Options Trader: Tuesday Morning Ideas

by: Philip Davis

We should get a better read on the markets today.

I like what I’m seeing in Asia and Europe and I’m very pleased with my new chart, which will give us a nice quick visual of just how we are doing as far as hitting our various goals.

I also like what I’m seeing over in Asia as the Nikkei made a very quick u-turn from yesterday’s drop, retracing 2/3 of its loss with a strong finish. While the Nikkei still looks weak in the longer-term view, the Hang Seng is on fire in the last four sessions, up 500 points and retaking the critical 20,000 level. In 2004, the Hang Seng was at 12,000 and the Dow was at 10,000 - to say we have lost some ground would be quite the understatement!

Even if you allow for the fact that the dollar has dropped close to 40% in value over that time, that still only accounts for 4,800 points of the gain, to 16,800 still leaving the Hang Seng outpacing the Dow by 2:1 over the past three years. As I’ve said before - if they have room to grow, then we have a lot of room to catch up.

We used to be able to bet Asia to do whatever the U.S. markets did the day before, but I think the global tables have turned and the U.S. markets are starting to slavishly follow the lead of Asia and Europe, acting as the lagging indicator of global sentiment. Whether this has been caused by the removal of spines from Wall Street traders (who have mainly been replaced by machines this year anyway) or whether it’s just U.S. finally taking the back seat in the global economy it’s too early to say - but it certainly bears watching!

Asia did get a boost from a trade deal we finally worked out with South Korea, but it’s China that is bailing us out this week by promising to go on a $12.5Bn shopping spree, the result of Hank Paulson’s recent negotiations/begging for mercy trip in December. They did this last year when Vice Premier Wu Yi made a similar shopping trip and dropped $16Bn as she toured the country. Anyone who’s been to Las Vegas knows how fast Asian women can spend $16Bn while their husbands gamble. Although this year’s reduced amount is a mild rebuke to our sanctions against Chinese glossy paper, the fact that China chose to tell us the trip is still on will be quite a relief to U.S. exporters. So thank you Ms. Wu and congrats to Secretary Paulson for pulling this one out of a hat!

Speaking of Chinese shoppers, retail sales in Hong Kong rose a whopping 28%, mainly due to the shift in their big Lunar New Year week from January to February 7, but January only had a 1.5% decline so the net gain is a very impressive 11% for those two months.

Europe is up across the board this morning as some progress seems to be being made with Iran (now that all the sailors have "confessed"). This leaves the EU free to focus on poor Apple (NASDAQ:AAPL), as they probe iTunes in an antitrust investigation into their music-pricing structure which is, by nature, achieved by colluding with the various music companies (there are only four).

"Jonathan Todd, a European Commission spokesman, confirmed that regulators sent their objections Friday to the record companies and Apple. He said European Union regulators are focusing on the sales agreements between Apple and the record companies, alleging they are anticompetitive and hurt consumers." The Brussels-based authority said Apple and the record companies have two months to defend themselves in writing and can request an oral hearing. After that, if the regulator finds evidence of an antitrust violation, it can fine the companies up to 10% of their annual global revenue. Ouch!

The futures look bright in the U.S. markets (7:30) and I see no reason at the moment why they shouldn’t hold up. While we are certainly not out of the woods yet, I think there may be a little bit of light shining through the trees as our indexes retake some critical levels:

Phil\'s US Markets

US Markets

I hope you like the new chart. Let’s call this 27 green, 20 red and five neutral (within .25%). Clearly we have NYSE leadership, but I’m disturbed by the Russell, who was the co-leader of the fall rally. The transports need to lead today’s turnaround as they are probably going to be losing the excuse of runaway oil pricing keeping them down. The SOX have a very easy path to green, needing just six points to change three boxes, so we’ll be flipping out of our
iShares Goldman Sachs Semiconductor (IGW) puts and grabbing the $60s for $1.35 as a momentum play this morning, to offset some of our other puts which we will hopefully be able to let go of once we clear our comfort zones.

Over the Barrel

With Iran actually using the word "diplomatic" in yesterday’s exchange with Britain, the poor oil traders may find themselves holding the barrel as the world once again fails to come to an end. Disappointing as this must be for them, I’m sure they can take solace in the fact that a return to normalcy should provide a nice boost for miners as copper and steel can resume their upward march with major global construction projects moving forward at a record pace.

We are a long way from comfortable at $66 a barrel, but let’s hope we can get below $65 and hope for a nice inventory build to give oil a push down to the lower $60s for the week.

ZMan and I have a long list of oil companies we’d like to short in addition to our "LVS-in-waiting" (our term for a massively overbought security about to crash), Tesoro (NYSE:TSO) who have REALLY overstayed their welcome above $100. We are already in on the $100 puts with a $1.80 basis but the $95 puts are going to start looking attractive again at just $1 as a momentum play. It’s a tricky day to play it with inventory coming out tomorrow but fortune is likely to favor the bold in this case and we are well protected to the upside with our ConocoPhillips (NYSE:COP) and Exxon Moil (NYSE:XOM) covers.

We need oil below $65, otherwise we’re better off waiting until the afternoon run-up. Here are the plays we will have our eye on (detailed picks are available on the member site):

We should be able to give up on our COP $70s this morning and take a shot at May puts - this gives us time to be wrong and a good shot at being able to sell the Apr $65 puts against for a possibly even play to help us stay in for the long haul.

Hess Corp. (NYSE:HES) has also taken a nasty turn and the puts seem reasonable. Marathon Oil Corporation (NYSE:MRO) jumped $1.63 yesterday, bringing the cost of the puts down, near their two-week low, but far below their $3 high. Murphy Oil Corporation (NYSE:MUR) puts make a nice momentum play ($XXX, .25 T stop), T. Boone’s Suncor Energy Inc. (NYSE:SU) is likely to be miserable if oil gets below $64 and the current puts are a fun play. Schlumberger Limited (NYSE:SLB) may have gotten ahead of themselves back at $70 and we like the puts ($XXX, .25 T stop) and Z likes
San Juan Basin Royalty Trust (NYSE:SJT) if natural gas breaks back below $7 with the puts looking very reasonable.

If the coal stocks start falling [Arch Coal (ACI), Peabody Energy Corporation (BTU), CONSOL Energy Inc. (NYSE:CNX), Massey Energy Company (NYSE:MEE), Fording Canadian Coal Trust (FDG)] then we can feel fairly safe that we are in a real downturn. We can expect the usual afternoon shenanigans, so let’s follow our day trading rules closely on these as well as the VRule before rushing out and overdoing it. The energy group may hold up in a general bull run. However, my main scenario for a sustainable rally is some rotation out of this sector and back to tech - it might happen, but I won’t hold my breath!

Gas traders will hang their hats on a Colorado University hurricane forecast due at 10 AM, so let’s be ready for that - hopefully ZMan will be able to give us the inside scoop in today’s comments.

Let’s keep an eye on gold, which was telling us all last week that the Iran crisis wouldn’t last (and we solved that one last Wednesday anyway) but it will also tell us that the dollar may be down but not out at the 83 level. $660 is gold’s 50 dma and crossing below that is going to leave a lot metal traders holding the purse. They tested it briefly yesterday, but we’ll see how today’s action plays out.

Oil and Dollar

Google (NASDAQ:GOOG) should get a nice boost today as they unveil their plan to sell TV ads through EchoStar Communications (NASDAQ:DISH) using their online auction system. The key to this system is Google’s plan to give advertisers great feedback like how many TV set-top boxes were tuned in to each commercial they ran, and charge based only on the number of set-top boxes where the commercial played. Additionally, it will provide advertisers data about whether users changed the channel during the commercial. We will, of course, take out our $470 callers this morning!

It seems to me that Google certainly has nothing to fear from Yahoo (NASDAQ:YHOO) as it currently displays June news at http://biz.yahoo.com/. Seriously, if they can’t get it together to give investors current information on one of their main links, how can they ever mount a serious campaign to unseat Google? I also stopped using their option screens last week as they were missing months of data ALL week without fixing it - someone is really asleep at the wheel over at Yahoo, and neither AOL nor MSN offer a credible threat to Google’s Global dominance. So why is this stock at $458?

I’m putting my foot down and taking another round of June $490s ahead of earnings (now $9.60) and I’m also going to grab the May $520s for $1.65 as a nice momentum play which we can hold if they make it to $470 this week. We’ll take a put on the turn, but right now I’m expecting to see $465 today so we’ll see how it runs.

There’s a nice business opportunity here for an advertising house to mass produce low-cost commercials, as this will bring many new small-business advertisers to the market if successful.

We still have plenty of May and June calls that make nice DD candidates on a good market move. I’m very pro-FedEx (NYSE:FDX) today and, of course, Microsoft (NASDAQ:MSFT) makes a very attractive target, along with Texas Instruments, Inc. (NYSE:TXN),
MEMC Electronic Materials, Inc. (WFR), Dell (NASDAQ:DELL), YRC Worldwide, Inc. (NASDAQ:YRCW), Intel Corp. (NASDAQ:INTC), IntercontinentalExchange, Inc. (NYSE:ICE), Marvell Technology Group, Ltd. (NASDAQ:MRVL), American Express Company (NYSE:AXP) … Let’s just say I’m very glad we have cash today!

Hopefully the market holds up, lots of action today. We should be very busy today if this rally manages to take hold.

A good pre-market move is to set 20% (of profit) stops on the calls we sold against our LTP plays, no reason to give that back and we can always resell them!

We do not want to get too excited though - let’s make sure these moves are real and coming with volume confirmation and scale into our positions - if it’s a real rally, we still have 400 points to go before we retest our highs, plenty of time to get in.

Let’s have some fun today,

- Phil