Options Trader: Wednesday Morning Ideas

by: Philip Davis

Hopefully we can grind it up to the next level today!

We are close to the line on many of our indexes and perhaps we can break into some new highs, not with a bang, but with a whimper:

• Dow 12,674 was our 2/1 top, now at 12,666.
• Transports need seven points to get back over 2,875.
S&P just needs to crack 1,450, 2.25 away!
• NYSE is already there! 9,345 is an ATH - let’s see if we can crack 9,350
• Nasdaq is our problem child, 2,500 is 29 long points away.
• SOX aren’t fooling anyone below 550, but we’ll settle for at least a run towards 500 from yesterdays close at 465. This index is single-handedly tying down the markets - more hand-clapping, folks!
RUT 810 is just .40 away!! Another ATH giving just the leadership we needed for the next leg of this rally!

DJIAS&P 500NYSE ChartNASDAQ

Funny how they all kind of sneak up on you, isn't it?

Our productivity numbers were up a strong 3% in Q4 (meaning we are on a pace to generate $400Bn in additional GDP with the same number of people) and unit labor costs were up just 1.7%, considerable easing from 3.2% in Q3. Cisco Systems (NASDAQ:CSCO) had great numbers too so there’s really no reason for the markets not to do well today.

A Model Showing Off a New Mercedes Car in Beijing
China Growth
The Hang Seng snuck 24.49 higher, they need just 43 points to get back over 20,821, outgaining the Dow by 60% in the past five years. I’m always fascinated by this since China’s GOAL is to get their GDP to $4T by 2020, projecting over $100Bn in growth every year - WOW!

If oil goes to $100 on fears of Chinese growth, XOM will be doing $100Bn a year in profits all by itself! Meanwhile, the U.S. plods along with our $14T economy growing at just 3%, adding a paltry $420Bn a year, that’s double China’s 2006 growth rate and "just" 60% of the 2007 China projection. As I’ve often said, the United States can offset 1/3 of China’s total oil consumption by properly inflating their tires (saves 10%).

India is catching up in the growth game, projecting 9.2% for this year on their $800Bn GDP. India has already taken steps to reign in that growth by adjusting its banking regulations and we’ve been holding IBN March $50s (1/22) on the assumption that they would have to settle on this, now official, higher level of growth.

Europe is also just plodding along with BHP (Australian) giving a huge boost to Asian and European miners with a $10Bn share buyback, almost immediately lifting the stock 4.5% of the additional (they already had a $3Bn program in place) 8.5% they intend to purchase. The fact that the CEO is stepping down this year and will be selling some shares is mere coincidence!

It’s inventory day over at the oil patch so anything can happen and probably will. ZMan says: "Today the size of the distillate draw will determine if “the third time is a charm” or it’s “three strikes and you’re out.” Wow, talk about pressure on a number! The projected drawdown range is 2.6 to 3.3Mb and we may get a draw to the high side after three weeks of lowballing the numbers.

Crude is projected to build by 1Mb and gasoline is projected to build 1.35Mb, but I submit that no amount of drawdown is going to get NYMEX traders to add a single barrel to the 336M they already have on order for March. Personally, I hear $56 calling for next week, but let’s break through $58.50 first before we start betting on it.

Natural gas will be interesting as the investigation I called for is beginning in the Senate this week. Sen. Jeff Bingaman, the panel’s chairman, has sent letters to two federal market regulators, asking them what they know about unusual price fluctuations that may have taken place, which could have the effect of artificially raising indexes used to establish market prices for natural gas.

Only a crushing defeat of the dollar can save oil now and yesterday’s budget proposal may be just enough to push it over the edge. Let’s watch gold around $660 and copper back over $250 for signs of our currency going down for the count (oil $60 will be a sign too).

Oil ChartGold ChartDollar Chart

No picks here, but I’ll be going over Zman’s candidate list and we will be ready to fire with puts at the inventory if we get some good numbers (but it would be a surprise, as we do expect this to be a tight week).

Let’s go for some records today!