Options Trader: Tuesday Wrapup

by: Philip Davis

At a certain point, I have to give up and join the party…

If the market can shake off negative after negative and keep on going, then at a certain point, who am I to argue?

Building permits fell 14%, which is, of course, an indicator of future housing activity but housing starts increased 9% and the market chose to accentuate the positive today even though we are on pace to create 500,000 less homes than we did in ‘04 or ‘05 (x $250K avg = $125Bn not produced = 1% of GDP). New home sales were off 16.6%, indicating that a 14% drop in permits may still not be enough.

Housing Starts

The Northeast was hit hardest with a 29.7% drop in housing starts but the South and West posted double digit gains so I have to consider that my perspective on how bad things are may be based on my location. Still, lending requirements are tightening and used home inventory is through the roof, not an ideal situation on the whole.

Oracle Corporation (NASDAQ:ORCL) had a great earnings report and justified much of the Nasdaq’s enthusiasm and Adobe Systems Incorporated (NASDAQ:ADBE) also turned in some great numbers so we should be able to follow through tomorrow ahead of the Fed. With all this "great" news, Bernanke needs to take the opportunity to raise rates and save the dollar before it’s too late, as commodities are still clearly out of control and inflation is on the creep (a more insidious version of "being on the march").

The dollar did fall .35% today, now just a hair above 83, posting its lowest close since early December. Fed inaction can break the 83 mark and send the dollar down to levels we haven’t seen since Q4 ‘05, when oil collapsed as well and the markets rose - so it’s kind of hard to know what to root for…

Gold made it up to $656 (+.38%) against the dollar but oil lost ground again with both the long and short-term charts looking weak at this point.

Oil finished a very weak session today with a last minute $1.30 pump (I kid you not) that turned the last of the April contracts positive by .14, to finalize at $56.73, the lowest contract close since January, back again at mid-’05 levels. This action masked the .45 drop in the May contracts, which fell to $59.25 the day before they become the front-month. You would think that for "just" $56.73, people would be snapping these barrels up but only 24M barrels (vs. 41M last month) remained open for actual delivery. 382M barrels have been shoved into May with 142M barrels open for June already and another 66M barrels open on the July contract.

With a $23+ crack spread you would think the refiners would be backing up the truck on sub-$57 oil. Why, you would almost think that the whole thing was about to collapse the way they are avoiding delivery…

Oil and Dollar

We had a strong finish on our indices and another day like today could put us out of the woods until we test a 50% retracement:

Phil\'s US Markets

US Markets

Let’s keep a close eye on the transports to confirm our rally is back on track as I stand ready to admit I was wrong and that this little dip was nothing more than a mild pullback on the way to 15,000. While I would have been happier if we had a proper correction, I’m not going to pout about it and miss out on another good leg of the market if that is truly the hand we are being dealt.