Options Trader: Tuesday Morning Ideas

by: Philip Davis

Is today the day we break orbit? Hard to say, these space flights are tricky... The last time the markets broke the laws of gravity was January 1995 when the Dow, after a full year of trying, finally broke 4,000 and went on to 5,000 in October, 6,000 a year later, 7,000 just 4 months later in February '97, 8,000 that July (finally a pullback there), 9,000 in April '98, one more pullback to 8,000 in September and then zooming right back to 9,000 in November '98 and flying to 11,000 by May 1999.

DJIA 1900s

Now you could argue that I'm being picky by counting that little blip of a pullback in 1994, and that our real takeoff point occurred when we broke 1,000 in 1981 which let to a factorial improvement in stocks over the next 20 years.

That move came after a 15-year break in which we were range bound between 600 and 1,000 and forms the basis for most living traders' understanding of the markets. The prior factorial expansion came from the 20 year period from 1942 to 1964 and, while I'm not going to jump right on the Dow 100K bandwagon just yet, I think it's important that we keep this little "rally" in perspective.

Dow Chart 30 yrs 21 11 06

I always say "If it's a real rally we'll have plenty of time to get in." As history shows us, we have about 20 years...

So let's get our Dow 12,500 rally caps on but perhaps the business we should get into is selling lots of Dow rally caps for the next decade!

I used historical charts to predict the current market move back on August 31st and nothing that's happened since has changed my opinion.

I'm sure if I would have made such an outrageous statement in Japanese in October of 2005, when the Nikkei was at 12,300, I would have been told by an army of experts how unlikely that was to happen but here's the Nikkei now, resting on the 5% rule, up from the breakout from 11,000.

Nikkei Chart 21 11 06

Perhaps, like electronics, the Japanese markets are a couple of years ahead of us too!

Speaking of Japan, the Nikkei stopped falling today and the Hang Seng kept going up as Hong Kong got a great Q3 report card, back at 3.5% for just that quarter! This is what they call in China, "moderate growth."

Spending on machinery and technology was up 12.7%, the most since Q1 of 2000. Inflation held steady at 2%!

Europe seems happy this morning but a lot of it was mining stocks as the opening of a new platinum ETF shot demand through the roof. I guess we will see a Copper ETF soon, as that commodity needs rescuing too!

Platinum Chart 21 11 06

In the biggest deal you never heard of, utility company Suez (NYSE:SZE) may not accept a $57B package from Gaz de France over deal terms. "If [Suez] shareholders were to be too greedy, well, [the merger] wouldn't go through," Finance Minister Thierry Breton said in an interview broadcast on French radio. Some broker is going to be bummed out about this!

Absolutely great article in the Journal about the Dems, the Wealth Gap, and the effects on the economy as well as a series of small experts writings on the economy by some of the leaders.

Also in the Journal, by a 2:1 vote, the housing bust is over! While they still expect home price declines next year, the economists surveyed seem to think the worst is behind us...

Will this be enough to finally break us free of the bonds of stock gravity? As I said yesterday, weekend sales figures will tell the tale!

Our indexes are holding up well, all we ever wanted out of this week was to hold our levels, anything up is a big bonus:

  • Dow 12,300
  • S&P 1,400
  • NYSE 8,900 (we are below that one)
  • Nasdaq 2,450 (this is amazing actually!)
  • Russell 790 (equally amazing)
  • SOX 490
  • Transports 2,700 (oops, they blew it!)

So we will watch the transports and pray they hold 2,650, otherwise it is really time to lighten up ahead of the holidays -- despite my generally bullish disposition. If it's a real rally, I can certainly afford to miss on month out of 120!

Somehow CNBC says "They" are expecting a 1.2MB build in crude tomorrow with an incredibly small 100Kb draw in gasoline and a 500Kb BUILD in distillates. It sounds to me like these expectations were written by T. Boone Pickens's P.R. firm, rather than by a sensible analyst!

They expect virtually no drawdown in gasoline ahead of the 3rd biggest driving weekend of the year and the only one where gas stations need to stock up with fuel after-hours AHEAD of the actual demand as there are 2 days off at the beginning of the weekend.

Talk about being set up for failure! At the same time our pals at BP PLC (NYSE:BP) and ExxonMobil Corp. (NYSE:XOM) came through to rescue oil from a very large fall by shutting the Alaska pipeline down to 25% capacity due to bad weather (bad weather, in Alaska, in the winter -- who could have expected this?). Note the very different analyst forecasts in this UK article.

Now it's not the pipeline shutdown per se that causes a price spike, rather the fact that we know the President of the United States will not use our massive Strategic Petroleum Reserve to ease a short-term supply disruption in order to keep heat affordable for American families this winter.

Let's watch our $59.17 level for a big test today, we may take some protective covers if we break back over there...

Gold is moving back up, more on the platinum trade than anything else, but let's see if they can break that pesky $630 mark.

If our miners are going to turn, Barrick Gold Corp. (NYSE:ABX) should be first and I like the $27.50s for $1.35 as a momentum play as long as gold holds $625.

I'm still waiting for the dollar to make up its mind and pick a direction. The yen has never been weaker in comparison to the Euro, but the dollar is not faring any better in the international currency basket.

The Democrats have caused their first official global shortage as Nike felt the pressure to address one of their most labor abusive suppliers, Pakistan based Saga Sports. The company is warning that a lack of child labor will lead to a world-wide shortage of hand-stitched soccer balls. That will teach those soccer moms to vote Democrat!

No picks today, we have plenty of stuff to watch and a holiday just around the corner. That Boston Scientific Corp. (NYSE:BSX) trade is on though as Medtronic Inc. (NYSE:MDT) had a great report.

We're still looking for Google $500, Microsoft Corp. (NASDAQ:MSFT) $30, Hewlett-Packard Co. (NYSE:HPQ) $40 and General Electric Co. (NYSE:GE) (which I'm worried about) $36. It would be nice if Sears Holdings Corp. (NASDAQ:SHLD) can get back to $175, and Texas Instruments Inc. (NYSE:TXN) needs to hold $30 while Motorola Inc. (MOT) needs to hold $22.50.

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