Options Trader: Thursday Morning Ideas

by: Philip Davis

This should be an interesting day!

As expected, the Bank of England raised its interest rates a quarter point to 5.75%, the fifth increase in 12 months. However, the ECB left their rates unchanged at 4% after a June hike as the dollar sits at an all-time low against the Euro, taking a pause after eight hikes since December ‘05.

We will pretend this doesn’t matter even as we pretend oil rising to $72 doesn’t matter or that the Shanghai Stock Exchange plunged 5% this morning. One would think this is significant since 10% is "limit down" for a stock over there, so for every stock that stayed flat there statistically could have been one they had to halt trading on. The smaller Shenzhen Composite Index fell 5.8% with 10% being the most any single stock could drop!

Chart

The Nikkei and the Hang Seng shook this off and closed modestly higher as they blame "liquidity issues" on the Mainland China drop with four IPOs scheduled for next week: Bank of Nanjing, Bank of Ningbo, high-tech firm Guangdong Ronsen Super Micro-wire, and Sichuan Gaojin Food.

I’m not so sure about the timing of SG Food as the Chinese government just acknowledged MAJOR problems in their food industry:

The Ministry of Health’s report singled out 26 categories of products for low quality, including bottled water, canned fruit, dried fish, linens, grass-cutting equipment and other goods. In the case of canned fruit, dried fish and vermicelli noodles, "major quality problems exist" because of high levels of bacterial contamination and excessive amounts of additives.

Hey, and we told them "no MSG!"

European shares are trading down ahead of our open but our pre-markets are looking up, so we will maintain our bullish positions even though we know the whole thing is a different kind of bullstuff entirely!

Hot Markets

Jobless claims are flat, but the very unreliable ADP report came in heavy, leaving investors very concerned and driving rates up ahead of tomorrow’s Payroll and Unemployment Reports. Goldilocks needs non-farm payrolls to stay below +150K or you will hear the term "wage inflation" until you are sick of it. Hourly earnings were up .3% last month and should continue to creep higher. Earnings start next Tuesday and expectations are way down at a 4.5% increase over last year so it would almost take a recession to disappoint analysts this round. I think guidance will be key so it’s not what they do; it’s what they say that counts.

Office rents in the US are up 3.1% in Q2, up from 2.8% in the previous quarter and well ahead of last year’s 2.1% pace. My members all know that this is my favorite form of investing and I’m proud to say that the NY Metro region leads the nation with a 7.8% jump over last year! While this is great for me, it’s not so hot for my tenants, many of whom have already asked for extensions now as the ones who have shopped around have found that the grass is certainly not greener on the other side. While the Fed may think that a 7.8% increase in rents won’t get passed down to the consumer - I’m just finding that logic (or lack of) a bit hard to swallow.

Meanwhile, the number of homes listed for sale are up 2.5% as home inventory is piling up almost as fast as oil inventories, so it will be fun to see which cartel breaks first. Obviously it will be the builders, as they have to compete in a fairly free market as too many individuals control the inventory. We will be watching builder’s earnings very closely for signs of collapse, but I think the recent price action of HOV pretty much paints the picture for us.

So Yipee for the US markets, but let’s keep those stops very, very tight and increase our hedges on the Diamonds Trust, Series 1s (NYSEARCA:DIA). I’m still looking for Nasdaq leadership above the 2,650 mark, but they need to drag the Russell along over 860 to confirm a positive rotation in the markets.

Index

Current

Day's Move

Must Hold

Comfort Zone

Break Out

Next Goal

Dow

13,577

41

13,000

13,300

13,500

14,000

Transports

2,956

31

2,800

2,900

3,000

3,250

S&P

1,524

5

1,470

1,505

1,530

1,550

NYSE

10,032

35

9,400

9,800

10,000

10,250

Nasdaq

2,644

12

2,525

2,550

2,600

2,750

SOX

505

0

480

490

500

560

Russell

848

3

810

830

850

900

Hang Seng

22,252

34

20,250

20,750

21,000

22,000

Nikkei

18,221

52

17,400

17,700

18,300

18,500

BSE (India)

14,861

-18

13,500

14,100

14,725

15,000

DAX

8,060

-15

7,300

7,600

8,000

8,200

CAC 40

6,093

-5

5,750

6,000

6,100

6,300

FTSE

6,676

3

6,400

6,550

6,600

7,000

Click to enlarge

US Markets

Keep in mind that we can’t fight the tape. Despite my concerns, if the market is determined to ignore them, then we will continue to play the upside. So let’s keep a close eye on the Russell, which is very hard to fake as it’s such a broad index - so no few stocks are going to send it one way or the other.

Happy Trading and I are calling for clear Nasdaq leadership if we are going to have a real breakout - commodity leadership is NOT what we are looking for this month:

Click to Enlarge
NASDAQ

We expect Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) to continue to lead the way and a downturn on either may be an early warning sign of trouble ahead. Rates also bear (oops, don’t say bear!) watching, but the ECB gave us a huge break by not raising today.

Of course, oil is a major concern, but not to our government, who exclude it from their inflation forecasts, allowing them to paint a very rosy picture while they keep those core-inflation adjusted social security checks at ultra-low levels. That way they make sure the 9M people (that’s all!) that are on Social Security get as little money as possible.

We’ll see how today’s news affects the dollar and gold, which will give us a clearer picture of real inflationary pressures than anything the Fed says or does.

GoldDollar

Be careful out there today!