Recap: It was another tumultuous market today with a lot of economic reports and stock news creating the volatility. Ford (F), General Motors and Chrysler, formerly the big three and currently the Detroit three, have been basically begging the House Financial Services Committee last night and today for federal assistance to keep their operations going. GM’s CEO told CNBC that the company is doing everything possible to avoid filing for Chapter 11. He worries that at the current trend that restructuring would eventually result in a Chapter 7 (liquidation filing). Toyota (TM) reported that they will cut North American production by closing its plants for two days. I am no auto analyst, but the best thing for the U.S. seems to be a closely monitored and government supported Chapter 11 filing by GM and F. Reorganization may allow these companies to become leaner with revised labor contracts and sales agreements. Then again, capitalism is based upon competitive markets. Allowing the government to intervene and aid corporations that have mismanaged funds and contracts treads near state run entities. It is a tough argument because aiding the company means aiding the employment figures. The Congress and Senate have a difficult decision to make whether to provide aid now or later by means of unemployment and other social programs. This is all a mess. The other automakers like TM and Honda Motors (HMC) closed down 3.49 to $59.76 and $1.48 to $19.89, respectively.
The Asian Markets only declined a little with the Nikkei falling 55.2 points to 8273.22 or -0.70%. The Hang Seng closed at 12815.80, which was down -100.10. The European Markets Closed down sharply with the FTSE closing down 205.5 to 4003.0, the DAX closing down 236.9 to 4342.6 and the French CAC closing down 129.5 or 4% at 3087.9.
News from Boeing (BA) and Citigroup (C) is also aiding in the decline today. Citigroup declined 22% to close at $6.45/share on news it will buy $17.4 billion in SIV assets it advised. In addition, Citi is liquidating a hedge fund, which managed $4.2 billion at its peak, after it lost 53% of its value BA is down on news that the company will have to delay the delivery on its jetliners as much as 10 weeks to its original delivery date for all jetliners in its backlog as it recovers from its machinists strike. Microsoft's (MSFT), another Dow Jones component, CEO said the company is no longer interested in acquiring Yahoo, but is open to looking into a possible search collaboration. MSFT closed down $1.33 to 18.29 while YHOO declined $2.41 to $9.14.
A ray of hope shone from General Mills (GIS) when the company reaffirmed its fiscal year 2009 guidance of earnings between $3.81 and $3.85 per share, which is short of the $3.90 consensus estimate. Back to the gloom, Best Buy (BBY) had its credit rating downgraded to BBB- from BBB at Standard & Poor's. The ratings company cited its belief that Best Buy will be more challenged than previously expected due to the weak economic environment.
At 8:30 a slew of economic figures were reported including October CPI and Core CPI. CPI fell 1.0% month-over-month, which was a larger-than-expected decrease compared to consensus estimate of -0.8%. While the Core CPI, which excludes food and energy, fell 0.1%, versus the expected increase of 0.1%. Compared to last year, CPI is up 3.7% and core CPI is up 2.2%. Housing starts were also released today which showed that 791,000 houses started. The results were better than the expected reading of 780,000. There were 708,000 building permits, which fell well short of the consensus estimate of 774,000.
At 10:30, the Department of Energy said that crude inventories increased by 1.6 million barrels during the week ended November 14, which was more than the expected increase of 1 million barrels. Gasoline inventories rose by 539,000 barrels. Oil prices were up 1.2% to $55.05 per barrel just prior to the announcement but closed down at about $54.10.
At 2 PM the FOMC minutes were released. In summary, some of the FOMC members saw potential for further rate cuts, with some predicting the economy will shrink through mid-2009. The Fed does not expect normal growth until 2011 and expects the economy to grow from 0.0% to 0.3% in 2008. The Fed’s previous forecast was 1.0% to 1.6% growth for 2008. For 2009, the Fed forecast GDP growth will range from -0.2% to 1.1%, down from its previous guidance of 2.0% to 2.8%.
The market is expecting a reduction in initial claims for last week versus the prior week. Leading indicators are expected to decline 1% to 0.70%.
Retail earnings are being reported from some apparel and technology companies tomorrow. The consumer is said to be saving rather than shopping. I would be surprised to see much decline in sales from PLCE because parents, I mean my wife, still shops like crazy for my two sons. GME might be a good play going into the holidays because rather than buying gaming systems people may stock up on games as a way to ignore the negative sentiment. Dell may surprise everyone tomorrow afternoon by reported decent numbers for last quarter but cautioning investors, since it’s the responsible thing to do, about potential slowing. I am beginning to think that all of the negative news releases are an attempt to get all of the necessary disclosures out so that next years numbers will look that much better.
The S&P 500 (SPX) broke below last Thursday's intraday low to close at 806.58, just above the day's low of 806.18. The SPX closed down 52.54 points after gapping down and attempting to go positive early in the session. As the chart below shows, the trend is downward. There is a bearish price objective to about 745 - 750 from an extension lower to the downtrend line. It should be noted that the RSI and Slow Stochastics are both in oversold territory yet still indicating downward momentum. The SPX has failed time and time again to break above the 21 day Exponential Moving Average (EMA), except for 11/4, and hold for more than one day. The 8 day EMA continues to be the short term short entry level with the 21 day EMA the short term risk management. Moving averages are dynamic and therefore provide ever changing adjustments to risk management and price objective levels. I had someone ask me today whether or not I thought that technical analysis still works in an environment that very little does. The one thing that has worked is the long term short trade and the oversold bounce/re-emergence trade to the 8 day EMA.SPX Daily Chart
The chart below shows that there is long term support down around 768 -770 from the October 2002 lows. The difference from the March 2000 high to the October 2002 low is 790 points. The difference between the October 2007 highs and today's close is about 770 points. Maybe that means that there is only 20 more points left to decline. I don't think it is likely there is an end in sight until after Thanksgiving. One last point is that the monthly Stochastics and RSI are grossly oversold. Obviously, the weekly chart is also oversold.SPX Monthly Chart
The chart below shows a micro view of the last five days. I drew the Fibonacci Retracement from Thursday's low of 818 to Friday's high of 917. The 127.2% Extension level is about 20 points lower at $791. Therefore, you may want to short any price advances to the 818 level and cover at about 791 - 793. Set a stop, for instance, at a 15 minute break and close above Tuesday's low of 827. You can use a variety of instruments to accomplish these trades. Since this is an options newsletter, you may choose to use SPY Long Puts or Short Calls to establish a negative delta position. Selling premium at high premium allows you to short volatility while also leaning toward the downside. You could use SSO short calls or long puts to accomplish the same trade. It all depends upon your risk tolerance.SPX 15 Minute Chart
The Ten Year Treasury Yield I realize bonds are boring but they give some insight into some interesting trends that help equity traders determine extremes. Furthermore, while there are options on the TNX and the TLT (iShares 20+ Year), the interesting investment in the the currency shares. For instance, a low in the TNX may signal that bonds that have been bought up from foreigners financing our continuation of the American Dream have begun to subside. Therefore, the long dollar trade may be a good dollar short. The TNX chart is near the yearly lows of a 3.4% yield.TNX Daily Chart
In Play Updates and Reviews
Play Editor's Note: The market's sell-off is picking up speed and there is a growing camp of investors and analysts that do not believe the October lows will hold this time. While we agree with this view we would use today's decline as an opportunity to start taking profits in our put plays. Some of our put plays hit our targets today. Several are getting very close to our targets. We have tighten stops on all of our remaining put plays.
*Currently we do not have any call play updates*
Bard CR - BCR - close: 79.08 change: -1.84 stop: 84.05 *new*
BCR continued to sink but we're a little surprised at its relative strength. The stock lost 2.2% versus a 6.1% drop in the S&P 500. BCR failed to close under its low from last week. We are not suggesting new bearish positions. Please note that we are lowering the stop loss to $84.05. More conservative traders may want to adjust their stops toward $83.00.
The Point & Figure chart is bearish with a $69.00 target. Our target is $75.50.
Capital One Financial - COF - close: 26.50 change: -2.75 stop: 31.31*new*
Financial stocks led the market lower on Wednesday. Shares of COF lost more than 9% and closed at lows not seen since early 2003. We are suggesting readers take profits right here but we will stick with our official target of $25.50. The Point & Figure chart is very bearish with a $15.00 target.
Please note that we are adjusting the stop loss to $31.31. We are not suggesting new bearish positions.
iShares Brazil - EWZ - close: 30.20 change: -3.01 stop: 34.55*new*
We are adjusting our play here and strongly suggest readers take some profits at this level. The EWZ lost 9% and sank to round-number support at $30.00. We're adjusting the stop loss to $34.55 and we are not suggesting new bearish positions. We will close this play if the EWZ hits $29.50. The Point & Figure chart is bearish with a $23.00 target.
Intl. Business Machines - IBM - cls: 75.97 change: -4.11 stop: 81.26*new*
IBM turned in another negative session and closed on its lows with a 5% loss. Yet shares did not breakdown past their lows from last week. We are adjusting our stop loss to $81.26 and we're not suggesting new bearish positions at this time.
We've set two targets. Our first target is $75.50. Our second target is $71.00.
iShares Russell 2000 - IWM - close: 41.36 change: -3.67 stop: 46.01*new*
Small cap stocks continue to under perform. The RUT lost 7.8% versus a 6% drop in the S&P 500 index. We are not suggesting new bearish plays here and we're lowering the stop loss to $46.01.
We strongly suggest that readers begin taking profits right here. Our target may be $41.00, which will probably be hit tomorrow morning but there is no reason to wait. FYI: The P&F chart points to an $18 target.
Kohl's Corp. - KSS - close: 26.39 change: -1.74 stop: 30.01 *new*
Retailers continue to plummet. While KSS hasn't taken the same beating that SHLD, ANF and TGT have the stock is quickly sliding lower. We are adjusting our stop loss to $30.01. More conservative traders may want to use a stop loss closer to our entry price. We're not suggesting new positions at this time.
We have two targets on KSS. Our first target is $25.50 since KSS appears to have some long-term support around $25.00. Our second target is $22.00. Believe it or not the P&F chart is still bullish from the late October rally but a new move under $26.00 would change that.
L-3 Communications - LLL- close: 65.16 change: -4.15 stop: 70.05 *new*
Target achieved! LLL delivered another failed rally under $70.00 this morning and then plunged to new multi-year lows. Shares hit $65.06 at its worst levels this afternoon. Our first target was $65.25.
Please note that we are dropping our stop loss to $70.05. Currently we have a secondary target listed at $61.00. We're not suggesting new positions.
Potash Corp. - POT - close: 64.02 change: -5.92 stop: 70.01 *new*
Readers may want to start taking profits in our put play on POT. The stock sank 8.4% today and looks poised to hit our target at $61.50 soon. There is no rule that says you can't start scaling out of a position early. We are not suggesting new positions and we're adjusting the stop loss to $70.01.
Our target is the $61.50 mark. More aggressive traders may want to aim lower. The P&F chart is bearish with a $48 target.
SPDR GOLD Trust - GLD - close: 72.26 change: -0.25 stop: n/a
This morning the U.S. dollar spiked lower and the GLD reacted by spiking higher toward $75.00. The rally in GLD didn't last as the dollar rebounded. We don't see any changes from our previous comments. If you are looking for a new position an entry in the $72.00-73.00 zone would work but we'd use December or January options.
Remember that we don't care what direction the GLD moves as long as it picks a direction and goes.
NOTE: lack of any real directional movement is bad news for our November play. Readers may want to exit early right now! November options expire in two days.
We listed two strangles back on Nov. 9th to take advantage of what appeared to be an imminent breakout, up or down, in gold prices.
The first strangle uses November options, which expire this week. Thus it's much more risky. The second strangle uses December options.
What is a strangle?
Ultra S&P500 ProShares - SSO - close: 22.18 change: -2.45 stop: n/a
The S&P 500 index dropped to new multi-year closing lows today. The SSO followed and ended the session with a 9.9% decline. We are not suggesting new positions at this time.
Note: The SSO is an ultra-long ETF that typically moves twice the daily performance of the S&P 500 index.
What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.
-December Strangle Details-
Range Resources - RRC - close: 38.53 change: -3.24 stop: 39.45
Our attempt at a bullish play didn't last very long. RRC had been showing some relative strength. All that strength evaporated today as the markets sank to new multi-year lows. RRC gave up 7.7% and hit our stop loss at $39.45 closing the play.
Northern Trust - NTRS - close: 38.65 change: -4.92 stop: 50.05
Target achieved. The financial stocks led the market lower on Wednesday and NTRS plunged 11.3% to an intraday low of $38.65. Our target to exit was the $40.00-38.50 zone.
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