Options Trader: Thursday Wrapup

by: Philip Davis

Now that's what I call follow through!

We ignored a sad 49.3% ISM report (below 50 is contraction) as it was 49.9 in November anyway.

"The manufacturing sector failed to grow in January" and "the signals are clear that there is relatively little change taking place in the sector, as the [manufacturing index] has averaged 50.5% for the past four months," said Norbert Ore, who directs the ISM manufacturing survey. "Manufacturing lost momentum in the second half of 2006, and is starting 2007 in a less than robust fashion," Mr. Ore added.

How can this be good for the economy? Well the results also show the inventories index is at the lowest level since February 2002. Declining inventories are running right into a .5% rise in personal income, as all these employed people are starting to get raises yet the PCE remains VERY LOW.

Historical comparisons are tough because we had other worries on our mind in February 2002, but what we do know is we had an
amazing rally pretty much from March 2003 to today!

Big Rally 2 2 07

The markets were certainly happy: The Dow tacked on another 50 point gain to another new record with big gains (again) from Alcoa Inc. (NYSE:AA), Boeing Co. (NYSE:BA), Caterpillar Inc. (NYSE:CAT), E.I. DuPont de Nemours (NYSE:DD), The Home Depot Inc. (NYSE:HD), Proctor & Gamble Co. (NYSE:PG), United Technologies Corp. (NYSE:UTX) and ExxonMobil Corp. (NYSE:XOM) and big bounce backs from Intel Corp. (NASDAQ:INTC), Merck & Co. Inc. (NYSE:MRK), & Pfizer Inc. (NYSE:PFE). We had a very strong finish and even the Nasdaq finally joined the party despite Google acting like a big baby sitting in the corner and dropping 20 points.

US Markets 02 02 2007 Chart

It doesn't get much better than that!

The finish was so strong in most of the indexes that it was a shame they rang the closing bell. According to David Gaffen, we can blame the Telcos and IT for holding the S&P back. Since 2000, 8 of 10 S&P sectors are up with only Telcoms (down 50%) and IT (down 63%) holding it below 1,500.

"There seems to be a lot of enthusiasm over the reports, but I think people are ignoring some of the warning flags," says Charles Rotblut, equity strategist at Zacks Investment Research. "I'm expecting short-term weakness at some point, but it's a bit like calling for a rainstorm in the midst of a drought."

The well suddenly ran dry over at the NYMEX, as they briefly achieved backwardation as a completely ridiculous attempt to keep pumping oil in the face of a surprisingly weak gas drawdown blew up in the trader's faces. We saw suspicious trading patterns building at 12:52 and it seemed very strange that close to 18,000 contracts were pared away (to 367K) without a drop but, at 2:24 I said: "NYMEX -- July is behind June again -- you can buy the July barrels at $60.43 and sell June barrels at $60.65, get me 10M of those!"

Before we could even get our order filled the entire oil complex began to fall apart from a mid-day high of $58.85 to $57.30 in the last 30 minutes of trading!

Even after the "adjustment" at the close, a total of just 14 cents currently separates the August through October contracts. But the whole year has tightened up considerably, leaving little or no reward for the growing contingent of barrel rollers who threw 8M more barrels into April (128M) but May (59M) and June (97M) aren't budging as there simply isn't enough money to get people to hold barrels there.

Gold tested $660 but settled for $657 as the dollar refused to give up any ground.

Oil Dollar Gold 02 02 2007 Chart

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