Options Trader: Tuesday Wrapup

by: Philip Davis

A nuclear power declared war on us this morning. And all the Dow does is drop 30 points?!? Kim Jong II better develop a Kryptonite Bomb if he wants to bring down this market!

We had a Core PPI that was triple the expected .2%, an annualized inflation rate of 7.2% -- but it did not matter! Intel Corp. (NASDAQ:INTC) got a Goldman Sachs Group Inc. (NYSE:GS) downgrade -- didn't matter! United Technologies Corp. (NYSE:UTX) fell 2¼% for no good reason -- and it did not matter! Merrill Lynch & Co. Inc. (MER) got a cold result from great earnings -- and it just didn't matter!

Nope, the Dow recovered from a 90-point drop to bounce off 11,887 -- 23 points above our target with a very impressive end run.

The S&P missed my 1,350 target by 7, and the NYSE, our fearless leader, never even went as low as 8,600. The Nasdaq stayed 1% above my 2,300 line, but, as I said this morning, "you'll be worried long before it drops 63 points!"

Interestingly, Hewlett-Packard Co. (NYSE:HPQ) gave us an all-clear signal today, moving ahead of the major averages over 30 minutes before they turned up -- we will watch this with great interest tomorrow.

The SOX had an awful day, dropping 2.5% further away from the 200 DMA of 477 and testing key resistance at 460. The transports also plunged 2.5%, despite falling oil prices and finished just over there 200 DMA of 2,560 after Werner Enterprises Inc. (NASDAQ:WERN) warned about Q4.

I hate to tell you but I'm a little worried that that's going to matter tomorrow...

The PPI hurt us today, but we started at such lofty levels that we could weather even a 90 point pullback without getting into technical trouble, but our safety net has been frayed, and I'm not sure we can stand another bounce!

Oil was kind enough to drop a dollar today and finished the day at $58.95, failing to hold the $59 mark, but that just won't matter tomorrow when the contract rolls over and the premium jumps us back over $60.

I am developing a new concept for oil: I'm willing to let them keep the price up at this level, as it is spurring an incredible amount of innovation. Last time we had an energy crisis it was in the pre-internet, pre-computer, pre nano 1970s and innovation took time. In the 21st century, almost every week that oil is over $50 I see a new way of not using it.

Zman points out that Beer companies are making fuel out of sugar in Japan with a self sustaining ethanol production facility that costs just $0.25 per liter. I'd be much more excited if I know how many gallons that was, but let's just say that's pretty darned good!

It used to be that if you came up with something annoying to oil companies, like a car that runs on water, they would send legal hit-teams after you, pay you off and bury the blueprints. But now, with so many billions at stake, there are plenty of well-heeled venture capital companies who will not only fund the development, but can roll a new fuel source out around the country in 18 months!

So my new opinion is: Every month they keep oil prices high they are spinning the wheel and hoping someone doesn't come up with a solution that makes oil about as important as coal which, less than 100 years ago, made wood obsolete as a fuel source.

In the wonderful world of coincidence-or-genius -- the continuous contract we track on StockCharts.com as our primary reference shows the rollover contract priced at $61.75, .06 over the target I set October 3rd after bouncing from the low I predicted on September 25th.

Gold fell to $589 today, drawing the 50 DMA lower and lower to the inevitable death cross even as the dollar continues to have trouble with it's own 200 DMA.


It was generally a nice, relaxing day as we watched the markets from the sidelines. There was no reason to buy or sell, and the real fireworks came at the end as we got some big earnings news from some of our favorite stocks:

Motorola Inc. (MOT), my retirement stock, dropped 8% after hours on a penny miss even though revenues were up 17%, but I'm not worried as they are shipping a new line and the turnovers simply missed the arbitrary date line. The GSM rollout in Europe is behind schedule, and I see this drop as another pending entry point.

Intel Corp. (INTC) let Goldman Sachs Group Inc. (GS) know they are on the wrong side of pretty much everything this quarter with a .04 beat (out of .17 expected) on robust revenues. Gross margins were in-line, which is great on a new product rollout and, most importantly, they see prices improving (not good for you and me but great for them!).

Intel has already shipped 6M dual-core processors and is already shipping quad processors in quantity, well ahead of expectations as well as rival Advanced Micro Devices Inc. (NASDAQ:AMD). If you're a gamer, you will really appreciate this demo!

International Business Machines Corp. (NYSE:IBM) had earnings no one can argue with! Revenues 3% over consensus and earnings a 10-cent beat of $1.35 projected by 23 analysts including Goldman who downgraded them on July 20th when the stock was at $75.

Yahoo! Inc. (NASDAQ:YHOO) was in-line with revenues slightly below forecasts and the company guided down for Q4 with lowered expectations, but it wasn't bad enough for the nerves of Cramer's fans who shorted in the AH yesterday and bailed out in the AH today, driving the stock up 3% in the post market.

The company announced the formal rollout of the long awaited Panama upgrade and a $3B stock buyback, and it remains to be seen how the trading will go when the big boys have at it tomorrow.

Sony Corp. (NYSE:SNE) fell too fast to buy, which is a shame as the Nov $40 puts finished at $1.55 (up 75%).

Aqua America Inc. (NYSE:WTR) dropped off today and the Mar $25s came in at just .90, so I'm happy there!

Some plays were just too tempting so we took some in comments as very small gambles:

  • ConocoPhillips (NYSE:COP) $50 puts for .25
  • Chevron Corp. (NYSE:CVX) $65 puts for .50
  • Valero Energy Corp. (NYSE:VLO) $52.50 puts for .65

I also made Occidental Petroleum Corp. (NYSE:OXY) an earnings play with the Nov $45 puts for $1.15 because:

  • The average cost of oil last Q3 was about the same as this Q3 so I don't believe they will do more sales.
  • They reported $1.35 last Q3 and got crushed for it, down from $44 to $33 in 2 weeks.
  • 60 days ago (and I kid you not) the earnings expectations on OXY were $2.73 and the stock was at $52.
  • They earned $5B last year, $2B so far this year, and have to do very well to make up ground.
  • Cost of revenue is up 20% from last year, and last Q3 they paid an unusually low tax of $44M on $1.5B in sales.
  • Their cash is up $700M but their AP is up $300M more than their AR.
  • "Other Liabilities" were up $500M last Q and "Deferred Long Term Liabilities" ran up $900M from last year.
  • They did buy back $900M in stock (2.3%), but borrowed $1.1B this year and Cap Ex has grown by $100M per quarter since last year.

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