Options Trader: Wednesday Morning Ideas

by: Philip Davis

Recovery Wednesday? OK, that title is only alliterative if you use your Elmer Fudd voice...

If that was it for the drop I am in big trouble because I have no idea what to buy at these prices. Obviously, I still have grave concerns that are apparently not shared by other investors who are piling money back into the markets after Monday's pullback.

We are still not in orbit yet, but the market is looking pretty weightless in overseas trading with (at 5 am) Asia, Europe and U.S. futures all firmly green.

The GDP came in better than expected (2.2% vs. 1.8%) and the core PCE remains at a very manageable 2.2% -- it's the Goldilocks economy for sure!

Asia was led higher by Japan as the Nikkei gained 221 on a strong industrial output (up 1.6%) which brought the Hang Seng back 141 points, recovering almost a third of yesterday's drop.

Europe's bounce is less impressive with indexes over there picking up about half a point, but globally we seem to be holding our ranges, which is very good stuff.

The dollar is down 12% against the Euro (the world's strongest currency) this year alone and 50% over the past 5 years and we can only hope, in that longer-term perspective, that this is some sort of bottom before we tip over into the funny money category.

US Trade 29 11 06We are completely dependent on the kindness of strangers to help our currency now as nothing is being done at home to narrow the trade deficit (we send $70B a month out of the country) or the budget deficit (we borrow $50B a month to keep the country running) so the only thing that will save the dollar is other Central Banks propping it up artificially.

It's not something I like to base my future on but, hey, that's just me -- you guys go to town!

Speaking of which, I hate to be a naysayer on the markets and one reason is it hurts readership. That's right. I'm going to let you into a dirty little financial writing secret and tell you that readership goes down if I take off my cheerleading dress.

This is the main reason I don't do advertising on the site (but I will soon), as much as I like to think I am above that stuff, when I had Google ads I used to get bothered by any drop in the daily take (kind of like a Nielson rating).

Nobody wants to hear the economy is about to collapse or the market is going to tank so it is human nature for readers to want to spend their valuable time reading things that make them feel good, rather than worried.

I'm just saying this now as my readership is through the roof thanks to a WSJ mention the other day and I feel the need to keep myself honest in what I consider a very tricky spot for the market and also to make all you nice people aware of this major industry dynamic to put what you read at other sites into context.

Telling you bad news costs money! If I had an editor and shareholders to answer to it is unlikely we would even be having this discussion, so imagine the pressure that most publications are under to keep you coming back. Always remember that the press is a business and their mission is to keep you reading -- sadly that is more important than giving you the truth!

Now, where were we? Oh yes, dollar = potential disaster and you are unlikely to hear it until after it happens as the press prefers to give you the warm fuzzys so you will click on a Google ad for more viagra. See I can summarize when I have to!

None of these ground-based issues will bother me though if we do finally get into orbit where we can look down at our deficits and the wars and the housing market and laugh because they all look like ants from Dow 15,000!

So let's watch our levels to see if this "rally" is going to have any legs:

  • Dow -- testing 12,200, very bad below it, 12,300 is breakout
  • Transports must hold 2,650 and 2,700 is not all that impressive
  • S&P -- must hold 1,385 and a long way to 1,400
  • NYSE -- 8,900 or bust -- literally
  • Nasdaq -- needs 2,450 to breathe again
  • SOX must retake 480 and get back to 490

US Markets 29 11 06

Crude will be interesting as a stronger-than-expected U.S. economy may salvage demand expectations against what should be a dollar bounce today.

Oil inventories are out at 10:30 and once again CNBC comes up with numbers from hell expecting a draw of just 300Kb despite a .5% expected increase in refinery utilization and a supposed OPEC production cut (and last week's Alaska outage).

Half a percent increase in refinery utilization alone would mean 100,000 additional barrels a day are being converted to products -- how can they not expect a bigger draw???

Not only that but they expect a 700Kb BUILD in gasoline and a 500Kb BUILD in distillates. That would be a build of 500Kb more than production has increased last week! Right after Thanksgiving (the second biggest driving week of the year)? At the beginning of winter (when people stock up on heating oil)?

Oh well, what are you gonna do? We'll see which way the wind blows in comments later but at this point I am just curious to see how far they can push this game...

Gold should nudge down on a stronger dollar today and we'll see how it handles $640. There's a lot of short money on the buck and we'll see if it's enough to give us a squeeze today. If not, I'll still be pretty worried.


  • I'm still on the sidelines but I'll be working back into a few of our beaten-down picks like Caterpillar Inc. (NYSE:CAT), Motorola Inc. (MOT), Dell Inc. (DELL), Starbucks Corp. (NASDAQ:SBUX)... unless we get rejected from our lower levels (like Dow 12,200) so let's be very careful out there!
  • Consolation Prize Queen Tiffany & Co. (NYSE:TIF) (we have the Jan $35s at $2.20) had great earnings and should at least make $37.50, and I will be half out on any pullback with a 20% of profit stop on the rest. We also have the June $25s and I'll keep a 20% stop on those -- hopefully it won't trigger.
  • Nordstrom Inc. (NYSE:JWN) is still just sitting around and now the Jan $50s are looking good for $2 (we have the Jan '08 $50s at $6.70 after buying out the Jan $50 calls we sold last week).
  • Boeing Co. (NYSE:BA) is another one where the calls we just sold now look attractive as a buy and the Jan $90s for $2.45 are a good play if the Dow stays over 12,200.
  • We took those Caterpillar Inc. (CAT) $65 calls to the cleaners and now I like buying the Jan $65s for .95 but this has been a bad trade more often than not (it sure was for the guy we sold them to!).
  • General Electric Co. (NYSE:GE) June $35s are back at $1.75, where we liked them last time before we made 40%!
  • I'm going to double down on the Dow Chemical Company (DOW) Mar $45s for .25 as long as oil stays below $61 (or gets below $61 as the case may be!).
  • Oops, I forgot to mention yesterday that we did manage to get into the Capital One Financial Corp. (NYSE:COF) Jan '08 75s for $10 in early morning comments, but we never sold the calls against as the stock was strong all day after the morning drop. We totally lucked out with a Cramer pump and we will almost certainly sell calls today!

A cautious approach is recommended and I'm still going to be 75%+ in cash until we are sure we have broken orbit because, as we've seen Monday, gravity can be a bitch!

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