Options Trader: Tuesday Morning Ideas

by: Philip Davis

Phil Davis submits: Turnaround Tuesday? Yes -- I'm hoping if I put up a headline it might come true!

That means it must be time for our mantra: "It is not our job to save the markets." Write it down or print it up and stick it right on top of your monitor. Don't just look at it -- say it out loud every time you are about to call a bottom...

The markets have turned bearish. It is always painful to give up on positions, but we have to face up to that reality at this point so we're going to watch for some downside break points and stand ready to unwind first short, then longer positions and move back to cash.

This does not mean we turn around and start shorting everything (as many people are suggesting). When a bear breaks into your nice, comfortable home and ruins your party, the first reaction of a logical person is not to jump on its back and see how far you can ride it!

Bears cause mayhem! Mayhem is not a good investment vehicle. We will need to study the path of destruction and try to ascertain which stocks are squarely in the bear's path and which will manage to avoid damage. We take on the role of insurance adjusters, and identify all the fragile items first before deciding where to allocate our risk capital.

One thing we can count on when a bear shows up at a party is that at least some of the guests will leave!

The question is going to be how many will head for the exits, and how many will stay behind and try to drive the bear out of the house. As all you woodsmen know, it always makes for a great story when you drive off a grizzly -- but you're risking some very major scars in the effort! Hence the mantra...

Asia seems unperturbed by the growling coming from our room of the house. China is cracking down on bribery and has "detained" 22 people including workers from ABB Ltd. (NYSE:ABB), McDonald's Corp. (NYSE:MCD) and Whirlpool Corp. (NYSE:WHR). It's not that they don't want the bribes -- it's just that you have to do it properly. Writing checks is considered lazy and distasteful...

Asian markets were generally flat today, which is not bad after our own poor performance. China Mobile (Hong Kong) Ltd. (NYSE:CHL) continues to be a powerhouse, and we do need to get back into them when (and if) they pull back. Banking was way up, but China Life Insurance Company (NYSE:LFC) took a 6% hit on profit takin. This is why I'm sticking with the iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI) as I said in our discussion yesterday -- it's just a safer mix!

We're finally getting to Europe, and the FTSE, which includes some of our stocks, has flatlined and is having a bad day today. The bulk of Europe is off about half a point, hoping as we are that the U.S. might get a bounce today.

Let's watch our bounce levels but BEAR in mind that the floor is a long way down, and trying to find firm footing in mid-air hardly ever works out -- even for cartoon characters:

US Markets 23 01 2007

Well I don't know about you but I'm discouraged!

We'll see if the new contract can hold $53 as Nigerian rebels are back on the march, but $52 needs to firm up as a floor on the new contract. An air turn at this level is not smart, but the traders have a very short window to pump their wares as the current contract expires in just 20 trading days (President's day is a holiday). Even if we assume they want 80M barrels to be delivered in March, that's still 310M barrels that need to be pared off between now and Feb 20th.

We can expect a huge drive to $55 ahead of inventories, but $54.60 should be the best they can do, and I wouldn't be surprised if they top out around $53.30 even with a dollar pullback. So let's keep an eye on those levels. Anything down is a terrible sign for oil, but today might be a good day for us to take some covers on our remaining oil puts.

Gold is also going to go for it, as a major effort has been made this morning to sell off the dollar by OPEC countries who hope to get more money for oil by devaluing the currency we buy it with. It's an interesting strategy because a rise in the price of oil creates a demand for more dollars, and the dollar has held very steady despite the fact that international energy traders need $50B less dollars a month to buy oil than they needed just this past summer when the dollar was at the same level. I wonder what all those dollars are being used for now?

Someone is using some of it to buy gold today, probably over the Nigeria thing, and gold will make another attempt to hold the $640 level again. Don't forget it's dollar inflection day tomorrow -- a failed attempt to drop the dollar today could lead to a huge breakout tomorrow.

Oil Dollar Gold 23 01 2007

I'm not going to say anything negative ahead of the President's speech tonight, but I find it interesting that the WSJ, a big supporter of Bush, ran a less than flattering review of his past six SOU addresses, which only serves to remind me how silly it is for the markets to react when 90% of the "promises" made go unfulfilled.


No picks for today, other than that I think it's steady as she goes into the SOU and hope for a relief rally if we come out of the evening with no major policy shifts.

  • Northern Santa Fe Corp. (BNI) had huge earnings.
  • CSX Corp. (NYSE:CSX) did very well as they get a double win on ethanol, shipping out corn and grain and shipping back refined product.
  • Johnson & Johnson (NYSE:JNJ) had a nice beat.
  • Nasdaq Stock Market Inc. (NASDAQ:NDAQ) is getting hammered this morning -- glad we took those!
  • PetroChina Company (NYSE:PTR)'s second half earnings grew at 4.9%, a far cry from the 40% gains they posted in the first half of the year.
  • UAL CORP NEW (UAUA) still can't make money!
  • United Technologies Corp. (NYSE:UTX) had a beat AND raised guidance.

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