Options Trader: Monday Wrapup

by: Philip Davis

That was just pathetic!

Now they’re blaming IBD’s article that predicts that Bush intends to reduce the deficit (gasp), possibly by raising taxes (!!!) while conceding that global warming (but not evolution) might be real, which "will cost the U.S. about $212 billion to $390 billion in lost GDP each year, according to a wide range of estimates. Total cost (of saving the planet) by 2020: as much as $5.5 trillion!"

Europe Rocket Jan 23 2007

I was just watching Kudlow and Company and Larry is actually making the statement, "it’s just not worth it!" Well, Larry is about 60, so it may not be for him, but some of us have a slightly longer-term perspective. Meanwhile, we already have a single budget item that dwarfs that very bloated estimate of $390Bn a year - Iraq! We spend $300Bn in hard dollars to fight that war every year, and that’s prior to sending 15% more troops. No one has even calculated the total burdened cost to the GDP of that mess because all the people who play those sorts of number games are employed by Republican think tanks in order to explain to you how taxing oil companies and saving caribou hurts the economy.

As I said this morning, if we don’t go up we should just get out. Are you out? Yeah, well, me neither…
Meat Loaf Jan 23 2007

Face it, we’re not that smart. Do the markets have to send us an engraved invitation that says "Welcome To Hell" before we know we’re there? I’m willing to bet that even if we got the invitation, even if it were literally on fire with burning letters that said, "You are entering stock market Hell!," even if we could smell the sulfur, even if the card was hand delivered by vile demons - we would still turn to each other and say "Oh, they can’t mean THAT Hell - can they?"

Are we investors or gamblers? The difference between an investor and a gambler is that an investor knows when to walk away! We are just 125 points into my 295 point correction (and that’s optimistically assuming we hold 12,300) ahead of my pullback prediction that could take us down to 11,500. Our launch mission was scrubbed today and we may not get the go-ahead for a second attempt at this point so get used to the gravity - it’s not going to go away!

In orbital terms we may have just burned the last of our fuel and are now trapped in the gravity well of the primary mass (under-performance) with just one more chance to break free this week before we take a very wild ride back around the planet Zero Gains, where we will pass through all those lovely levels we broke on the way up. We could still pull it out, we might still pull it out, we…oh, who am I kidding - we’re going down!

We pulled out some big guns to start the week. After great earnings from Apple, GE and IBM failed to excite the markets, today we went with AXP (net income up 24%, stock down), CSX (profit up 46%, stock down 2%), PFE (penny beat, down 1%), PETS (sales up 21%, stock down 15%) and TXN (profit up 2%) who very surprisingly are going up on good news - maybe it’s the job cuts…

As I said Friday, "it’s OK to play in Wonderland if you have a handle on the topsy-turvy logic - otherwise it is 'off with your head!'"

Maximum Financial Risk Jan 23 2007

Clearly, we are at least in the lower level of Anxiety with many of you in Denial with Fear, Desperation and Panic to look forward to. I know many of you are waiting for them to slam on the brakes and reverse the roller coaster back up the hill to Euphoria and skip that nasty Capitulation, Despondency and Depression that most people have to go through before the market turns, but THAT’S PROBABLY NOT GOING TO HAPPEN!

I’m in the last leg of contrarian optimism myself and it’s wearing thin! Even though we had three consecutive weeks of 100% gains to start the year, I’m not going to let the portfolio go negative this week and we’re already cutting it close so I’d rather take it off the table than risk more of this nonsense:
Miner Holding Cage Jan 23 2007

• Dow 12,477 is not good! Failing 12,500 stinks!
• Transports lose 1% on a day cruder drops another 1% - 2,800 acts like an unbreakable wall - pathetic!
• S&P 1,425 is now a ceiling?
NYSE held 9,100 - yay, woopie, woot…
• Nasdaq took a bounce off 2,425 - really the only thing that gave me hope (and I sold my Google puts so wish me luck!). This is what they call "grasping at straws."
• SOX almost sort of kind of bounced off 450 but it’s like watching a car crash in slow motion.
• Russell took another sad little bounce off 775.

US Markets 19 01 2007

The NYMEX closed out the month at $51.20 with just 28,000 contracts remaining open for February deliver. This is a far cry from the 77M barrels that were sent to Cushing for January and there are probably some good shorts to be had in that town! Not to worry though, March has an amazing 393M barrels on tap and we should start tomorrow with a bang as oil opens around $52.50 on the new contract.

I can’t wait to see how CNBC pretends tomorrow that oil actually went up a dollar overnight! It’s fun to be lied to when you know it as you can watch them keep changing the story to fit the facts. We had a really fun day hearing how cold weather and rising demand and global concerns were pushing oil higher all morning as oil rose to $53.40. All the pumping rhetoric suddenly failed them as crude dropped $2.27 once the NYMEX actually opened.

I said in comments yesterday that we have a two-day pump-fest, likely into inventory before reality catches up with the energy traders. They get a big break tomorrow with the new contract price but ZMan boldly predicted this morning another test of $50 before the end of the week and so far his aggressive call appears on target!

Make sure you check out ZMan’s section because he made an exhaustive round-up of potential oil plays and I’ll be targeting a few over the next couple of days. Gains by VLO, OII, OIH, CHK, EOG were somewhat delusional today as those investors are just rolling right through denial on our little chart and we will jump on top of that wagon to the short side just as Fear kicks in at the $49.50 mark!

All this oil fun came on a stubbornly flat dollar that just refused to fall below 85 as the 200 dma comes down to meet it, now at just 85.44. Scroll down to the weekly chart and you’ll see the 40 wma has moved down to 85.16 and I’m sorry I’m not a chart guy and I can’t draw all the cool lines and arrows, but with just .11 to go, we should have a MAJOR inflection point on Wednesday morning, AFTER the State of the Union speech! Isn’t it amazing how all these events can come to a head like that?

Gold did not like that one bit and fell sharply from the $640 mark on their morning pump, settling down $2 at $634. Speaking of being on the wrong side of a trade - gold usually tracks closely to oil but oil has fallen away from gold by 25% since mid-August Yet the extended contracts continue to climb up to the sky, with the Dec 2011 is going for $808 while oil Dec 2011 oil is down to $59.97. Either oil or gold traders are very, very wrong!

Keep watching copper for a possible bounce that will confirm that gold traders aren’t crazy, or a break below $250 that signals a multiplex of pain for commodities of all stripes. As I’ve said, there are a lot of people on the wrong side (possibly) of the dollar trade and the December contract for dollars is trading down at 84.09. You can see from this little set how interconnected all these assumptions are!

Oil Dollar Gold 23 01 2007

Here’s a great Forbes article on the 10 most disruptive business changes of 2006!

Good luck to all of us tomorrow as we have a heavy day capped off (or bottomed-out as the case may be) by the President!