Options Trader: Tuesday Wrap-Up/Wednesday Morning Ideas

by: Philip Davis

We got our monster rally early on, but fortunately, we were skeptical about it and tightened up our index puts. It only took 45 minutes in the morning before I said:

ConocoPhillips (NYSE:COP) was just kidding with that opening. Oil sector heading south in general - markets may follow, especially with much of brokers’ gains coming off energy sector investments! So forget the Financial Select Sector SPDR (NYSEARCA:XLF) for now, ignore the Dow and if the SOX fails, it’s all over for the Nasdaq!

At 3:01 the market looked toppy and I said: "I’d like this rally better if the S&P would break 1,555" so we got a nice, clear indication just after that as the S&P confirmed an end-of-day downtrend, no doubt caused by people who got the The Bear Stearns Companies Inc. (NYSE:BSC) news before we did.

We had a nice heads up at 1:03 when we caught the builders taking a dive: "Builders going down and sentiment index at 16-year low!!! Down to 24 in July from 28 in June, worst since Gulf War began. This is wiping out a week of gains for many builders. Toll Brothers (NYSE:TOL) holding up if you want to jump on one but housing starts are in the morning so very risky."

We had been watching the S&P all day and Happy posted this chart:

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US Markets

Kudos to Happy Trading for showing excellent restraint yesterday. As I said in yesterday’s wrap up, this is the least amount of bullish picks we’ve had in months and Happy posted in the morning: "People are wondering why there are no trades listed. I’m being careful ahead of Intel Corp. (NASDAQ:INTC) and Yahoo's (NASDAQ:YHOO) earnings. So please be patient. Thank you!" As we learned in the movie "War Games," sometimes the only winning move is not to play!

We also learned from the movies that sometimes toxic waste creates cool monsters that destroy cities, but sometimes toxic waste is wrapped up in a pretty package and marketed as "The Bear Stearns High-Grade Structured Credit Strategies Fund" and destroys $20B of investor assets. The total credit market is $7 Trillion - do you really think this is over? Click on this video to remind yourself how they spun this last quarter.


Combine that with sad results from YHOO and INTC last night and now Pfizer Inc. (NYSE:PFE) with a monstrous Q2 miss, coming in at .18, quite a bit lower than the .50 that had been the consensus of the 20 analysts that follow the stock for a living! JPMorgan Chase & Co. (NYSE:JPM) came in with a 20% rise in net, but I don’t think anyone’s going to be trusting anything a broker says for a while. So don’t expect much there, even with a 10% earnings beat.

Big Oil

This will be a great test of the markets today as we get CPI followed by day one of Uncle Ben’s Congressional Testimony. Once again, it will be hard for Bernanke to sugar-coat the housing crisis, especially on the heels of the Bear news. As I said last week: "Without Uncle Ben to tell investors that the very obvious disaster in housing may not be such a big disaster, it does tend to look kind of like an actual disaster."

The CPI was up .2%, headlining at 2.7% for the year with a 2.2% core - these are pretty good numbers! The bad news is that the only reason these numbers are good is because one of the largest costs in your life, the cost of owning a home, is slipping. The Bureau of Labor Statistics measures "owners equivalent rent" and that figure makes up a whopping 24% of the CPI and an even larger share (about 40%) of the core. Since the price of your home is falling and rents are going up (because the people who are selling their homes, causing the price of your home to fall lost money and can’t afford a new home, so now they are renting and driving up those prices), your cost of ownership is down (assuming you are a landlord and not a real person just trying to live in your own house). How far down? About 20% since the Fall. I’ll bet all those folks who live day to day on Social Security checks are just thrilled that their COLA is kept below 2% because they can rent out their homes for more money to make up the difference!

I hate to say it, but when the brokers are lying to you and the bankers are lying to you and the government is lying to you - you might want to take a hard look at your investments strategy. I will also say though, that all of this nonsense was very evident in early 2004 and the market is up 35% since this article, so we continue to be cautiously optimistic. We will see if we hold our levels without panicking out of things.

Hopefully, we will get the "healthy venting" that Happy and I have been looking for prior to a real break above 14,000, but these are good times to have cash, as we will have to be quick on our feet as we continue to get an inflow of earnings and data.

House of Cards

One bit of data we will be focused on this morning will be the oil inventory report and you can catch ZMan and I on Market News First, live at 10:25 EST. We’ll have to see which way the wind blows on that one too, though, as we already had a big sell-off yesterday. Backwardation is much worse than you may think; the front month contracts on the NYMEX found support (some might say blatant, possibly criminal manipulation, but we’ll call it support) that eluded the leap contracts, which in turn fell at a rate of 10x that of the August through the October set.

Things are so bad in the energy market that T. Boone was forced to do what every struggling business does when sales are fizzling and investors get nervous - HE WENT TO CHINA! That’s right, he took off this week for the promised land, accompanied by a CNBC crew so he could get hours of camera time telling everyone how great it will be when 1B Chinese people have cars. Let’s hope Mr. T didn’t buy Starbucks (NASDAQ:SBUX) on the same premise; things haven’t gone as well for them since they announced their China strategy last fall.

This whole oil thing is a huge joke at this point - as ZMan points out, traders are already trying to excuse the gasoline builds by saying we are past the summer driving season already. Wow - all three weeks of it? Maybe they are right not to build any more refineries, they’ve finally found a price-point that has caused people to change their driving habits!

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Oil and Dollar