Option Investor

Daily Newsletter, Wednesday, 09/24/2008

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

The Sleeper Hold!

Market Wrap

Stocks witnessed a mixed-to-lower trade on Wednesday while Treasuries found a strong bid as the tag-team effort of Bernanke/Paulson continued their efforts to convince Republican and Democratic Senators alike, that the U.S. economy could slip and fall into a recession if a still being molded $700 billion tax-payer funded rescue plan isn't approved soon.

Market Internals -

Despite yesterday evening's news that Berkshire Hathaway's (NYSE:BRK.A) $133,300.00 3.49% Warren Buffett said it was investing at least $5 billion in Goldman Sachs (NYSE:GS) $133.00 6.35% the major averages traded modestly higher on negative breadth at both major exchanges.

Mr. Buffett said the primary reason for the decision to invest in Goldman was based on his belief that a rescue plan would be delivered.

Like the "sleeper hold," equity traders appeared little interested in jumping into the ring today.

Volume levels have dropped off significantly at the big board, which I would attribute in part to the delisting of Lehman Brothers at last Wednesday's close, but I would also think the SEC's no short sale rule of many NYSE-listed stocks, which grows further in number and even outside the "financial" sector.

Today's 4.8 billion shares at the big board were well off its 5-day average of 6.97 billion and 10-day average of 7.53 billion shares.

NASDAQ's volume also continued to abate at just 1.82 billion shares, down from a 5-day average of 2.77 billion and 10-day average of 2.74 billion.

The number of new highs at both the NYSE and NASDAQ are well off some shocking readings from Friday. On Friday, the NYSE reported 208 issues having traded a new 52-week high, while NASDAQ reported a slightly better 230.

Updated from 09/23/08 SEC NYSE short sale prohibition

Medco Health Solutions (NYSE:MHS) $45.55 1.19% and S&P 500 Index (SPX.X) 1,185.87 -0.19% component that at today's open accounted for a 0.22% weighting in this market cap-weighted index edged higher.

The most heavily weighted stock in the price-weighted Dow Industrials ($DJI.X) 10,825.17 -0.26% and 1.51% weighting in the S&P 500 Index had "big blue" IBM (NYSE:IBM) $117.00 1.42% gaining $1.64, but still finding some sellers at its 200-day SMA of $117.71.

Late this afternoon, S&P 500 component CVS/Caremark (NYSE:CVS) $33.10 -1.66% is among a list of nine (9) new names added.

At the time of this writing, I was unable to find a NASDAQ list of SEC prohibition names.

Investors appeared unfazed by a larger-than-expected drop in sales of existing homes in August. The National Association of Realtors said sales fell by 2.2% to a 4.91 million annual rate. Economists were looking for sales to decline a more modest 1.6% to 4.93 million annual rate. The number of unsold homes on the market dropped by 7% from a record set in July, marking the steepest drop in inventory since December 2006.

Today's Global Economic Calendar -

Additional data on the housing sector had the Mortgage Bankers Association saying its seasonally adjusted purchases index fell by 10.4% to 340.80, while the refinance index fell 11.2% to 2043.4 after the prior weeks 88.1% surge. I should note here again that these are APPLICATIONS for mortgage purchases and refinancing, and does not equate to actual approvals as lending standards for prime (high credit score and/or verifiable income), or subprime (lower credit score and/or stated income) are getting closer scrutiny, despite benchmarks from the Community Reinvestment Act (CRA). The MBA said the average contract interest rate for a 30-year fixed-rate mortgage increased to 6.08% from 5.82% the week ended 09/12/08, while a one-year ARM increased to 7.01% from 6.95% during the same period.


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For those of you that found last Thursday's Market Wrap "opinion" from Robert Ogilvie as interesting/informative as I did, the CRA and all of its amendments also gives some background as to the S&L crisis, its taxpayer rescue plan, and resulting revenue surpluses during the Clinton administration (1992-2000). Regulation and oversight of such programs is also a key sticking point for some lawmakers that are now burdened with a decision in regards to the rescue plan.

The Dow Jones Home Construction Index (DJUSHB) 324.80 5.22% was today's sector/index winner in your U.S. Market Watch, the only equity-based index to post a gain greater than 1.0%.

US Market Watch - 09/24/08 Close

As investors, economists and traders around the world listened to today's continued testimony from Dr. Ben Bernanke, the weekly EIA inventory figures (excluding natural gas) were released at 10:35 AM EDT.

Market Monitor - EIA Inventory / Refinery Data

While I don't tabulate the daily updates from the Department of Energy (DOE) or Minerals Management Services (MMS), the post Hurricane Ike inventory data offers little surprise.

For the week ended 09/30/2005, roughly four (4) weeks after Hurricane Katrina hit the Gulf of Mexico shores, the Percent Utilization of Operable Capacity saw a similar "sharp decline" to 69.79% from 86.73%, then refineries began coming back online.

Platforms began producing as demand returned.

I would also note that the # Days Supply of Crude Oil for the week ended 09/30/05 rose to 21.7 and eventually hit an "inflection" high of 24.7 by 10/21/05.

Since the termination of the Nymex October Crude Oil futures contract (cl08v) on Monday (09/22/08), which found an impressive little short-squeeze to $120.92 ($130 intra-day), I'm now tracking November contracts for crude oil, unleaded, heating oil and natural gas.

Nymex November Crude Oil (cl08x) settled down $0.88, or -0.83% at $105.73 (this contract settled $109.37 on 09/22/08 and traded intra-day high of $110.45 and its 200-day SMA).

Nymex November Nat. Gas (ng08x) settled down $0.236, or -2.90% at $7.908 and was a percentage loser in the energy complex.

I don't have an current market estimate for tomorrow's EIA release of underground storage. My estimate is for a build of 75 Bcf to 3,047 Bcf.

Well, that's some of today's events.

Per last week's Market Wrap, I want to update you on the 13-week Treasury Yield ($IRX.X), where trade still gives me the impression that traders and investors are very nervous and defensive.

The recent SEC decisions for more "socialistic" policy regarding NO SHORT many financials and now some other stocks, and a pending tax-payer funded rescue plan, provides the backdrop for a market that can, and will moved on a moments notice.

If you've ever watch a professional wrestling event in person, or on the TV, you're pretty certain what you're seeing isn't real.

The wrestler getting the "sleeper" hold put on him doesn't lose the match until the referee lifts his arm, and the arm drops to his side as if the wrestler is "out" with all blood supply to the brain seemingly cut off.

Oh but the surprise, and roar of the crows, when he maintains a super-human effort, to somehow keep his/her senses, sometimes able to get to the ropes where the hold must be broken.

13-week Treasury Yield ($IRX.X) - Daily Intervals

Earlier in this evening's wrap I quickly reviewed some of the "shocking" new high figures over the past few days, and their abatement.

On first word of the "rescue plan" and other government interventions in the equity markets, you can see some formidable selling came into this very short-term Treasury note, with its yield jumping as high as 1.05% Friday, before closing at 0.92%.

To be truthful, today's equity action didn't show as much downside as I thought we might see by day's end, when this short-term note's YIELD fell below 0.50%.

Again, I'm using the $IRX.X more as a pulse of just how LOW a yield return (even short-term) that market participants are will to buy, in order to AVOID risk in other places of the market, namely equities.

See back in late March, when this bond's YIELD was able to see a close above the 1.00% level?

That would be a first indicator for this technical analyst to begin to think that market participants might be somewhat more "comfortable" with things.

Again, the tax-payer rescue plan is being molded. We have NO IDEA what it looks like, or ... if it will ever exist.

President Bush will address the nation this evening at 09:00 PM EDT, and may give some greater detail.

To instill in traders and investors how quickly things can change, let's also revisit the various major market bullish % from Dorsey/Wright. I do not recall EVERY having witnessed this type of volatility from what tend to be more "slow and methodical" moving indicators of internal bullishness, or bearishness.

Wednesday, 09/17/08 was our last visit.

Some of the cash that came out of the 13-week Treasury ($IRX.X) generated a notable number of "buy signals" on a lot of stocks' point and figure charts (a column of X exceeded a prior column of X).

For instance, the BROADEST OF BROAD bullish % and the BPALL was at 26.47% last Wednesday evening and by the 09/22/08 close (Monday) had 40.25% of roughly 5,000 PnF charts then seeing a "buy signal."

From roughly 1,324 stock to 2,012 stocks and this very broad indicator reversed back up into "bull confirmed" status.

The very broad BPOTC, which is Dorsey's bullish % for the NASDAQ Composite (COMPX) 2,155.68 0.10%, remains in a column of "O" and would need a closing session measure of 36.00% or higher to see a 3-box reversal back higher.

But look at the various bullish % (BROADEST to left, the NARROWER/NARROWEST to right).

Remember, there are only 30-stocks in the Dow Industrials and this very narrow bullish % is not used that much by institutional money managers.

SPX and RUT New High and New Lows

I was "shocked" to say the least when I learned that the RUT.X had posted 198 stocks having hit a new 52-week high on Friday.

This is where I think a BULL would have to be focusing on an index, or tracker trade like the iShares Russell 2000 (IWM).

But NOTICE the quick, and notable "lack" of new highs since.

Still, if the SEC is going to take away a portion of market participants that SHORT stocks, and the RUT.X/IWM most heavily weighted sector is FINANCIALS, then the supply/demand characteristic FAVOR demand.

The "explosion" in the number of new highs to 198 is the most in over a year! That would have to mean that any "old" supply of stock for at least 198 small cap names is becoming limited. Yes, there may be some "old bulls" that are selling, some stocks are still able to be shorted, but if we were to see a BULLISH response to any pending "rescue plan," then this is where I'd be placing any new BULLISH capital.

I would STRONGLY suggest OPTIONS.

If we're going back to the "stone age" with no rescue plan, then the MOST you can lose is what you place in a CALL OPTION.

By now, bears, or LONG PUT holders now what to expect.

We should all be managing our accounts to EXPECT the UNEXPECTED.

New Plays

Most Recent Plays

Click here to email James
New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

Play Editor's Note: There is still a lot of uncertainty and fear in the market place. I'm not adding any new positions today. My bias is bearish but stocks could pop if we get any sort of "good" news on the bailout plan. What constitutes "good" news at this point is anyone's guess. The best trade may be to sit out and wait.

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

Updates On Latest Picks

Click here to email James

Call Updates

Allergan - AGN - close: 55.97 change: -1.39 stop: 54.95

AGN fell sharply this morning under performing its peers. We couldn't see any news to account for the relative weakness. The selling paused when AGN hit its rising 50-dma near $55.30. We have been warning readers to expect a dip near $56.00. The stock overshot to the downside. Short-term technicals have turned bearish. Wait for a bounce before considering new bullish positions. Our target is the $64.00-65.00 range. The Point & Figure chart is bullish with a $75 target.

Picked on September 21 at $ 58.68
Change since picked: - 2.71
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 2.4 million


Tidewater Inc. - TDW - cls: 58.67 chg: -2.01 stop: 57.90

Crude oil inched lower on Wednesday and oil stocks followed. TDW under performed its peers and the market with a 3.3% plunge past the $60.00 level and its 10-dma and exponential 200-dma. This is short-term bearish move but we've been warning readers to expect a dip near $58.00. The low today was $58.12. A bounce from here can be used as a new bullish entry point but I am reiterating early comments about the broader market bearishness and how this isn't a great environment to open new bullish positions. We have two targets. Our first target is $64.90. Our second target is $68.00.

Picked on September 23 at $ 60.25 *triggered 9/23
Change since picked: - 1.58
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 1.4 million


Washington Mutual - WM - close: 2.26 change: -0.94 stop: n/a

Look out below! WM crashed to a 29% loss on Wednesday. The move was fueled by news that S&P had downgraded the company's creditworthiness even further. What really fueled the sell-off was comments that WM may not be sold as one piece but chunks of the company might get bought. It's possible the analyst was suggesting that the U.S. government may step in and slice up WM to be sold to its competitors. Such a move would kill any "premium" paid and our bullish bet would be dead money. Of course at this point our bullish bet is looking pretty grim already. We're not suggesting new bullish call positions. We're not listing a stop loss because the stock is so volatile and we knew this would be a high-risk, speculative bet. We listed the October or January calls as suggested strikes to buy.

Picked on September 21 at $ 4.25
Change since picked: - 1.99
Earnings Date 10/22/08 (unconfirmed)
Average Daily Volume = 113 million


SPDR S&P Oil - XOP - cls: 49.55 chg: -0.17 stop: 47.45

The trading in the XOP continues to grow more and more bearish as it hovers around the $49-50 zone. The stock is building a short-term trend of lower highs under its 50-dma. If XOP doesn't bounce from its 10-dma near $48.65 we will probably consider an early exit. We are not suggesting new bullish positions at this time. The XOP hit our first target on Sept. 19th. We're currently aiming for the $53.50 mark.

Picked on September 16 at $ 46.70 /1st target hit 9/19/08
Change since picked: 2.85
Earnings Date 00/00/00
Average Daily Volume = 2.0 million

Put Updates

Volatility Index - VIX - cls: 35.19 chg: -0.53 stop: n/a

The market spent the day hovering sideways and the VIX followed suit. We remain bearish but readers have a couple of choices on potential entry points. You could wait for another failed rally or blow-off top type of move around the 40 region. Or you could wait for a breakdown under the 10-dma. We're setting our first target at 25.50. Our second target is 21.00.

Picked on September 16 at = 30.30
Change since picked: 4.89
Earnings Date 00/00/00
Average Daily Volume = --- million

Strangle Updates


Dropped Calls


Dropped Puts


Dropped Strangles


Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.


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