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Market Wrap

Blip, Dip, Then Rip As Financials Finish Higher

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It is getting tougher and tougher to describe some of the intra-day action and just when it looks like the major averages are going to break lower from a choppy 2-week range and provide an attractive bullish entry point, or cover some short/put positions on a climactic dip, buyers show up in force on news that pending deals may save some mortgage insurers from losing their "AAA" debt ratings.

Negative comments out of Oppenheimer regarding banking giant Citigroup (NYSE:C) $24.74 -1.51% took some wind out of Friday's late-afternoon rally early this morning.

Citigroup's shares darted lower at the open and provided a somber tone as stock futures gave back the bulk of their overnight (Sunday) gains at the cash open after Oppenheimer's Merideth Whitney said further write-downs tied to subprime mortgages, risky corporate debt and consumer loans could have the banker posting another quarterly loss, and possibly forcing the company to sell up to $100 billion in assets.

Citigroup (NYSE:C) - Daily Intervals

Ms. Whitney, who in October correctly predicted that Citigroup would cut its dividend and raise some $30 billion in capital, said the largest U.S. bank might lose $0.28/share, or roughly $1.4 billion in the first quarter. Ms. Whitney's revised estimates are well below Wall Street's current estimate for a profit of $0.62/share.

While somewhat encouraging to bulls that Citigroup isn't trading below its 1/22/08 inflection low, a close much below $24.41 would be viewed as further negative.

Dow Diamonds (DIA) - Daily Intervals

While Citigroup (C) is no longer a heavily weighted PRICE component (#27 of 30) in the Dow, the banking giant's price action tends to carry some weight as it relates to market psychology. As well it should.

The Dow Diamonds (DIA) $125.54 +1.40% posted a strong gain on breadth of 29:1. Late Thursday afternoon, the DIA was trading $121.56 (INDU 12,155) when sellers vanished on news that mortgage insurer Ambak (ABK) $12.41 +15.87% might keep its "AAA" rating.

For several days now, I've been looking for a DIA decline back near the 1/22/08 close on heavy volume approaching 43 million shares, and look for a BULLISH entry on a "sling shot" type of move back above my 19.1% conventional retracement of $120.87.

So far, buyers have been stubborn above the $120.87 level and sellers don't appear to be overly aggressive.

Stocks slid to their morning lows at 10:00 AM EST, but then turned back higher after the National Association of Realtors said January's existing home sales came in slightly above expectations.

The National Association of Realtors said sales of single-family homes and condominiums dropped by 0.4% in January to a seasonally adjusted annual rate of 4.89 million units, which was slightly above economists' forecast of 4.80 million units. Still, January's decline marked the sixth-straight monthly decline for existing home sales. The NAR added that the median price of a home sold in January slid to $201,000, a drop of 4.6% from a year ago. Alarming to some industry watchers was that the inventory of unsold homes jumped to a 10.3 month's supply, meaning that at the current pace of sales, it would take that long to sell the 4.19 million homes on the market.

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January's 10.3 month's supply was up from December's 9.7 months and just below a 20-year high of 10.5 months.

Buyers really stepped in later in the session when rating agency Fitch said was putting the credit ratings of various insurers on watch for further downgrades because of continued weakness in the U.S. mortgage markets. Fitch said MGIC Investments (MTG) $15.98 +7.97%, Radian Group (NYSE:RDN) $8.06 +5.63% and PMI Group (NYSE:PMI) $7.78 +4.85% were the firms they were monitoring closest.

Ambak (NYSE:ABK) $21.41 +15.87% and MBIA Inc. (NYSE:MBI) $14.58 +19.70% surged when their names were not on Fitch's list.

Moments after Fitch's comments, rating agency Standard & Poors took MBIA's "AAA" rating off its credit watch. While some industry watchers say ratings are subject to change any given day, it has been thought that ABK and MBI were likely candidates for downgrades.

Having held two (2) of the MBI April $7.50 Puts (MBI-QU) since 1/22/08 and 2/12/08 based on the thought that a downgrade on their debt was coming, I thought bears should move to the sidelines today.

There is potential for some powerful short covering in MBI should the stock break much above $16.20.

After the close, MBIA (MBI) did say that it was eliminating its quarterly dividend to save the company approximately $174 million in cash. Shares of MBI eased to $14.33 in extended session trade.

Closing U.S. Market Watch -

Both the AMEX Natural Gas Index (XNG.X) 609.65 +3.25% and CRB Index (CRY) 401.26 +0.64% closed at new multi-year highs today.

Oil prices held steady near the $100/barrels mark on reports that OPEC is expected to pump around 250,000 barrels a day less in February versus January as some members start to pull in output ahead of the end of winter in main consuming nations in the northern hemisphere.

Chevron (NYSE:CVX) $87.18 +2.06%, which was added to the Dow Industrials on 2/19/08 (replacing Altria (NYSE:MO)) closed above its 200-day SMA ($87.00) for the first time since falling below on 1/16/08 ($86.42). Exxon/Mobil (NYSE:XOM) $89.13 +2.24% and CVX are now the #2 and #3 weighted components in the Dow Industrials.

International Business Machines (NYSE:IBM) $110.08 +1.85%, the most heavily weighted Dow Component also closed above its 200-day SMA ($109.29)!

IBM - Daily Intervals

It isn't just "energy" that is giving the Dow Industrials a lift, and it may not be just energy stocks that are building gains from the January lows. "Big Blue" has retraced more than 50% of its October highs to January lows and depicts BULLISH leadership among the Dow 30.

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

While "Big Blue" gets a technology trader's bullish attention, two of the QQQQ/NDX heavyweights has Apple Computer (NASDAQ:AAPL) $119.74 +0.23% and Google (NASDAQ:GOOG) $486.44 -4.20% still below their 1/23/08 intraday lows of $126.15 and $519 respectively.

The QQQQ may well be the most manageable bull trade and offer very good risk/reward for a small position, where a rather tight stop could be placed just under the $41.63 level.

With IBM (not a QQQQ component, but a bellwether for tech) showing some signs of favor, the QQQQ could launch with bounces that catch some momentum in AAPL and GOOG.

At tonight's close, Dorsey Wright & Associates' NASDAQ-100 Bullish % (BPNDX) is still in "bear confirmed" status at 25.00%, and would need a higher measure reading of 28% to achieve "bull alert" status. A measure of 30% would be needed for "bull confirmed."

If a trader/investor would normally consider $10,000.00 as a "full position" in the QQQQ, then under current conditions, I would think a 1/4 position, or $2,5000 appropriate (2,500 / $43.90 = 57 shares).
 


 

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