Options Trader: Thursday Morning Ideas

by: Philip Davis

Limbo high and limbo low! Today looks like a limbo low day with Q3 productivity unchanged and costs up a whopping 3.8%. Wal-Mart Stores Inc. (NYSE:WMT), Target Corp. (NYSE:TGT) and Costco Wholesale Corp. (NASDAQ:COST) came out with disappointing sales numbers today [cue danger music].

We need something to get Mrs. Jones off the ropes and I'm not sure if another round of merger mania will qualify. It is possible that the consumers are feeling so good they are blowing off the discount sector, but that is probably just wishful thinking.

I would have thought MasterCard's report on charge-o-mania would have qualified as the company "didn't see any evidence" of slowing U.S. consumer spending. This echoes AXP's 20% growth in consumer charges last week (I guess they are waiting to hear from Discover).

Hong Kong isn't playing our game... As I pointed out on Tuesday morning, the Chinese market had a PMA as it came back from a Monday holiday and ignored the pullback. This morning the Hang Seng made a new record high with a 1.4%, 261 point gain in a generally strong Asian market.

Only Pakistan is underperforming this week, retracing 1/3 of its gains from the recent run. They are not alarmed so I won't be either.

In Japan, signs that Goldman Sachs Group Inc. (NYSE:GS) may be losing their mojo are appearing as the IPO of Sachs' own Accordia Golf unit flopped in their debut, coming in 3.6% below the offering price.

Europe is waiting for the U.S. markets to open before committing, but they look ready to sell at the drop of a hat. In a preview of corporate America's worst democratic nightmares, EU officials raided Samsung's German offices as part of an investigation into memory chip price-fixing. Our pals at Sony got a U.S. subpoena along with Cypress Semiconductor Corp. (NASDAQ:CY), Micron Technology Inc. (NASDAQ:MU) and Mitsubishi.

Unilever NV (NYSE:UN) (the European Proctor & Gamble Co. (NYSE:PG)) had great sales showing strong consumer trends in Europe and America (I know we eat those Country Crock mashed potatoes all the time!).

So we have the CVS Corp. (NYSE:CVS)/Caremark Rx Inc. (CMX) merger, and Tribune Co. (TRB) going on the block, Time Warner Inc. (NYSE:TWX), Electronic Data Systems Corp. (NASDAQ:EDS), Cigna Corp. (NYSE:CI), Burger King Corp. (NYSEARCA:BKC) and Mastercard Inc. (NYSE:MA) with huge recent earnings reports, sounds good to me...

Let's just watch our bottoms as I think it is very unlikely we will be breaking out of upside resistance this week. Good signs will be holding the following through tomorrow:

Dow -- 12,000
S&P -- 1,360
NYSE -- 8,700
Nasdaq -- 2,325
SOX -- 453 (currently below)
TRANQ -- 2,567 (currently below)

In order to get the transports back on-line we need a hat-trick of some good retail numbers, declining oil prices and something positive from housing -- I suppose emphasis will be on the trick!

The ECB already came to the dollar's rescue by leaving rates unchanged at yesterday's meeting, and the BOJ did the same. We can only hope they will be charitable towards us at the treasury auction.

Oil should be down a bit more today as we pass the November 1st deadline for cuts without any actual cuts taking place. "It's doubtful [OPEC] is going to get a full implementation," said Neil McMahon, an oil analyst at Sanford Bernstein in London. He estimates the group may get about half of the planned reduction.

Let's keep an eye on that $58.56 mark to hold as a top for oil as we shoot for $54.28 on this leg down, but keep in mind that we are fighting an army of trillionaire roaches who will do anything to keep the door on this trap from closing on them.

Battles will be fought more at the psychological numbers like $58 and $57 but we need to keep our eye on the prize and ignore the daily games. Still, we are not fighting the power and there is no reason to blow our December put profits by holding on over $59 (if it gets that far). We follow the Valero Rule, get out and get back in when the signals dictate.

Gold should tick down a bit today as the dollar firms up a bit.

Here's a great item that Trader Mike posted about Fundamental Analysis, useful as I get asked a lot what FA is.


What do you do when you have trouble maintaining pricing power in the market? If you are an infinitely rich quasi-monopoly the answer is simple: Buy out or merge with your competitors. We discussed how eliminating the competition was being used effectively in the gold sector to keep a lid on supply over there and now it looks like the oil companies are stepping back up to the plate.

BP PLC (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) are in merger talks! That's two $200B companies worried that they need to get bigger to compete effectively... How do you think that makes a little $8B company like Sunoco Inc. (NYSE:SUN) feel?

The two companies are already involved in cooperative projects. Just last month, BP shut down production in Alaska while Shell took out 2 platforms in Norway and shut down 3 wells in Nigeria in order to keep oil over $60. Both companies are already being investigated for market manipulation so they can save by driving to Washington together.

As Adam Smith said over 100 years ago: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices..." He laments, "It is impossible indeed to prevent such [contrivances]..."

Rather than rehash it here, you can read an interesting exchange, between Saul Sterman of CrossProfit and I, regarding which side of this trade to play in the comment section.

In our own comment section yesterday several people asked me if we should take the clear sell (puts) signal from the Valero group as a buy (calls) sign on oil plays. I said no, mainly because Suncor Energy Inc. (NYSE:SU) did not confirm the pump and, although there was some quick money made for the day traders (congrats), I don't think it will sustain itself through the open.

Honda Motor Co. (NYSE:HMC) and Toyota Motor Corp. (NYSE:TM) are just knocking the cover off the ball in what they call the New Vehicle Mix, projections for the next 5 years of sales.

I will not make any picks today other than going back to our usual oil puts (check comments), but I think we need to watch and wait as we get a really good market test today.

Read all of Phil Davis's articles on Seeking Alpha.