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Daily Newsletter, Wednesday, 10/01/2008

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Table of Contents

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

Market Wrap

Constituent "Flip Flop," Buffett Chuckles On Way To Bank

Market Wrap

After a sharp decline on Monday, followed by a bounce Tuesday, stocks finished mixed to lower today as stock market participants and now those with some type of "economic interest" awaits word from Congress on a rescue/bail out plan aimed at the tight credit markets.

Of course, it took an 8% SPX decline from roughly 1,215 to 1,112, a GE Capital to no longer offer loans to start a McDonald's or Sonic franchise, an inability for "good credit" consumers wanting to refinance a mortgage, or buy a new car, for some to understand that Bernanke and Paulson's calls for immediacy were not to bail out the fat cats on Wall Street.

If you listened, or read any financial news network today, the calls from constituents to their Senators had many "flip flopping" from last week as their business, or job suddenly seemed at risk as the tightening credit markets put a squeeze on things.

Yes, the sleeper hold was getting tight, and it wasn't just getting tight for the "fat cats" on Wall Street.

Wednesday's Global Economic Calendar -

A stronger-than-expected German retail sales report had Germany's DAX finishing down 0.4% at 5,806, and more than likely gives us an observation of what market participants around the globe will be monitoring this evening and approximately 07:45 PM EDT.

Perhaps in anticipation of a "yes" vote, the Britain's FTSE-100 finished with a 1.2% gain to 4,959 to start the new quarter, even as its Manufacturing purchasing manager's index (PMI) showed a larger-than-forecasted contraction measure of 41.0 in September from a downwardly revised 45.3 in August.

That reading out of the UK gives those in the US and around the globe a preview of upcoming PMI's as the US financial system and flow of capital, or "lack of flow," trickles down.

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I should note that there were reports this morning that France (a member of the EU) proposed a EUR300 billion rescue package for member countries. Later in the session, France's finance ministry denied the reports. Germany reportedly opposed any such package, which according to France, never existed.

I'm not kidding.

A sharp decline in the US September ISM Manufacturing to a still expansionary measure of 53.5 (reading above 50.00 signal expansion) from the elevated 77.00 suggests the demand/supply relationship for prices in my opinion.

ISM Sep Mfg. At A Glance -

Prices of inputs saw a sharp decline in September and was the largest contributor to September's ISM. However, if you believe as I do that commodity prices tend to follow the stocks, there's probably some more downside to those figures coming.

Another area, or perhaps equity market I see as having some potentially BIG downside still is emerging markets that have benefited from "easy money" were the credit crunch is starting to be felt.

I would think institutional money as well as individual money in developing countries' markets will be monitoring tonight's "rescue bill" vote.

Yes, even some eBay (NASDAQ:EBAY) $20.85 -6.83% sellers and buyers that have noted the "no longer accepting" out of country funds due to the tight credit markets.

Market Internals -

At 10:00 AM EDT, some equity selling did come in on the US PMI data,

Banks and brokers were among today's sector winners, but the insurers as depicted by the S&P Insurance Index ($IUX.X) 204.33 -5.25% were notably weak.

JP Morgan (NYSE:JPM) $49.63 +6.27% did close at a 52-week high, having been gobbling up some financial assets on the cheap. Probably the "best thing" that happened to Bear Sterns in more than a year too.

Now, Mr. Buffett's Berkshire Hathaway (BRK.A) $137,000 +4.90% while not yet at its 12/11/07 intra-day high of $151,650.00 is starting to trade bullish again, and Mr. Buffett stepped into the chaos again today and unveiled a plan to buy $3 billion worth of General Electric (NYSE:GE) $24.18 -5.17%. Berkshire also received warrants to buy $3 billion worth of GE stock at $22.25/share over the next 5-years.

If that sounds ANYTHING like the "first plan" taxpayers could have got, or SHOULD WANT with the "rescue plan," then you know where Mr. Buffett is going, and he's following, or chuckling all the way to the bank. Yes ... JP Morgan bank.

Then at 10:35 AM EDT we got the headlines from the Energy Information Agency. It takes me awhile to tabulate more than just the headline numbers of crude oil stockpiles, total gasoline stockpiles and refinery capacity utilization, but here's some of the numbers that traders and investors need to recognize (in my opinion).

OptionInvestor.com Market Monitor -

We did see some selling on the "headline number" in oil as it relates to the 4.3M build, but factor out the 1.38M draw in the SPR as the Department of Energy (DOE) releases some more oil due to the impact of Hurricane Ike, and 2.92 million barrel build still above the forecast of +1.8 million barrels.

In last Wednesday's wrap I thought, based on hurricane history, that we'd start to see refineries start bringing some capacity back online, and while we did, with utilization up to 72.27% from the prior week's 66.71%, that's a bit off from the ~75.00% recovery week from Katrina and Rita in 2005.

Energy Secretary Bodman noted today that electrical damage is more extensive than first thought and will prolong a full recovery to at least 4 to 5 weeks in the Gulf region.

The DOE said it has delivered an additional 900,000 barrels of crude oil from the SPR today.

Metals Mining Services said 52 of the 3,800 oil/gas production platforms were destroyed in the US Gulf. The 52 platforms accounted for 13,300 b/d of oil and 90mmcf/d natural gas.

Shares of beaten down banker National City Corp (NYSE:NCC) $2.89 +65.14% inched higher, but remain shy of their "we'll have a bill by Sunday" Friday close of $3.71.

Two (2) iShares with an "emerging market's" flavor I'm fond of from the PUT OPTION side of things should the "rescue plan" be further delayed ended mixed.

The iShares Emerging Markets (EEM) $34.58 +1.19% and the iShares S. Korea (EWY) $39.05 -1.71%.

On a NO "rescue plan" (most expect the rescue plan now), the EWY may be the best PUT OPTION on the board.

Here's the field position of the GLOBAL bullish % at Monday's close.

Global Bullish % - Dorsey/Wright 09/29/08 Close

One "primary reason" I would think a broader iShares Emerging Markets (EEM) trades up from Monday's close, is that many "emerging market" countries were and still are "oversold" below our 30% measure.

The "South Korea" bullish % at 46.67% isn't in the best of field positions considering how "oversold" the rest of the world is.

Let me check ... At tonight's close the S. Korea bullish % has reversed back lower to 30.27%.

iShares S. Korea (EWJ) - $1 and $0.50 box

I would think any "lingering" of the credit crunch would have even GREATER impact on developing countries' that hunger for foreign investment and business to keep their engines running.

RISK to a "buy signal" ($44.00) is roughly $4, so look for an OPTION that is $4.00 or less, then hold on for your life.

You think US market indices are volatile? You haven't traded/invested in an emerging market.

A passage of the "rescue bill?" RISK to another "sell signal" at $36.00 is roughly $3.50, but field position may not be as favorable for a stronger PRICE gain bounce.

S&P 500 Index (SPX) - 10-point box

The top chart in tonight's Market Wrap was a 60-minute interval chart of the SPX. There was MAJOR internal damage done on Monday to the various major market bullish %.

For example, the S&P 500 Bullish % (BPSPX) was 47.80% last Wednesday, at Friday's "we'll have a bill by Sunday" the BPSPX from Dorsey/Wright was 47.00. At Monday's "no bill" had fallen to 24.20% and at tonight's close is once again at BPSPX inflection lows from March and July at 24.00%, or 23.20%, but still off the January low measure of 14%.

I'd certainly expect some "when in doubt, get out" long liquidation, even on the passage of a "rescue bill" back near 1,210, and more of an "all out" near 1,250.

Well, its editor's deadline for the wrap, and still no word on rescue bill. Should be coming shortly.
 


The Contrarian

The Put/Call Indicator

Ever since the 10 day moving average (DMA) of the CBOE Equity Volume Put/Call ratio curled over on 9/19, the signal of the Put/Call Indicator has been on a Positive bias. However, while the bias shifted the portfolio correctly for a couple of days, the market has sold off significantly. The Indicator switched to a Positive Confirmed once the 10 DMA crossed below the 20 DMA on this Monday (9/29/08). I have to admit that the Put/Call indicator isnt providing much help in determining option traders bias. The initial curl over correctly predicted the bounce from the previous extreme lows of the market and the lows of option trader sentiment. When the Put/Call ratio is high the indicator interprets the increase in Put trading as bearish. Finally, when Put volume apparently peaks at a 1 Put to 1 Call ratio. There is a constant skew in call trading versus puts. Translated more option traders buy and sell calls than puts and therefore create a constant skew. Since I am a contrarian, I prefer to trade bullish and bearish strategies with Puts because the same delta Call position usually costs more to buy.

The signal has been moved to a Positive Confirmed rather than just Positive. I must admit, I like the Positive/Neutral/Negative signals better but it may be a result of the unusual/inconsistent readings of the Put/Call ratio during these turbulent markets. It seems as though nothing makes much sense. I liked what Joe Kernan of CNBC said of contrarian indicators this morning. He said that contrarian signals, such as the current apocalyptic talk, usually predict market bottoms in the pastand that the signals should continue to do so until the apocalypse occurs. Sadly, buying the supposed lows during the actual end of days wont matter what price you paid because its the end. Off the gloom and doom and onto the data. As of Wednesdays close, the 10 DMA closed at 0.718, down from yesterdays 0.737. The peak on 9/18 was 0.895. It should be noted that the sell signal was generated from a reversal in the 10 DMA near the 0.70 level. While the 10 DMA has been giving somewhat of a false signal, the 20 DMA has continued to trend upward and closed at 0.805. If the 10 DMA reverses upward, the signal will revert to a Negative bias. I would like to see the 10 DMA dip below 0.65 before reversing upward. SIGNAL: POSITIVE BIAS

Volatility Index Indicator

The VIX has been talked about quite a bit on the news lately. While most analysts are trying to predict the high, the moving averages continue to trend higher and confirm the Negative bias. The signal will remain Negative until the 10 DMA reverses downward. On Monday, the VIX spiked to a high of 48.40; a level not reached since July 2001. In fact, the high was almost exactly the same level as the high from July 2001 (48.46). These levels of volatility are rarely seen and usually signal peak panic from option investors and portfolio managers. Today the VIX closed at 39.81. The 10 DMA closed at 36.34 and the 20 DMA closed at 31.57. The 10 DMA has been the support level for volatility. Short term traders can sell the market or cover longs at the next test of the 10 DMA. But I think that the VIX will blow through the 10 DMA and head to the 20 DMA. At its current trajectory, the 20 DMA should be in line with the 200 day Upper Bollinger band. At this point in the markets move, I would rather wait to cover longs at the 20 DMA. Dont forget that the VIX Indicator is just one of three that should be used to establish ones overall portfolio bias. I like to think of it as three greens (Positive signals) to light the way to load the boat with positive Deltas. Conversely, three red lights (Negative signals) mean stop and short. In summary, the signal is still Negative. Assuming the indicator is still Negative, dont put new money to work with Negative deltas until the VIX dips down to the 20 DMA at about 31.6 32. SIGNAL: NEGATIVE BIAS

Investors Intelligence

After last weeks long awaited upward reversal in the Bull/Bear spread, the Bears have come back to fight the bulls. In general, peaks in Bullishness that occur above 50% provide the best probability short entry trades. In addition, Bearish levels above 45% generally provide the best long position setups. To recap, the level of Bullish newsletter writers polled by Investors Intelligence decreased to 33.7% from 37.5%. The percentage of Bearish advisors increased above 45 to 47.2% from last weeks 40.9%. The spread between the percent Bullish and the percent Bearish decreased to minus 13.5; a level not seen since August 13th. Even though the Spread declined from a relative peak, the Bearish percentage of newsletter writers ticked up 6.3% to 47.2%. Lately, the polls have been trudging around and therefore not giving any definitive indications. The signal will return to a positive bias once the Spread ticks upward. But for now, since the Bearish percent is above the high threshold, the signal is being lowered a notch to a Neutral bias. SIGNAL: NEUTRAL BIAS

As mentioned above, these indicators are best when used together to develop an overall portfolio bias. While the signals can be traded individually, I am not making any recommendations. I have collected and interpreted the data for you. With a Positive, a Negative and a Neutral, the overall signal is neutrals. If you have positive Deltas, reduce them at resistance levels or breaks of recent support. Dont try to be a hero by guessing the bottom.

Robert J. Ogilvie
 

New Plays

Most Recent Plays

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

Play Editor's Note: Aggressive traders might want to check out JOYG and FCX. Both look very bearish. It wouldn't surprise me to see JOYG drop to the $36.00-35.00 zone. Unfortunately, the stock is so volatile that stop loss placement is a big challenge. FCX could drop to the $47.50 level. I would also keep an eye on the fertilizer stocks. They don't look very healthy. MON might be a bearish candidate if shares slip under $95.00 or its recent low of $92.67 again. I came very close to adding FSLR as a put candidate tonight. The oversold bounce struggled near the $200 level. However, what stopped me was news that the Senate's bailout plan had provisions to extend the tax incentives for the solar industry. We'll have to wait and see if that remains in the final rescue legislation.


New Calls

None today.
 

New Puts

Sears Holding - SHLD - cls: 89.04 chg: -4.46 stop: 95.15

Company Description:
Sears Holdings Corporation, the publicly traded parent of Kmart and Sears, Roebuck and Co., is the nation's fourth largest broadline retailer with over $50 billion in annual revenues and approximately 3,800 full-line and specialty retail stores in the United States and Canada. (source: company press release or website)

Why We Like It:
I've recently highlighted SHLD in my play editor's notes as a potential bearish candidate. The stock peaked in mid September and investors have been selling the rallies since. The stock just broke down under significant support near $90.00 and its 200-dma and 50-dma. The Point & Figure chart is bearish with a $77 target. The fourth quarter is shaping up to be a very bad quarter especially as consumer spending begins to slow. We're suggesting put positions now but don't be surprised to see a bounce from the $85.00 level. We have two targets. Our first target is $81.00. Our second target is $76.00.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 90.00 KTQ-WR open interest= 291 current ask $12.70
BUY PUT NOV 85.00 KTQ-WQ open interest= 266 current ask $ 9.60
BUY PUT NOV 80.00 KTQ-WP open interest= 136 current ask $ 7.20

Picked on October 01 at $ 89.04
Change since picked: + 0.00
Earnings Date 11/28/08 (unconfirmed)
Average Daily Volume = 3.1 million

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WYNN Resorts - WYNN - close: 80.19 chg: -1.45 stop: 82.65

Company Description:
Wynn Resorts, Limited is traded on the Nasdaq Global Select Market under the ticker symbol WYNN and is part of the NASDAQ-100 Index. Wynn Resorts owns and operates Wynn Las Vegas (http://www.wynnlasvegas.com) and Wynn Macau (http://www.wynnmacau.com). (source: company press release or website)

Why We Like It:
Even if congress approves the bailout plan it won't change the fact that the domestic and global economies are slowing. It's possible that WYNN could see a short-term bump on the approval of the plan and thus more conservative traders will want to wait until after we see the market's reaction to the news, which could happen this Friday. The trend in WYNN is bearish and I'm suggesting readers buy puts on WYNN at $77.49, which would be a new relative low. The Point & Figure chart is bearish with a $63 target. If we are triggered our target is $70.50. More aggressive traders may want to aim lower.

Suggested Options:
Our suggested entry point is $77.49. We're suggesting the November puts.

BUY PUT NOV 80.00 UWY-WP open interest= 23 current ask $10.80
BUY PUT NOV 75.00 UWY-WO open interest= 20 current ask $ 8.30
BUY PUT NOV 70.00 UWY-WN open interest= 95 current ask $ 6.40

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 2.0 million
 

New Strangles

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Call Updates

Apple Inc. - AAPL - close: 109.12 chg: - 4.54 stop: 97.45

As the credit markets remain frozen the tech sector seemed to suffer more than financials and industrials. The NASDAQ Composite lost just over 1% on Wednesday. AAPL under performed with a 3.99% drop. Shares of AAPL look like they're shaping up for another dip toward support near $100.00. Our plan is to buy a dip in the $102.50-100.00 zone with the $100.00 level acting as psychological support. If triggered at $102.50 we have two targets. Our first target is $112.00. Our second target is $118.50.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/22/08 (unconfirmed)
Average Daily Volume = 28.5 million

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JPMorgan Chase - JPM - close: 49.63 change: +2.93 stop: 39.95

Those banks that appear the healthiest are starting to pick up momentum. JPM rallied more than 6% and tagged a new 52-week high at $50.00 today. We don't see any changes from our previous comments but readers might want to wait for a dip before opening new bullish positions. Don't forget this could be a bumpy ride in the financials but JPM should benefit following the approval of the government's bailout plan. We're going to set our first target at $53.00 and suggest readers exit 50% to 75% of their position at $53. Our secondary target is $57.50.

Picked on September 30 at $ 46.70
Change since picked: + 2.93
Earnings Date 10/15/08 (unconfirmed)
Average Daily Volume = 50.6 million

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Wells Fargo - WFC - close: 36.70 change: -0.83 stop: 32.95

WFC actually under performed its peers in the banking system today. The BKX index was up 6.9% and the BIX ended up 2.9%. WFC actually lost 2.2%. We remain bullish on WFC and would still consider buying dips near $35.00 but we're starting to wonder if USB might be a better choice for a bullish position. Our first target is the $42.50 mark and suggest readers sell 50% to 75% of their position there. Our secondary target is $47.50.

Picked on September 30 at $ 37.53
Change since picked: - 0.83
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 54.5 million
 

Put Updates

Volatility Index - VIX - cls: 39.81 chg: + 0.42 stop: n/a

There was huge expectation on Monday that congress would pass the bailout plan. Now there is a stronger expectation that it will pass a second time before the week ends. Yet there is a nagging sense of doubt and that helps the VIX hover at these elevated levels. No one wants to get burned twice after seeing the carnage on Monday. Our September 16th position (suggested entry at 30.30) has a 25.50 target. The September 29th position (suggested entry at 46.72) has two targets at 36.00 and 31.00.

Picked on September 16 at = 30.30 first position
Change since picked: + 9.51
Picked again Sept. 29 at = 46.72 second position
Changed since picked: -6.91
Earnings Date 00/00/00
Average Daily Volume = --- million

---

Whirlpool - WHR - close: 82.44 change: +3.15 stop: 85.25

WHR almost erased yesterday's losses with a 3.9% gain today. We didn't see anything specific to account for the strength but we think it's misplaced. The government's rescue plan will not solve the economic slowdown, which will impact WHR's sales for months to come. Of course with the credit markets frozen the rescue plan might help consumers buy more big-ticket items short-term. One of our suggested entry points was a bounce into the $83.00-84.00 zone. WHR hit $83.05 today so the play is open. Our stop loss is at $85.25 although more conservative traders may want to put their stop above $86.00. We're setting two targets at $75.25 and another one at $70.25. More aggressive traders may want to aim lower. The P&F chart points to a $64 target.

Picked on October 01 at $ 83.00 *triggered 10/01
Change since picked: - 0.56
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 1.6 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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

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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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