Options Trader: Monday Morning Ideas

by: Philip Davis

106 S&P companies including 12 Dow components report in the next 5 trading days. Today we hear from my favorite bank, Commerce Bancorp Inc. (CBH), which has great expectations that I am concerned they may not live up to. Wachovia Corp. (NASDAQ:WB) also reports today and should give us a real handle on the sector. Mattel Inc. (NASDAQ:MAT) reports this morning, but I don't think Q3 tells you anything about this company, but they cannot afford a miss at this height. Let's also take Eaton Corp. (NYSE:ETN) and WW Grainger Inc.'s (NYSE:GWW) results seriously today as an indication of the real economy.

Tomorrow is a big day with Intel Corp. (NASDAQ:INTC), Johnson & Johnson (NYSE:JNJ), Yahoo! Inc. (NASDAQ:YHOO) and Motorola Inc. (MOT). Wednesday is Apple Computer Inc. (NASDAQ:AAPL), AMR Corp. (AMR). Thursday we have Citigroup Inc. (NYSE:C), McDonald's Corp. (NYSE:MCD), Coca-Cola Co. (NYSE:KO), and Friday we hear from Merck & Co. Inc. (NYSE:MRK).

It is literally 12,000 or bust this week for the Dow, and it would be a shame if we can't at least visit the promised land -- if only for just a little while! Applying the 5% rule to the Dow and calling the last major support line 11,300, we get a probable pullback to 11,865 in the near future. Nothing to be alarmed about if it holds!

The S&P is right on it's 5% line above 1,300 at 1,365, and, being a less volatile index, will provide a better indication of true market strength, so let's keep a close eye on this one.

The NYSE is 7.5% above the 8,000 mark and faces a critical test here with a very likely pullback to 8,400 before making a run to 8,800 (see how bullish I'm getting, I'm assuming a run!).

The Nasdaq has a 5% mark at 2,310, above the 2,200 resistance it has often tested. With 40 points to go, the Nasdaq will be our canary-in-the-coal-mine if trouble breaks out.

Both the SOX and the TRANQ are well off their highs, still the most suspicious indicators to me. The SOX face a critical test of the 200 DMA at 477, while the transports just broke over their 200 DMA at 2,558. Failures at these levels should encourage you to take something off the table!

I'm going to adopt a sensible stand on oil this week. It should go down, there is no good reason for it to go up, but we will let ourselves be guided by our rules, rather than our feelings! From my perspective, until oil breaks $60 and, even then, back over $61.69, I will be a skeptical buyer at best. On the other hand, I will not open any new short positions without good reason as the market has just become too unpredictable.

Last week, we fixated on the one indicator that was going down -- very anti VRule!

I previously compared commodity investors to fans trapped in a sports stadium during an emergency and how some of the first people trying to get (Amaranth) out the door are getting trampled as the crowd gathers steam, but I'm starting to think it is more like a Roach Motel -- Investors Get In -- But They Can't Get Out!

We spoke about the glut of oil (which is old news) getting so bad that tankers are going from the Middle East to Singapore and being sent back to South Africa in an attempt to find buyers. Oil tankers are being used for storage as there is simply no room left, and investors are holding their bad hands, hoping to pull an ace on the last card rather than folding.

Let's not forget these are very wealthy people and they can not only afford to hold their cards long enough to put you all in, but they can also afford to take the loss and walk away, so you can't bluff them or force their hand -- this is an end game!

According to Forbes (and I agree), there is a domino effect to commodity pricing, so we need to watch them all for signs of collapse. Investors pulled just 1% out of natural resource funds (gold, etc.) the first week of the month with $263M out of $27B finding an exit. There is $96B tied up in emerging markets and over $500B in energy plays.

Take a look at what a 1% withdrawal did to the price of gold through in the 9/28-10/4 period Forbes tracked. http://stockcharts.com/gallery/?gld Gold fell from $607 to $559 in just 5 trading sessions! Oil went from $64 to $58 in the same period. That, my friends, is a lot of trapped investors!

Even long-time commodity bull, MS's Stephen Roach (I know, the irony!) now says:

"The tidal wave of money that has flowed into commodities over the last three years has transformed commodities markets from one of the best real-time gauges of economic activity to a financial asset like any other -- that is, one that's susceptible to hysteria and bubbles... Just as return-hungry investors chased these markets on the upside, they could well run like lemmings to get out on the downside... These data suggest that September's downfall in commodities might only be the beginning of a protracted bear market."

Gold is taking advantage of the dollar running into resistance to make another run at the 200 DMA at $600, and it's getting a huge technical push in order to avoid the 50 DMA forming a death cross below the 200 as soon as Wednesday!

For gold and oil this week it's really going to be all about the dollar as it tries to break its 200 DMA at 87.25, well below last November's post-Rita high of 92.63. According to the 5% rule, the next real resistances are 88.75 (2.5% below 91) and 89.25 (5% above 85), so look for a rapid dollar move if it breaks over the 200.

To show you how well the 5% rule works, look at the weekly chart. The triple top of the dollar was right about the 91 mark (we throw out spikes) and it fell from there to firm up at 85, 7.5% below 91. From 85 it has climbed up test the resistance at almost exactly 2.5% above lower resistance...

Vacant housing units are on the rise, which should bring down the core CPI over time, as rents are a huge component. It should be enough of a data point to allow the Fed reason to wait until after the holidays for another hike!


UnitedHealth Group Inc. (NYSE:UNH) is finally putting this option scandal behind them as McGuire is gone after yesterday's board vote -- the quick intatallation of a new CEO should save them but this may worry some of the other companies on the option scandal hit list.

Let's remember what is really wrong with these programs. McGuire has done a great job, but the employees are being squeezed by the company's health care cutbacks for their own workers:

"We UHG [UnitedHealth Group] employees -- who don't earn millions per year but perform a vital function for the company -- are left having to pay much more out of our own pockets," the employee complained in a recent email to TheStreet.com. "Maybe [McGuire] could give his own employees part of the millions he is using for the butterflies at the University of Florida so that we could have a normal co-pay plan like we used to, and like they offer most other employers ... [Meanwhile] , the UHG benefits people won't even address our concerns with the plan. They just say that is what is being offered, and we have to either take it or not."

As an entrepreneur and a shareholder of various companies I am torn on this issue. How much is enough? I don't blame the CEO's as much as the irresponsible boards who are so out of touch that they don't think they can find good help for under $20M a year. It's really all Fred Cook's fault anyway.

Today's Picks:
Like the Fed (we hope) I will watch and wait today as we digest this week's reports.

I buy nothing if any of the indices are negative! If we're not going over 12,000 I have little faith in the overall market, but I am starting to warm up to some calls pre-earnings for gambling money only...

  • It's just about a year since bird-flu was the biggest concern on the planet, and people are still dying, but it just doesn't matter anymore. Poor Tyson Foods Inc. (NYSE:TSN) still hasn't recovered at the stock plunged from $19 to $13 in the spring. It's a little risky to play the option, but it's a nice dividend playing stock with good potential at $15.10. You can also pick up another 8% by selling the Jan $15s for $1.20.
  • Research In Motion Ltd. (RIMM) is going to miss it's filing deadline on 10/17 as, "charges against past earnings will substantially increase as a result of accounting problems surrounding stock options." It may seem like a buying opportunity, but let's remember UNH (P/E 18) actually raised guidance in April, but the scandal has been a merciless drag on the company. Look at their chart compared to RIMM (P/E 53), whose scandal just broke.

From the Why-Didn't-I-Think-Of-This-Last-Month Department: No hurricanes + higher rates = big profits for insurers!

  • Allstate Corp. (NYSE:ALL) (10/18) may have a little more room to run with the Nov $62.50s at $1.80. This is a high-risk trade as there is unlikely to be a recovery if they blow it!
  • AIG is very flat for the past 2 years so it won't take too much to get them moving. Earnings are not yet announced so I will carefully enter Nov $70s at 0.35
  • Goldman Sachs Group Inc. (NYSE:GS) has decided Lowe's Companies Inc. (NYSE:LOW) (11/20) is better than The Home Depot Inc. (NYSE:HD) (11/14) with an upgrade to "Buy" on LOW and a downgrade to "Neutral" on their rival. We could discuss the merits of this call 'till-the-cows-come-home but HD is 15% ahead of LOW for the year, so I like the LOW Nov $32.50s for .35 as a catch-up play.
  • Intel Corp. (INTC) (Tues) is shipping a lot more dual-core processors than expected, so the Nov $22.50s for .40 are playable into earnings. Like all earnings plays, these are very high risk and should be treated as such!
  • Altera Corp. (NASDAQ:ALTR) is done with their options review and will be adjusting $47M in earnings, no small potatoes for a company that earns $300M a year, but they are a solid grower and I will be looking to pick up the Nov $20s for .65 as a pre-earnings gamble, but I'd be happier getting the Jan $20s for under $1 on a pullback.
  • Koninklijke Philips Electronics NV (NYSE:PHG) had pretty weak sales and earnings, something you would think concerns the tech sector. General Electric Co. (NYSE:GE) got a downgrade from ML -- good chance to get in again!
  • WorldWater & Power Corp. (WWAT) is a penny stock I'm starting to warm up to, but not yet. Good time to start reading up on them!
  • Merck & Co. Inc. (MRK) may have FDA approval on a diabetes drug (discussed last week), and with earnings coming up the Nov $45s may be in reach at .55.
  • Suddenly the Gap is out of favor on a Goldman downgrade, and the Gap Inc. (NYSE:GPS) $20 puts are just .40 for a nice momentum trade.

Read all of Phil Davis's articles on Seeking Alpha.