Options Trader: Monday Morning Ideas

by: Philip Davis

Come on everybody -- let's play stock market limbo!

How low can we go without falling down?

The Nikkei took our news very badly and dropped 317 points, but they do tend to overreact. The rest of Asia was mixed with India actually adding a percent as great earnings push them to a new all-time high.

Japan's reaction was mostly on worries by exporters who, for some reason, think an abysmal-looking U.S. GDP report is cause for concern. Quick, someone needs to tell Japan "Itto dake iiya kotogara" (perhaps my Japanese is rusty?) The Hang Seng was closed, so tomorrow will be very interesting in Asia.

European markets are down about a half a point but they are playing catch-up as most of our drop on Friday occurred after they had closed. UBS is under SEC investigation for manipulating the $4T Treasury market -- "One senior bond trader familiar with the concerns of regulators says officials also have been worried about whether hedge funds or other investors were asking brokers to take certain securities off the market, to make certain positions more valuable."

Despite concerns at home, Mr. Jones still rides 100 points above the 12,000 mark, and, as I said on Friday, is riding 300 points above what would be a healthy retracement to 11,787. Let's keep an eye on that and the 12,000 mark for signs of a real correction.

Wal-Mart Stores Inc. (NYSE:WMT) decided to spook the markets today with some very weak October sales, but I suspect it's a competitive/product mix problem rather than a sign of the economy slowing.

SPX Chart 30 10 06I'm very comfortable if the S&P holds 1,370, and we'll probably know today if it can or not, but 1,360 provides another good area of support as did 1,350 before it. If we can hold 1,350 long enough to meet the rising 50 DMA (perhaps 2 weeks), then we should be in very good shape for a year-end rally.

The NYSE has 2 weeks worth of support at 8,700 and will likely be a trendsetter this week, as a move back over 8,800 will give us a very bullish signal.

The Nasdaq makes a downside indicator with that critical 2,350 line we worked so hard to get past and will prove the weakest below that point. As it is almost certain to open below it, we will watch the Nasdaq very closely today!

COMP Index Chart 30 10 06

The SOX are also resting on a critical point, just on the still-inverted 50 DMA at 452 and, as usual, will let us know if the Nasdaq has a chance or not. The chip sector is still stinging from that Goldman warning on Friday, and is most likely to lead the markets lower today. Transports are in far less danger but let's watch that 2,565 line.

We got through another weekend without anything blowing up in the oil patch, and that's going to hurt as the roaches scramble to free themselves from what is likely to be a pretty big build on Wednesday as the backed up tankers from last week's LOOP closure start hitting the ports.

Short contracts on the NYMEX outnumber longs by 5,000. With each contract representing 1,000 barrels of oil, that's a $300M bet on oil heading down this week!

Another bet we are watching is our friend who bought 94,000 Energy Select Sector SPDR ETF (NYSEARCA:XLE) $53 puts last week for $2. Those puts are now worth .35, and I'm going to pick up some for myself along with the now more sensible $55 puts for .90!

We still haven't broken my $61.69 danger zone on oil, and the long-term trend remains down, but we need to disconnect our brains and be guided by the Valero Rule, to which we will add the XLE for the week.

Gold has jumped over the 200 DMA at $603 and, if it holds that, will flash some nice bullish signals that should make us very cautious about oil prices. The dollar just fell through the floor last week on a soft Fed before the GDP put a nail in the coffin in the eyes of foreign buyers. This is a critical support level for our currency and is the thing most likely to take our economy down in the near term!

US Dollar Chart 30 10 06

Bear (oops, don't say bear!) in mind that last two week's dollar drop of 2.5% should have given us a $15 rise in gold to $615, and should have added $1.55 to the price of crude -- keep that in mind as you track commodities.

Homeowners with ARMs are concerned but not necessarily worried about rising rates. Are they delusional or just better at math than we are?

Today we get personal income and spending data that should help us confirm the mood of the U.S. consumer. Tomorrow we get the consumer confidence report which, if it looks like last weeks sentiment numbers, could help to bring some buying confidence back to the market.

Also on Tuesday we get the Chicago PMI, and Wednesday brings us the ISM numbers and domestic vehicle sales (uh-oh), and Friday we get the service-sector report rounding out a dull data week.

October became the worst month in Iraq since January 2005 with the 100th U.S. serviceman killed over the weekend. White House spokesmen said that October, "is a long month." This pushes this October up to the 4th deadliest month since the war began, ahead of 18 other months when the war was officially on! Stay the course people!

Don't worry, the Republicans are not going down without a fight!


On Friday morning I said Boeing Co. (NYSE:BA) had bottomed, and I suspected that the statement by Emirates that they would stick with Airbus "for now" would not last long. Well, it lasted the whole weekend, but today they are switching 10 A340 orders for 777s -- this is very bad for Airbus as the 340 isn't even the one they are having problems with!

Singapore Air had disappointing profits due to fuel prices, and is projecting far lower numbers next year due to missed delivery of the A380s. Singapore has 10 on order and Emirates 43, representing a good chunk of the 159 orders Airbus has had to date.

Every time you hear this happening, think how good this is for Boeing! They made the right choice by tailoring their line to be fuel efficient rather than opulent. That choice was made years ago, when fuel was still cheap, and management deserves a lot of credit for being ahead of the market. The delays will also help BA by lowering materials cost as Airbus delays 159 planes worth of parts for at least another year!


We are watching and waiting with cash in hand today, seeing which way the wind blows.

Today is a light earnings day with Verizon Communications Inc. (NYSE:VZ) being the biggest star, and they look very good as the MCI acquisition is already paying off. Lots of miners report today and they should be light compared to last year as expectations are much higher now.

Blue Nile Inc. (NASDAQ:NILE) is always interesting and will impact Tiffany & Co. (NYSE:TIF). Humana Inc. (NYSE:HUM) is a sector mover (should beat), and Hydril Co. (HYDL) tells us a lot about what's really going on with the drillers.

If HUM does well I like the UnitedHealth Group Inc. (NYSE:UNH) $50s for .85, as they got an unfair sector pullback last week but held $49 well.

Tuesday we hear from Proctor & Gamble Co. (NYSE:PG), who have high expectations, as well as Archer Daniels Midland Co. (NYSE:ADM), which I like but I won't play. Baidu.com Inc. (NASDAQ:BIDU) checks in with what should be a good report, but Cummins Inc. (NYSE:CMI) is the most important report of the day as they can confirm or deny a big slowdown in the economy. Eastman Kodak Co. (EK) has been a long turnaround story, and estimates are all over the place, and I wish I had confidence -- but I don't.

We don't even try to guess DreamWorks Animation SKG Inc. (NASDAQ:DWA) as the world of studio math would make Einstein cry. Oshkosh Truck Corp. (NYSE:OSK) is another big economic indicator, and St. Joe Co.'s (NYSE:JOE) call will be interesting. Valero Energy Corp. (NYSE:VLO) and Vornado Realty Trust (NYSE:VNO) give us windows into two market-moving industries, while Vonage Holdings Corp. (NYSE:VG) will finally let us know what all the fuss is about.

That's just the first two days of the week, so you'll forgive me for sticking to the sidelines for a day or so! I have meetings today but will check back in the afternoon -- hopefully the main site will be back by then.

Now we are happy with our Yahoo plays as Merrill Lynch & Co. Inc. (MER) gives us a big upgrade all the way to a buy ($32 target) from neutral! Let's see how we handle resistance at $26.50, but through that will be smooth sailing to $30! I'm not adding, but the YHOO $27.50s for .20 might be a fun play.

There are a lot of stocks I'd love to buy if they pull back a bit more, but I'm not going to hope for too much of a correction, as I only just began to enjoy disconnecting my brain and buying into the Energizer Market!

We'll see if this bunny has real power this week.

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