Options Trader: Tuesday Morning Ideas

by: Philip Davis

We have lots of good earnings to point to, but some scary economic data hitting the markets this week -- so it will be a great test of the markets to see what investors are really paying attention to.

Nothing pre-market, but today we have Consumer Confidence (pretty good but down from last month) and Existing Home Sales (how bad will it be?). Tomorrow is a big day with Durable Goods (should be much better), New Home Sales (if there's no spring uptick -- run away!), THE BEIGE BOOK (very big deal) and, of course, crude inventories (temperature moderated, no real driving, airlines grounded -- sounds like a build).

Thursday we are hit with Initial Jobless Claims. But Friday is the Big Kahuna, the GDP (1.8% expected) with the Chain Deflator and Employment Costs (both have to be up), as well as our beloved Michigan Consumer Sentiment Poll -- but it's just a revision, we already got an 85.3 from them.

Earnings are just too numerous to list but some of the biggies are:

Alcan Inc. (NYSE:AL) -- up 30%, Amgen Inc. (NASDAQ:AMGN) -- up 11%, BP plc (NYSE:BP) -- down 17%, Boston Scientific Corp. (NYSE:BSX) -- down 64%, Coach Inc. (NYSE:COH) -- up 38%, E.I. DuPont de Nemours (NYSE:DD) -- up 16%, Kimberly-Clark Corp. (NYSE:KMB) -- up 64%, L-3 Communications Holdings Inc. (NYSE:LLL) -- up 17%, AT&T Inc. (NYSE:T) -- up 100%, Texas Instruments Inc. (NYSE:TXN) -down 12% [BTE], Whirlpool Corp. (NYSE:WHR) -- down 1% (but BTE), United States Steel Corp. (NYSE:X) -- way up but lower guidance?

Target Corp. (NYSE:TGT) reported weak sales that would probably really spook the market if it weren't buried in everything else today, and I feel psychic for taking those $60s off the table yesterday, but really that's why we have trading rules. You can't always know what's going to happen, so we let ourselves stop out and took those profits off the table!

General Motors Corp. (NYSE:GM) blamed the sub-prime meltdown for slow auto sales, but Toyota Motor Corp. (NYSE:TM) is up 10% globally and GM would do well to listen to Toyota's statement: "Our goal has never been to sell the most cars in the world, we simply want to be the best in quality. After that, sales will take care of themselves." Quality -- who'd have thought that would work? Certainly not U.S. auto makers, as Toyota gained 12.9% last year, passing DaimlerChrysler (DCX) and placing neck and neck with Ford Motor Co. (NYSE:F).

Asian markets finished flat as rising oil prices put a damper on stocks over there, but we got a good gain from the BSE, which was lagging the group.

China said they would fight the U.S. on product piracy regulations over at the WTO, which is an interesting place to make a stand as it is their most egregious violation. It's not so much that China doesn't acknowledge the problem, it's that they were under the impression they would be able to work the matter out themselves, and they are annoyed at our impatience. Yahoo! Inc. (NASDAQ:YHOO) already caught some flack in this as China ruled against them in a suit brought by recording companies, who were awarded fines because Yahoo had links to illegally copied songs. Baidu.com Inc. (NASDAQ:BIDU) won a similar lawsuit in November so "ha-ha America."

How great is this market? This market is so great that Morgan Stanley (NYSE:MS) banished famed perma-bear and chief economist, Stephen Roach to China -- I told you it was dangerous to be bearish in this market!

That being the case, far be it for me to say something negative about the markets or we may wake up to find out .com taken away and I'll have to get one of those dreadful .us addresses... Europe started out OK, but fell off the table around lunch, still feeling the pain of Astrazeneca plc's (NYSE:AZN) big drop. But it was REITs that led the drop. The Yell Group (yellow pages publishers) dropped 21% on news that U.S. revenue growth will slow to 3%, down from 10% expected. Advertising slowdowns are a very bad early indicator of economic malaise.

BP plc (BP) earnings were sharply down as they produced 700,000 barrels a week less than last year, the price of complying with OPEC production cuts. We will hear from the other majors this week and next, and it will be interesting to see how much oil they had to take off the table to create this "shortage."

Tech should give us a boost today with good news from TXN and T. Our test results will be simple today: anything down is very bad and anything up will be good but not great until we get back above yesterday's levels:



Index

Current

Day's Move

Must Hold

Comfort Zone

Break Out

Next Goal

Dow 12,919 -42 12,468 12,600 13,000 13,500
Transports 2,901 -4 2,825 2,900 3,000 3,250
S&P 1,480 -3 1,430 1,460 1,500 1,550
NYSE 9,660 -36 9,218 9,465 9,600 10,000
Nasdaq 2,523 -3 2,454 2,500 2,600 2,750
SOX 484 -3 477 490 500 560
Russell 827 -1 803 820 850 900
Hang Seng 20,572 16 20,200 20,600 21,000 22,000
Nikkei 17,451 -3 17,400 17,500 18,300 18,500
BSE (India) 14,136 208 13,200 14,000 14,725 15,000
DAX 7,289 -46 6,900 7,000 7,400 8,000
CAC 40 5,905 -12 5,650 5,800 6,000 7,000
FTSE 6,444 -12 6,325 6,450 6,600 7,000
Click to enlarge

If it weren't for the BSE I would be concerned, and I'll be watching the FTSE closely as they are at a critical level. If we don't get an uptick in the SOX I will turn bearish fast, as we are not going to be getting better news than TXN's from anyone else who is scheduled to report.

US Markets 24 04 2007 Chart

Oil will simply kill the markets if it insists on remaining over $65. So far the average for this month is $64 vs. March's average $61.50 and February's $60 (Jan. was way down at $55). This is going to come back and bite us in the inflation data, and let's not forget that Brent Crude is up MUCH higher ($69) than WTIC so it's really worse than you think.

As long as gold stays below $700 there is a ray of hope, but it just looks like it's biding its time to me, waiting for the right moment to make another run at $800. I hope this doesn't happen, because I really don't think the economy can take it this year (a general commodity run, not just gold).

Oil Dollar Gold 24 04 2007 Chart

Let's put on our Dow 13,000 caps but -- VERY CAREFULLY!

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