Options Trader: Friday Morning Ideas

by: Philip Davis

Stop the week, we want to get off!

It's funny as it seems like this week will never end, and I was just rereading last Friday's post (to get some perspective on what signs there were last week) and my opening comment was: "Wow, this week flew by!"

We should have paid more heed to the Hang Seng as our canary in the international coal mine (represented in this chart in canary yellow!) as it started falling that morning, but we wrote that and the Nikkei's drop off to the Sanyo investigation -- which was, as I said at the time, an "Enron-sized scandal." That was also the day the Presidential Working Group concluded there was nothing wrong with hedge funds. And, free of the annoyance of potential regulations, perhaps some of them got together for lunch and decided it would be a good day to take down the markets.

Canary Coal Mine 02 03 2007Not that the worsening housing situation didn't give them a good excuse, but we did see it coming, and I said on Friday morning: "If you can't beat them and you're too poor to join them, I guess we may have to start betting with them! If we can't hold on (to our levels) here, we are going to have to take some solid covers into the weekend!"

Greenspan (remember him) kicked off the week with recession talk, and the 2% GDP pushed us right over the edge, but I said on Monday that we need to focus on the ISM index, and that was a big beat yesterday, in news that was buried in all of yesterday's action.

Had we not had that big round of mergers on Monday, we probably would have fallen first thing this week, but as I said on Monday morning: "With all that money pouring into the markets you would think we should be heading up from here, but let's make sure we are really breaking up before we all go and drink the Kool Aid."

I also said "If oil stays over $61 it will be time to quickly revalue those positions but we can certainly expect a test of $62 before we get a turn down." So far we are right on plan for the week, waiting for our next opportunity to short them again!

That's enough review as this is starting to sound like the weekly wrap-up, but I've been spending the morning reviewing the week so I could decide what stance to take over the weekend -- and it looks like that stance will be cash if we don't get positive ahead of the weekend. This all works out just great, though as we are misallocated and need to build up the Long-Term Portfolio. And what better way to do that than to Dollar Cost Average into our very strong proven positions if we are presented with the opportunity to buy them on the cheap!

Cutie 02 03 2007Japan looks like they are throwing in the towel this morning as the Nikkei gives up another 235 points to 17,217 -- a 5.5% drop for the week, but 75% of it was Wednesday. Most of today's declines came from exporters who are worried about declining U.S. imports -- this is their problem -- not ours! Let's use our patent-pending buyer's trick to try to grab those Sony Corp. (NYSE:SNE) $50 puts for $1 or less at the open as a day trade!

We'll also keep an eye on Toyota Motor Corp. (NYSE:TM), but I'm really not in a call-buying mood today even though Shanghai had a lot of bargain hunters step in this morning and the Hang Seng also took back half a point, forming a similar pattern to the Dow.

Europe is flat to downish, and the question for the day is whether the Dow can hold that 5% line. Channeling here -- between 12,200 and 12,800 represents a perfect par for the 5% rule (we don't sweat the extra 10 points). While it may be annoying to flatline like that, a consolidating trading range will open up some great income producing opportunities for us!

If we don't flatline, well there's always the 10% rule to look forward to. Don't forget my call for the year was 11,500 before 15,000 -- and the 15,000 was my target for next June anyway. I just didn't expect to leap down to it like this:

Dow 12,200 has to hold this morning and all day for me to even consider staying long over the weekend. Remember -- If we are coming back, we have 600 points ahead of us and you won't miss out if you don't catch the first 100!
Transports were what I called on to lead us back and we must make 2,850 but it will be meaningless unless oil gets back under control.

US Markets 02 03 2007 Chart

Am I painting too rosy a picture? I don't think so, I'm a fundamentalist, not an artist and I just don't see anything I can really point to say "this has changed this week." We knew about the debt, Iraq, Iran, the deficit, the semi glut, the oil "crisis", the option scandal, dollar weakness, the housing glut, the sub-prime mess, the unwinding yen carry trade and It Just Didn't Matter! Why should it matter now, what has changed?

If all this starts to matter, we'll be talking about Dow 10,000 soon enough -- but I cling to my new global paradigm and I think we will weather this storm in the near future. That doesn't mean I'm going to bet real money on it -- just that I'm looking for it to happen and ready to climb on board when it's ready to go.

Our post-it for today: There is NOTHING I Can Personally Do to Move the Markets! Let the big boys have their fun, we'll pick our spots as things develop!

We'll test my top oil target of the week at $62 this morning. But again, fundamentally speaking, what has changed since oil was at $51 just 6 weeks ago? Demand isn't up, supply isn't down, Iran doesn't hate us more than they did in December, I don't think Iraq CAN get any worse, Chavez is just as irrational, NYMEX traders are still manipulating the markets -- same as it ever was...

ZMan shows Petrohawk Energy Corp. (NASDAQ:HAWK), Carrizo Oil & Gas Inc. (NASDAQ:CRZO) and Ultra Petroleum Corp. (UPL) upgraded at Jefferies so I'll be watching those with interest in addition to ExxonMobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX) and Suncor Energy Inc. (NYSE:SU) who saw no reason to rally despite the seven-straight-day rise in oil prices. This is an older chart but we can see there is little correlation between GDP growth and the price of crude -- it's a scam, pure and simple, a con being perpetrated on global consumers by an energy cartel that includes the major oil companies as well as the more obvious OPEC members. I'm not going to get political about it, draw your own conclusions from the timeline you see -- I imagine that you could track the defense index along a similar plane...

Old Oil Chart 02 03 2007

Oil can go to $65 and we can still prosper, but a rebounding economy does not necessarily correlate with a rebounding stock market, which is why we are going to wait and see how this all shakes out -- anything else is just gambling so please size you bets accordingly!

I said earlier in the week, watch gold closely because if we break back below $650 (and copper below $250) then we are in a nice deflating commodity bubble and we can soft land on that, but oil over $62 belies that theory as we need a trifecta to collect here.

Oil Dollar Gold 02 03 2007 Chart

Obviously no new trades, but I hope to be pulling off my NASDAQ 100 Trust Shares ETF (QQQQ) puts rather than triggering my stops on calls this morning, but let's keep an open mind as, "It is not our job to save the markets!"

Have a great weekend!

- Phil

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