Options Trader: Friday Morning Ideas

by: Philip Davis

This will be my last post until next Friday, as I will be far away and hopefully having way too much fun on my vacation to worry about the markets.

The Dow appeared to have a good day yesterday but a lot of that was the result of MO gaining 6% and XOM gaining 1.5%, adding $10Bn worth of value to the index. The S&P was also boosted by across the board gains in the tobacco sector as they scored a dismissal of a $145Bn lawsuit in Florida.

Despite fairly good energy and commoditiy performance and a big move by tobacco, the S&P could hold an early gain over 1,275 and is resting just under its 50 dma at 1,274.

AMD cut Q2 sales forecast so forget the Nasdaq today! If I were around I would consider a short on the QQQQs but it's a very risky momentum trade.

We can watch the Dow for a signal today as it is 40 points over the 50 dma of 11,180 but I was very, very concerned by the NYSE's low open and inability to hold 8,200. With all the indices so close to their 50s, today will be highly relevant in setting direction for the quarter.

The jobs report was much weaker than expected although wages are creeping up. This news is very stock postiive so anything other than a big rally will be a big disappointment. The dollar has stopped falling for the moment as it is still somehow considered a safety currency for Asian investors as they worry about another dozen test missles dropping in their back yards.

Oil is hovering around $75 despite an unexpected build in gasoline stockpiles. You people just keep on buying gas, even at over $3 a gallon so the demand numbers are actually going up. We have record supply and record demand, if either one turns there will be a huge move in this sector. Natural gas has plummeted to $5.60 as the weather predicts a cooler summer, meaning less air conditioning and less hurricanes so it remains to be seen whether oil will follow suit.

Gold broke $635 and the question of today is will they hold it? If not, coming into a weekend where Kim Jong Il remains at large, then it will be a surprisingly bad sign for that sector.


A Billionaire fight has broken out over Google's private jet. The boys have been fighting over details like who has a bigger bed and where the bar will go, rather than worrying about gassing up a plane designed for 180 people and using it as a private jet.

As a once in a while shareholder, I worry about the lack of perspective of people who are willing to spend this kind of money for fun. You cannot argue a legitimate business purpose to this, as much of the usual time advantage of having a private jet is destroyed by using one that requires a gate at a major airport.

Advantage number 2 of a private jet, being able to accomodate sudden changes in schedules, is ridiculous with a plane that costs $20,000 just to take off, plus another $10,000 an hour to remain airborne (fuel is about 35% of the cost of running a plane) and that, of course, is not including the cost of the plane itself.

A shareholder may wonder: "If they are willing to spend that kind of money to save perhaps an hour over flying commercial, how can I be sure they're getting the best price on a copy machine?"

I'm also not too wild about the entire executive team all getting on one plane on a regular basis.


As I am all cashed out and not involved, I'm not going to make any picks today but we will get a good idea of how low the Nasdaq can go with today's AMD warning. If the index can hold up today, we may get a nice bounce next week but I'm not expecting it.

The OIH is back at its 50 dma of $150 but well below the $169 high last time oil was at $75. Last July we thought the oil sector was out of control when the index was at $100 before hurricanes added 20%. Most of 2004 OIH was at $75 with oil around $40 so look for the sector to follow oil quickly down if it starts to drop. Of course we do not like short oil into the weekend but we are ripe for a downturn...

Homebuilder action will be telling today if the Fed looks like it will continue hiking. If TOL goes below $25 then I am wrong about the sector. Without homebuilders, last summer would have been miserable for the S&P...

Speaking of disasters - the SOX is heading back for last summer's low of 420 and will either bounce or cross down in a very nasty way. Last summer the SOX went from 376 in Apr to 480 in Aug and peaked at 559 in January. The Nasdaq pretty much followed suit but held up a little longer before falling off the table in May. We need to keep an eye on the SOX which is still dragging down the markets.

Let's watch AMD's action around the 5% rule to get a feel for where the SOX may bottom.

GM has a big conference call today. While they cannot reject the Nissan merger out of hand, expect the action to be treated as hostile by the board with a "study" of some sort formed to look into the deal but not much more.

Have a nice week everybody!