Options Trader: Thursday Morning Ideas

by: Philip Davis

I’m really having trouble enjoying this rally.

Despite my determination to go with the flow and despite the break-out levels we’ve hit for the Dow, the S&P, the NYSE and the SOX, I still feel like it’s some kind of silly dream we may wake up from at any moment.

We hear from retailers today and expectations are already low, so they’d better not miss. We also have a Google Gathering, which is always interesting but, at this point, Google needs to colonize other planets in order to grow any faster than they are, so it will be interesting to see what they have to say today.

Reading the Paper

Shanghai is still showing no signs of worry, with yet another record close. New Zealand, Australia and Indonesia also closed at record highs. The Nikkei, Hang Seng and Bombay all took a rest. India concerns me as it has some catching up to do. Toyota was a huge disappointment as it is having trouble controlling costs as it grows sales 9%. Forbes makes an interesting observation that perhaps the company is just having trouble controlling expectations as the numbers are indeed far better than the guidance would suggest. Toyota made more money this quarter ($3.7Bn) than General Motors Corp. (NYSE:GM) has this decade (-$11Bn) and is on track to earn GM’s entire $16Bn market cap this year.

Xinhua

China is doing its best to bail us out by purchasing $4.3Bn worth of " technology " from U.S. companies but I was disappointed that this includes $1.3Bn worth of Microsoft Corp. (NASDAQ:MSFT) software by Lenovo, who need some sort of operating system on its computers anyway. An additional $8.2Bn will be spent on China’s upcoming shopping trip as it joions millions of other International shoppers taking advantage of our cheap dollar this summer.

Europe’s big news is that Tony Blair is stepping down on June 27th, paving the way for new leadership to tell Bush he is on his own in Iraq. Mr. Blair told supporters: "Hand on heart, I did what I thought was right." Following the Sept. 11, 2001 terrorist attacks in the U.S., it was right, Mr. Blair said, to "stand shoulder to shoulder with our oldest ally, and I did so out of belief. But the blowback since, with global terrorism and those elements that support it, has been fierce and unrelenting and costly. And for many it simply isn’t and can’t be worth it. For me, I think we must see it through." He added: "I may have been wrong. That’s your call."

In an additional blow to U.S. interests, Tony Blair is stepping down on June 27th, but the ECB Bancorp, Inc. (ECB) saved us by holding its rates steady at 3.75%. Watchers there are certain they will hike next month, though, so it’s tick, tick, tick for the dollar… "If the euro-zone economy gains further momentum in late 2007 and early 2008 … the ECB will probably raise rates further to 4.5% by mid-2008," said Holger Schmieding, Bank of America’s chief economist for Europe.

We’ll watch the S&P to see if we hold 1,510 today, but retail numbers look weak and nothing spooks this market more than fear of a pullback in consumer spending. SKS posted huge numbers though as the rich grow ever richer and do its best to trickle on the rest of us whenever the mood strikes them. Nordstrom Inc. (NYSE:JWN) had an interesting report with stronger sales of designer wear being offset by a drop in children’s wear, indicating that the moderately wealthy (it’s hard to be very wealthy when you have kids) may be starting to feel some strain:



Index

Current

Day's Move

Must Hold

Comfort Zone

Break Out

NextGoal

Dow 13,362 53 12,468 12,600 13,000 13,500
Transports 2,910 -4 2,825 2,900 3,000 3,250
S&P 1,512 4 1,430 1,460 1,500 1,550
NYSE 9,827 40 9,218 9,465 9,600 10,000
Nasdaq 2,576 4 2,454 2,500 2,600 2,750
SOX 509 8 477 490 500 560
Russell 834 3 803 820 850 900
Hang Seng 20,746 -98 20,200 20,600 21,000 22,000
Nikkei 17,736 -11 17,400 17,500 18,300 18,500
BSE (India) 13,771 -10 13,200 14,000 14,725 15,000
DAX 7,442 -33 6,900 7,000 7,400 8,000
CAC 40 6,033 -18 5,650 5,800 6,000 7,000
FTSE 6,524

-25

6,325 6,450 6,600 7,000
Click to enlarge

US Markets

Oil will rear its ugly head again as the Nigerian news catches up with the slow traders, but we are still watching that $62.50 mark with great interest. Today is natural gas inventory day, so we can expect a pointless run-up into those numbers. The damage is already done to our trade deficit, however, which shot up 15% last month on rising energy costs.

ZMan is featuring positive plays on Contango Oil & Gas Company (NYSEMKT:MCF) and Endeavour International Corporation (NYSE:END). Neither one optionable, but at $2 per share, END may as well be a leap. If oil does break back above $62.50, both of these plays should make good hedges against our longer puts.

Criminal Narrators Boosting Crude have now sunk to new lows by promoting a ridiculous segment where it is featuring a woman who claims that she broke a florescent light bulb and the mercury inside it required a hazmat team to clean it up, costing her "thousands of dollars" in damage. Could the fact that its parent company is the World’s largest seller of old fashioned, energy inefficient filament light bulbs have anything to do with it? This is being coordinated with a PR campaign to slow the spread of these light bulbs, as Congress is considering requiring them.

All this safety nonsense may be a nice boost for my pals at Cambridge Display Technology, Inc. (NASDAQ:OLED) (currently $5.18), as its diodes will soon provide another energy-efficient light source in the near future. I like owning this stock and selling the June $5s for .75, as I consider it a great long-haul investment. But if someone wants to pay me over 10% for holding it for a month, I have no problem with that either!


Oil and Dollar

Speaking of exotic metals, Titanium Metals Corporation (TIE) is having a great week after I told members on Monday that I liked it much better than Allegheny Technologies Incorporated (NYSE:ATI). Happy Trading has our chart of the day on it, and we’ll see if they can break back over $39 on this run. Shame on you if you didn’t take some off the table, though:

Click to Enlarge
TIE