Options Trader: Thursday Wrapup

by: Philip Davis

That was nasty! Not really bad in the big picture, but for those with a short-term view of the markets, that was a scary little dip today. Canaries are dropping like flies and, to further puree a metaphor, we have a full-fledged flame-out on our Nasdaq engine and the SOX drive is shot!

Well that's OK. The manual says, "In case of Nasdaq engine failure switch to the Transport drive." What? Down 16 you say? How about the backup Russell engine? Fell apart at 780? OK -- time to panic! (just a little).

Cat 19 01 2007We did hold our senior index levels today! But when you're driving with 7 major tracking indices and you have a blowout on 3 of them, you'd better schedule a pit-stop fast and rotate your positions or you may crash and burn on the next curve!

US Markets 19 01 2007 Chart

Hard to get enthusiastic isn't it?

I can forgive the Dow, the S&P and the NYSE -- they are dragged down by the commodity sector, but the other indexes are supposed to provide some sort of leadership and they have really fallen apart. Blame Bernanke for being a downer this morning, warning congress that "rising entitlement spending could create a 'vicious cycle' of rising debt and interest payments and an eventual fiscal crisis." Not exactly a tune you want to whistle is it?

Oil was no help today, falling so hard so fast that it made investors think something was wrong with the global economy, despite CPI and PPI evidence to the contrary. International Business Machines Corp. (NYSE:IBM) net was up 11% but it sold off, Apple Computer Inc. (NASDAQ:AAPL) was up 48% but it sold off. Merrill Lynch & Co. Inc. (MER) was up 68% but they sold off...

Hey -- I found one! Bank of New York Company Inc. (NYSE:BK) earnings were up 300% -- all the way to $1.79B -- and their stock actually went up: .69! That's almost 2%!!!

2%??? The market cap of BK is $30B and they earned almost $2B in one quarter and, other than the little gap up this morning, they flatlined too! Something is just not quite right here. Are people bailing on the markets or are stocks, which are up an average of 20% since last January, simply being pinned down into the expiration of many long-held January leaps? We'll have a clearer picture on Monday!

Oil Use 19 01 2007Today's crude inventory report was a total disaster for the energy sector. We had an overall build of 11 Million barrels of crude in a single week. To put this in perspective, on weeks where the draw is just 500Kb over, oil can spike up $1-2. An 11Mb build, at this time of year, can only mean demand has fallen off a cliff AND supply is still rising.

The chart on the left is meant to illustrate how we will run out of oil, and has some very conservative supply numbers, yet it still shows massive supplies of oil through 2020!

Folks, we've been lied to by energy traders (T Boone), Investment Bankers who fund mega-mergers between commodity companies (NYSE:GS), our government (NYSE:HAL) and of course, CNBC (Convincing Neophytes to Buy Crude) who have engaged in a 7-year campaign to drive the price of the second most abundant liquid on earth up 600% since 1999.

Now this bubble is bursting the same people who were running around with pins poking at housing are all just shocked and amazed that maybe something that was as recently as 2002 profitably delivered for $20 a barrel just might not suddenly be worth $80 or $70 or $60 or, maybe not even $50 a barrel, five years later.

That being said, we're already below my target for the week of $50.79 and we did take some more off the table today as the NYMEX boys whittled 45,000 more contracts off the February expiration and the urgency to sell may have been abated for the week.

The dollar went nowhere again as nothing Bernanke said was very encouraging (perhaps it was his comment that the U.S. has $38 trillion in unfunded long-term debt obligations -- making us the General Motors Corp. (NYSE:GM) of nations) but gold decided not to wait and fell back $5 to $628.

Oil Dollar Gold 19 01 2007 Chart


We continued to lighten up on positions today, with good timing as the markets turned choppy. Our energy puts are making up for our tech calls, but we are reaching our tolerance limit if the Nasdaq slide continues.

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