Options Trader: Thursday Morning Ideas

by: Philip Davis

This will be a good day to take a breath.

We don’t want to get all bearish just because the markets gave back 150 of the 1,500 points it has gained since March 13th. Another 150 points will only put us in a normal pullback and the 50 dma is 13,300 anyway, so I’m not even looking for things to short until we break through there. Below that, we may have fun all the way to 12,500 - but let’s not get ahead of ourselves.

Hong Kong is up 270 points this morning and the Shanghai Composite B-shares (the ones owned by foreigners) are down 2.25% while the A-shares (the ones reported by CNBC and the WSJ) are up 1.2%. Our President has advice for CNBC viewers and Journal readers today.


The Nikkei was fairly flat with steel and trading companies leading the market there as they did in Hong Kong. But the BOJ reported that corporate sentiment over there is growing more pessimistic as it seems inevitable that the BOJ will have to raise rates in the fall. A Finance Ministry official said the downturn was likely due to more-pessimistic sentiment from auto and machinery makers hit by higher costs for metals such as steel and copper. The reading for large manufacturers went to minus 2.2 from 0.1 in the first quarter. The companies surveyed, however, expected the mood to brighten in the coming two quarters.

Europe is flying down as bond yields climbed, causing Goldman Sachs Group, Inc. (NYSE:GS) to downgrade rate sensitive stocks over there like Nokia Corp. (NYSE:NOK) and Lafarge S.A. (LR) (funny how they are silent on this side of the ocean - so far). We have our own rate worried as there was a fresh upsurge yesterday, but we are nowhere near last week's levels - so far. It’s Philly Fed day, so we’ll see how depressing the picture is over there. But Barry Ritholtz points to "Agflation" as a brand new negative indicator:

As we noted this past weekend, the prices for commodities in general, and agricultural commodities in particular, had reached all sorts of highs: Wheat prices hit 11-year high; Oil Rises to Nine-Month High; Copper Gained; Gold, Silver Rise; Corn, Soybeans Rise; Cotton Extends Rally to Three-Year High; Cost of Gas and Food Rose Sharply Last Month.

The absurd list of what doesn’t go into "core" inflation is long, and ever more ridiculously, getting longer: Wheat, Oil, Copper, Gasoline, Gold, Silver, Corn, Soybeans, and Cotton. Oh, and education and medical care never seems to have much impact, regardless of the extraordinary price gains they have seen over the previous decade — the past five years in particular. Then there is the actual cost of Housing, not properly reflected in the BLS Consumer Price Index [CPI].


As I mentioned in yesterday’s wrap-up, we need to be prepared for anything today. I think we need a very serious adjustment in oil to get this market back on track but the serious adjustment in oil will crash that sector, which would bring down the markets until new leadership is established. So we will be paying a lot more attention to the Nasdaq, the SOX and the Russell than the S&P or the Dow as we desperately need new leadership if we seriously expect to be heading to 14,000 before revisiting 12,500.

Still, our short-term movement will be dictated by the S&P and I said at the beginning of the week that it would be 1,540 or bust this week and, as of Thursday morning, we are shaping up for bust:

Click to Enlarge
SPX - 3 Months - Daily

US Markets

Be prepared! As the Great Yogi said: "It ain’t over ’till it’s over." We could still pull it together and rally, but a commodity rally based on $70 oil will be no reason to buy Apple.

The Cheesecake Factory Incorporated (NASDAQ:CAKE) got a double downgrade. Pier 1 Imports, Inc. (NYSE:PIR) continues to be a retail disaster, so forgive me for not being too excited about our prospects. H&R Block, Inc. (NYSE:HRB) wrote down their subprime portfolio to $1.1B, after a $678M loss. The Bear Stearns Companies Inc. (NYSE:BSC), however, got some relief from JPMorgan Chase & Co. (NYSE:JPM), who held off from auditioning their failed fund’s collateral. This was unlike Merrill Lynch & Co., Inc. (MER), who couldn’t wait to dump $800M worth of assets they seized.

Today is a day to watch the market without prejudice and look for patterns to emerge. I am, on the whole, fairly bearish, but that doesn’t mean I’m right. So we will follow the advice of the master:

• Relax. Take a deep breath.
• Don’t focus on the negative.
• Be mindful of your thoughts.
• You must do what you feel is right.
• Let go your conscious self and act on instinct.
• Your eyes can deceive you. Don’t trust them.
• Stretch out with your feelings.
• You can do it.
• There’s no such thing as luck.
• Be patient.
• Don’t give in to hate. That leads to the dark side.
• Many of the truths we cling to depend greatly on our own point of view.
• Your insight serves you well.

This is all good advice - it’s a wonder he didn’t do better in the markets!