to go before our next real Dow resistance at 12,000 (still 4,000 behind the Nikkei), and I'm sure we'll find something to trade...

The S&P faces a real test at 1,340 and a strong finish up there will give me the strongest reason to remain bullish into next week as I think it may make a sustainable floor on the way to 1,350+. 1,325 is still the big danger zone, but I'm pretty sure THEY want to go into the weekend with a new record and the pullback yesterday may have been a ploy to make sure all the weekend reading is about the markets.

The NYSE has long been our leading index and can be forgiven for being a little tired but I really want to see it get over 8,500 and under 8,400 is very bad news.

The Nasdaq faces very light resistance at 2,275 and should have no trouble getting to 2,300 and really must go well past there to confirm a full rally. Even a point down on the Nasdaq would be a terrible signal.

SOX are still struggling under 460, which makes no sense as they were above it on the 19th, while the transports are in apparent economic denial as all these booming Dow companies must be teleporting their goods to consumers.

Oil is moving down in foreign markets, but that is meaningless until our U.S. traders get ahold of it, so it can do the master's bidding! After yesterday's sharp bounce off $64, we can hope for another test of $62 with our 5% level of $61.69 hopefully NOT providing a floor. $63.28 is the upside notch we are trying to hold -- which could really set us up for another down leg next week.

Only the Jim Cramer jumping out the window sound effect can do justice to the natural gas market as it's finally occurring to people that, if you don't put a cap on it -- it just keeps coming out of the ground whether you want it or not!

Gold is going to do whatever the dollar doesn't, and demand for U.S. stocks feeds a demand for U.S. dollars (that's what you buy them with), so a stock rally should hold gold down a bit. This will be a good time to gauge the strength of the $600 level.

Let's have fun today -- it's Party Time but watch out for a possible hangover next week!

Today's Picks:
It's a little early for the Analyst of the Month award, but I don't see who is going to beat Think Equity, who raised their price target today on Research In Motion Ltd. (RIMM) to $115, up slightly from yesterday's $45! Gee, ya think? Well they were off by $70 before, so they must really have a handle on this thing now! Sometimes you should just withdraw from covering a stock...

If you are in RIMM, remember out admonition to Always Sell into the Initial Excitement! You rarely get a better price on an option than you do in the first 15 minutes of a huge run-up. Roll if you want to but protect those profits! There is a detailed discussion of this in last night's comments.

  • Palm Inc. (PALM) is the way I'd like to play RIMM. I am happy to announce a the formation of a new team to play in league with the Boeing Buddies™ and the Consolation Prize Team™. The newly formed Valuations Gone Wild! Palm is going to be the charter member with a P/E of just 4.55 (lower than builders and oil companies) selling 40% below April's levels. I like the $15s at .30 as well as the Jan $17.50s at .60 as a pre-roll.
  • IMAX Corp. (NYSE:IMAX) will bat second for the Wild team after dropping to $5, down from $11 in August. I wasn't brave enough to buy them at $4.43 on last month's crash, but I think they are a long term buy, either straight up or playing the high risk March $7.50s for .30 (a little of each is good for me, taking the stock off the table at $5.30 and letting the free call ride). A conservative fellow could even buy the stock and sell the Apr $5s for .95 for a nice 20% return over 6 months and 20% downside protection while we wait for a buyer.
  • Also in last night's discussions we decided that Genentech Inc. (Private:DNA) was a good spread play with earnings in 10 days and the $85 calls for $1.35 and the $80 puts for $1.55, as last earnings we got both a $10 up and $10 down move!
  • Chevron Corp. (NYSE:CVX) bounced off the declining 50 DMA at $65, which is easy to remember as a stop, so I like the Nov $65 puts for $2.30 and the Nov $60 puts as a pre-roll.
  • ExxonMobil Corp. (XOM) is still in that sweet spot for the spread we discussed yesterday with the Nov $70s at $1 and the Nov $65 puts at $1.15, but I'm naked short on these guys.
  • Valero Energy Corp. (NYSE:VLO) has been having a lot of trouble at $52.50, and the $50 puts are $1.20 with a .40 trailing stop if you can risk it.
  • Swift Energy Corp. (NYSE:SFY) got a Forbes pump on Tuesday, and also bounced off the falling 200 DMA at $42.25, and you can short this stock at $42 and sell the Nov $45 puts for $5 which protects you to within $2 of the all-time high and gives you $3 in 7 weeks if you are called away.
  • The Houston Exploration (THX) fell so hard they don't even list $50 puts for November! The Nov $55s aren't bad at $2.45.

With all oil plays, we are strictly following the Valero Rule!

Read all of Phil Davis' articles on Seeking Alpha.