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Daily Newsletter, Saturday, 9/3/2011

Table of Contents

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

Market Wrap

Worst September Since 1974

by Jim Brown

Click here to email Jim Brown

It may be early to start calling September the worst month but the first two days of trading have been the worst September start since 1974.

Market Statistics

The market was inching lower before the open on worries out of Europe but the jobs report kicked it right off the cliff. Payroll employment crashed to a halt in August with ZERO new net jobs added. Even worse the prior two months were revised lower by -58,000. The July gains of +117,000 were too good to believe at the time and they were revised down to +85,000. The June gain of 46,000 was revised down to only +20,000. Estimates of the 86 economists surveyed by Bloomberg for August payrolls ranged from a decline of 20,000 to a 160,000 increase.

New private payrolls in July were revised up to +156,000 but government job cuts were revised up from -37,000 to -71,000 to offset those private payroll gains.

In August the private sector added +17,000 jobs, a significant decline from the +156,000 in July, but government job cuts of -17,000 cut the net number of new jobs to zero.

There are some qualifications. The BLS said the Verizon strike, which kept 45,000 workers on the picket lines, had a significant impact on job losses. Those workers went back to work during the last week of August and after the survey period for this report. That means some portion of those 45,000 were counted as losses in August and they will be counted as new jobs in September. Personally I don't think they should be counted on either side since they were just on strike but they did not ask me.

Also positive was an increase of 331,000 jobs in the Household Survey. This is a different survey than the nonfarm survey and this is where they get the unemployment rate, which remained flat at 9.1%. That rises to 16.2% (25.4 million) if you count everyone who have run out of unemployment insurance benefits and fallen off the official government rolls. That is another pet peeve of mine. Why drop people from the unemployed list just because their benefits expired? Answer, because it makes the unemployment number look better and keeps politicians in office. That means politicians can claim unemployment is only X% when it is really Y% and the general public does not know the difference. The official unemployment rate is now expected to remain at 9% for the rest of the year and decline to only 8.8% in the first half of 2012. Some analysts believe it will remain at least 9% for all of 2012.

It takes the creation of 150,000 new jobs each month to stay even with new workers joining the workforce. In fact 366,000 people joined the workforce in August. The monthly pace of job creation for the rest of the year is expected to remain at 100,000 or less even if we don't return to a recession.

I would take bets today that the August number is revised to a loss when the September report is released. Maybe it is the conspiracy theorist in me but to have a report saying the economy lost jobs on the Friday before a presidential speech on jobs might have been seen as politically damaging. A revision a month later to jobs lost is normally ignored. Time will tell.

Nonfarm Payroll Chart

In reality when you consider the setup for August with the debt debacle in full swing and the threat of default being blasted across the airwaves every day there was no incentive for employers to hire. Even after the debt deal was done we had S&P downgrade the U.S. credit rating and the equity markets were in freefall. That is not exactly a positive business environment. I am surprised we did not see a headline number with job losses instead no gain.

The president will speak on Thursday evening and offer proposals for putting Americans back to work. This could be the defining moment of his reelection campaign. His disapproval rating rose to 52% last week and there is a near zero chance of passing any stimulus or spending program in the current political environment. He will have to come up with some plan that does not involve spending and that is extremely hard for any president to do. The government, any government, can only directly create jobs by spending and those are only temporary, as we have seen from the sharp declines in government workers since the 2009 stimulus programs expired. Real job creation only comes from business and that is where any new programs will have to be focused. Job credits for new hires, tax credits for repatriation of jobs, payroll tax cuts for employers and reduced regulations are some of the programs tried in the past. A recent survey showed that 48% of businesses were considering trimming their workforce as a result of new regulations including the healthcare bill. If 48% of businesses are cutting back it will be very hard to add net new jobs going forward.

I believe the business climate improved in the latter half of the month when the world did not come to an end on the ratings downgrade. That downgrade has now been forgotten and we should return to some semblance of normal at least until the gang of 12 present their recommendations for another $1.5 trillion in spending cuts. That could start the political battles again and resurrect the story in the daily press.

Lost in the frantic coverage of the nonfarm payrolls was positive news in the Monster Employment Index for August. The index rose +3 points to 147 thanks to increased job openings in natural resources, healthcare and retail trade. On a year ago basis help wanted activity is up +8% compared to a +4% increase in July. Mining, transportation and other service businesses saw help wanted ads increase +20% since last August. Ads in New England increased by +3.2% and +3.5% for the Pacific region. An increase in ads for manufacturing, retail and professional services late in the month suggest the jobs climate was actually better than what the nonfarm payroll report showed. The headline number is now at the highest level since early 2008 after dipping to a seven year low at 114 in July 2009.

The economic calendar for next week is very light. The ISM Services on Tuesday is expected to decline slightly to 52.0 from 52.7. The Fed Beige Book reports is on Wednesday and it is the most important report of the week. This is the report that shows the economic activity in each of the Fed districts. In the July report economic activity was still growing at a moderate pace in most of the districts but there were some cracks beginning to show. This was to some extent due to the rising intensity of the debate over the debt limit. The report also detailed continuing weakness from the impact of the Japan earthquake on the supply chain. Both of those factors should have moderated by late August. However, the report does cross calendar month boundaries with the last half of July and first half of August represented in the report we get this week. Unfortunately that means the majority of the survey period was the most intense portion of the debt debate and the ratings downgrade.

Economic Calendar

The biggest problem for next week will come from Europe. Italy's Premier, Silvio Berlusconi, was criticized by the ECB and even the Vatican over weakening of the planned austerity measures. Berlusconi's coalition has been waffling on the plan and changing it almost daily to placate various groups. The ECB said the $65.8 billion package of spending cuts and tax increases was of "extreme importance" and urged Italy to follow through on its promise to pass it. The package was supposed to be sent to parliament for a vote next week but almost nobody believes it will happen as promised.

Italy is too large for the current 440 billion euro rescue fund and finance ministers are afraid the failure to follow through on the initial austerity package will send Italy spiraling out of control and the EU will have to put up even more money to solve the problem. Italy's debt is 120% of GDP and the second highest in the EU after Greece.

The ECB President Jean-Claude Trichet warned Italy again on Saturday when speaking at a finance conference. He urged Berlusconi's government to "fully confirm and implement" the austerity as initially planned in order to "reinforce the quality and the credibility of the Italian strategy and its credit worthiness."

The Greek austerity review by the EU commission was halted last week along with talks about future bailout payments. Inspectors for the IMF, EU Commission and the ECB, known as the troika, had been in Athens to check on the pace of compliance. The troika halted the inspections and talks for a ten-day cooling off period after tensions reached a fever pitch. The troika found that promised austerity measures were slipping farther behind and the budget deficit for 2011 was growing. Reportedly the troika had asked to see the 2012 draft budget but were refused with Greek officials saying it had not been completed yet. When they would not even disclose the draft under discussion the troika members left Greece.

Currently Greece is depending on two bailout loans of $157 billion from May 2010 and another $155 billion that was agreed on in June 2011. The funds are being released in small increments as stages in the austerity program are completed. The troika claim Greece is dragging its feet and failing to follow through on many of the conditions for payment. The troika released a report on Wednesday warning Greece would likely miss its 2011 budget targets because of months of austerity delays by the government and lax tax collection. Avoiding taxes is an art form in Greece.

On Saturday further news broke with a senior IMF official saying they expect a "hard default definitely before March, possibly this year, and it could come with this current program review. The chances for a continued bailout are slim." Separately, senior German FDP official Otto Solms, a VP of the Bundestag and an economic committee member in parliament said, "since Greece could not handle its debt problem it should consider leaving the euro. It should be considered whether a restructuring and exit from the euro would offer better perspectives for the euro currency union and Greece itself. Taxpayers in Northern Europe and especially Germany cannot accept inability or reluctance." This was in response to a Greek official saying on Saturday they would not consider any further austerity.

Germany was supposed to vote on the new EFSF rescue fund next week and on the constitutionality of the bailouts in general. Recent comments from various sources suggested the vote was in trouble. Late last week a spokesman for Merkel's conservative party said the vote could be pushed back until the 29th -30th because of a visit by the pope. The pontiff is scheduled to speak to parliament on the 22nd. Analysts believe the delay is to shore up support for the vote. This is just another challenge for the EFSF and the EU bailouts in general but at least a failed German vote should not cause market trouble next week.

The entire EU debt crisis is quickly getting worse. It is eventually going to blow up with very damaging consequences. The bond market has already factored in a debt default by Greece despite the continuing bailout funds. They don't believe Greece will pay those back either. For instance the one-year treasury note now has a yield of 72.05%. It rose by more than 10% on Friday alone. That is a 1,000 basis point move. In bond terms that is gigantic. The two-year note is not much better at 49.6%. Greece is going to default. It is only a matter of time and that will be a serious crisis for the EU banking system. If Greece leaves the EU and banks take a hit the two with the most risk are CS and UBS. Shorts anyone?

The U.S. jobs report and the worries over Europe pushed gold up once again. The magnitude of the moves is simply amazing. On Friday gold gained more than $57 to close at $1,878.50 before rising to 1886.70 in after hours trading. The -$200 point decline from two weeks ago has been almost completely erased. This rally came despite a four-day rise in the dollar to a two week high.

Gold Chart

U.S. treasuries were the safe haven of choice last week. The ten-year note closed with a yield of 1.996% and the lowest closing yield since the 1950s. Talk about safe haven! The 30-year yields closed at a two-year low but still above the yields seen during the recession.

Ten Year Yield Chart

30-Year Bond Yield Chart

The drop in yields on the five and ten year notes is in anticipation of the Fed coming back into the market in a new program to lengthen the term of the securities they are currently holding. Currently the Fed bought short-term securities in the QE2 program and they are continuing to buy the short term paper as securities in their portfolio mature and roll off. After Friday's jobs report the Fed is expected to begin a new program called operation Twist. This was first done in the 1960s under JFK and named the Twist after the Chubby Checker record at the time. Basically the Fed twists its portfolio out of short term notes and into longer term durations like the five and ten year notes. This forces down yields on the longer end of the curve and implies that rates will continue low for years into the future. Analysts believe it will have only a marginal impact on the economy but the Fed is running out of bullets or as Dr Doom says, "There are no rabbits left in the Fed hat." The Fed is likely to announce the new program on or before the Sept 20th FOMC meeting.

Also weighing on the markets on Friday was news the Federal Housing Financial Authority (FHFA) was suing 17 financial firms for more than $200 billion in mortgages that turned toxic when the housing boom collapsed. Bank America is being sued for losses on $57.5 billion in mortgages originated by Bank America, Countrywide Financial and Merrill Lynch. Merrill's portion is $24.8 billion, BAC $6B and Countrywide $26.7B. JP Morgan was the second highest at $33B and Royal Bank of Scotland at $30.4 billion. Barclay's (BCS) was sued for $4.9B, Deutsche Bank $14.2B and Nomura $2B. Others sued were Citigroup, Ally Financial, First Horizon, General Electric, HSBC, Morgan Stanley, Goldman Sachs and Societe Generale. Several banks commented on the suits and the general response was something like, "the government's claims are without merit and we intend to defend ourselves vigorously." Of course that is the standard answer whenever someone is sued.

However, When you look at the legal firepower that can be brought to bear by that list of companies you have to think the government better have a very good case. Unfortunately we know from past history the government does not even have to have a case in order to win. They have unlimited funds, unlimited time and they are not motivated by a profit motive. They can continue fighting the case forever or until the other party runs out of money or simply gives up. This is a fishing expedition by the FHFA and the best thing the banks can do is throw up a solid first defense with thousands of pages of legal precedent and then try to settle before it actually gets into the courts.

BAC lost -8%, GS -4%, MS -6%, DB -6%, CS -4%, BCS -8% and RBS -5%.

The administration is doing everything it can to create jobs and get banks to lend money. At the same time the FHFA is doing its best to crash the system. Analyst Richard Bove said on Bloomberg "if you make the assumption over the next few years, all of these suits are going to move forward and they are all going to be won, you are going to wipe out the American banking industry and you are going to wipe out the American economy." The government already claims the banks are under capitalized and under Basel III they have to raise additional capital. If the suits cost them another $100-$200 billion in capital that simply means the banks will have to lower costs even further and they do that by laying off workers, closing branches and cutting back on loans. Instead of helping businesses expand they hurt businesses by reducing credit lines and calling in loans. They will make fewer mortgage loans and home sales will suffer. By default they will be increasing unemployment and pushing us closer to a recession.

The FHFA is claiming the banks packaged loans with subprime credits and did not tell Fannie and Freddie. DUH! Fannie and Freddie are the ones that set the rules on what they would buy. Fannie and Freddie ARE the mortgage market in the USA. They write the rules and the mortgage originators create mortgages that conform to those rules. Were there errors and omissions? Undoubtedly. Were there subprime credits? Absolutely but they fit the rules laid out by Fannie and Freddie. Those two lenders had a fiduciary responsibility to underwrite any loan portfolio they purchased and resold. What this suit means is that Fannie and Freddie did not do their underwriting in advance and if they did they did it badly. That is not a reason to come back later and sue the banks.

I get it. I understand their frustration with the billions in loan losses they eventually took. I should probably say losses we the taxpayer took since the government bailed them out with $140 billion so far. However, the lawsuits have to end somewhere. This is ridiculous at this point in the game to launch a new round of "let's beat the bankers." The banks fund the economic growth. We know from playing monopoly if you run out of money you can't build buildings or buy inventory. This is just another example of government stupidity. You can't sue your way to economic growth.

Many of these banks have already taken tens of billions in write-downs and charge offs on the subprime loans. Many have already been sued by various agencies and groups for tens of billions more. Bank America has a $20 billion settlement in process and another one for $12.9 billion. On Thursday the Fed asked BAC to come up with a contingency plan just in case economic conditions worsened. That should be a clue as to what the Fed is thinking. Add in Friday's suits and conditions just worsened.

On a side note you may remember from the many references in the subprime crisis that New York governor Andrew Cuomo was U.S. Secretary of Housing and Urban Development from 2004-2007. His memos instructing Fannie and Freddie to lower their credit guidelines and accept the subprime loans in order to promote home ownership in the USA were the reasons those agencies became so heavily involved in subprime mortgage securitization. When they were buying the loans the home values were going up 20% a year and everybody was making their payments. When the bust came in 2008 it turned out to be the Great Recession. You should not be able to sue banks in 2011 for loans you bought in 2006-2007 that defaulted in 2009. That is like a person buying a Suburban in 2006 when gas was $2.50 and then suing GM for their money back in 2008 because gas was $4.50. You knew gas could go up but you bought it anyway. It was not GM's fault.

The drop in jobs caused serious knee jerk reactions in almost every sector. Energy was no exception. Crude prices declined more than $3 at one point because a lack of jobs and a potential recession is negative for demand. At least that is the theory. I believe it was profit taking on anything with a recent rally. Crude was up +$10 in the last two weeks so it was a way to capture profits and raise cash to cover margin calls on imploding stocks.

Crude had more bullish fundamentals on Friday than any other time in recent weeks. Tropical storm Lee picked up speed just as it hit the oil patch in the Gulf and almost 60% of Gulf production from nearly 3,000 rigs and platforms was shut in along with 55% of gas production. 237 platforms and 23 drilling rigs were evacuated. There are 617 manned platforms and 70 drilling rigs operating in the Gulf. The storm does not have strong winds at only 45 mph but it is packing expected rain of 14-20 inches. Because rig operators did not know how quickly Lee would accelerate or to what level they had to err on the side of caution and evacuate many of their installations. This will cause a decline in crude inventories over the next couple weeks but no material damage is expected to the production platforms.

Crude Oil Chart

Just to prove it was a bout of knee jerk profit taking the Brent contract fell over $2 and nothing in the U.S. jobs report would impact short-term demand in Europe. There is still an ongoing shortage of light crude in Europe of roughly 600,000 bpd that is being made up by drawing down existing inventories. There was no specific reason for Brent to decline.

Brent Crude Chart

Gulf Storm Chart

Next weekend is going to be a problem for the eastern seaboard. Hurricane Katia is slowly moving closer to the mainland and should reach the Carolinas on Saturday. It is currently a category one storm but is expected to strengthen as it moves over warmer water. The storm is still to far out to predict landfall but the direction has not changed in a week. The normal directional change from here would be a turn to the north to follow Irene's path.

Hurricane Katia

Markets sold off sharply in August with the MCSI All Country World Index down -7.5% and the biggest loss since May 2010. Short bets on the S&P rose to 3.03% of all shares outstanding on August 29th. This was up from up from 2.7% at the beginning of August and the highest level since November. The recent high was 5.52% in August 2008 just before the recession crash.

Some analysts are already ratcheting up expectations for another dip below 1100 on the S&P sometime in September. They believe that even if the U.S. economy struggles through we are going to see Europe hit a wall on the sovereign debt problem and European banks are going to take significant losses. That will also hurt U.S. banks indirectly as the counter party transaction problem comes back to haunt us.

The Dow has already declined -373 points in September to make this the worst start since 1974. The S&P rallied +9.8% from the 1121 low on Aug-22nd and the high at 1230 on Aug-31st. A nearly 10% rally was due for a decent bout of profit taking. The jobs data and impending holiday weekend became the perfect opportunity. Stops were hit and the market collapsed on very low volume.

I wrote on Thursday that all the trading would be in the first hour and the market would be dormant the rest of the day. That is exactly what happened. The market gapped lower from 11,496 to 11,244 in the first 15 minutes and we closed the day at 11,241. Everybody exited at the open either by choice or by getting stopped out and then they went home. Volume was light at 6.9 billion shares.

Some market reporters were complaining there was no dip buying in the afternoon. When you think about it very few traders were either a) actually trading after 10:AM or b) were stupid enough to go long ahead of a three day weekend with Europe in meltdown mode.

The U.S. just got the worst economic data in months and declined -250 points. You know Europe and Asia are going to follow our lead and trade down on Monday while our markets are closed. With Germany, Greece, Italy, the IMF and the ECB all in a daily spitting contest there is a good chance Europe could trade down on Tuesday as well and that could produce an ugly open for the U.S. on Tuesday. That is not the kind of scenario a U.S. trader would want to buy on Friday afternoon.

The S&P rallied +9.8% since the Aug 22nd lows and then declined -4.5% since the August 31st highs. That is close enough to a 50% retracement in my book that we could be looking for a bounce. Obviously that depends on what happens overseas on Mon/Tue and on how much play the bank suit gets in the press but technically it might be an opportunity. In a perfect world I would like to see a dip down to 1160 at the open on Tuesday and then a rebound back over 1185. That is probably too much to ask for in one day in this environment so I will be happy with a dip to 1160 and at least some indication of dip buying. If the FHFA bank suit news gains speed and begins to develop a life of its own then a dip to 1120 could be in the cards. That would erase the entire August rebound.

S&P Chart - 90 Min

The Dow slipped below initial support at 11,325 and could see a further dip to 11,100 or even 11,000 on Tuesday. Obviously we would like to see it bounce at 11,100 because weakness below that level could take us all the way back to 10,800. A break below 10,800 could achieve terminal velocity with the next stop at 10,000.

Predicting a landing point with the Dow moving 300-400 points a day is impossible. We have to watch for the decline to end and then nibble at the edges. We don't want to catch this falling knife.

Dow Chart

Tech stocks were weak with the overall market but they were also reacting to the third consecutive month of declines in semiconductor billings. The semiconductor index declined -2.4% to initial support at 340. Networkers were also weak. Google and Apple held up relatively well with declines of only about 1.5%.

The Nasdaq closed right on initial support at 2480 and any further weakness could test 2400. In theory the Nasdaq has minimal exposure to banks but when the tide goes out all ships settle lower.

Nasdaq Chart

Odds are good the Russell will test support at 675 or even 650 if the market weakness continues. Small caps have declined faster, -3.6% Friday alone, and will continue to do so if the economics worsen. If the economy is going to weaken the small caps will be dumped first and blue chips last.

Russell Chart

There is a lot of noise in the market with various components in Europe competing for headlines every morning along with multiple challenges, both political and economic, in the USA. However, what we are not hearing are problems in U.S. corporations. Earnings warnings are minimal and companies are announcing stock buybacks again. Insiders are buying stock and earnings guidance is holding. There may be signs of economic weakness in the reports but the company guidance is still positive. Sure there are some outliers but even if the economy was growing at 5% there would still be companies failing to execute properly.

I read a guidance report for WABCO (WBC), a global supplier to the commercial vehicle industry, and they were very positive about order growth all over the world including North America. "Currently, we see no sign of a slowdown in our markets globally and we feel confident about our previously communicated guidance for 2011." (WBC Guidance) Are they the outlier or are they the norm?

We could be just experiencing an economic hangover from the debt debacle and the ratings downgrade. If so it will pass once the brain fog clears. The Fed is almost sure to increase stimulus on the 20th. It is a good bet traders will act on that starting sometime next week. That puts me in the "buy the dip" camp for next week. I might not jump in at the open on Tuesday but I would look for a bounce from support on Tue/Wed as a signal to start a couple positions.

Jim Brown

Send Jim an email

"The fundamental cause of trouble in the world is that the stupid are absolutely sure while the intelligent are full of doubt."
Bertrand Russell


Index Wrap

No Jobs Blues

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

In line with what I wrote last week, namely that: "The indexes could now have a period of back and forth choppy action before they're in a position to mount a sustained rally." That idea has proven to be quite true this past week as the rally fell apart once the S&P and the (Nasdaq) Composite got near the upper moving average envelope lines I've been using. The rapid pullback was to the 21-day average. This type action is typical of a market that goes sideways or what some would consider to be 'trend-less'.

Then there's also the technical and fundamental question as to whether we are in transition to a bear market. I don't think that but jobless recoveries can go on a long time and without more spending, the economy is going to sputter along. That's not bear market material exactly but it could work against any prolonged upside moves. We could be in prolonged period well into this fall where the Dow trades in a 10700-11700 range.

I continue to suggest that 1125-1100 in SPX and 2330-2300 in COMP continue are must hold areas for the bulls, especially on a daily and weekly chart Closing basis. If these key areas don't hold up as support, another down leg could carry SPX to the low-1000 area and COMP to 2100 in a retest of the July lows of last year. The potential upside looks limited in the Composite to 2700 or the S&P (500) to perhaps 1250.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The chart continues to be bearish. The S&P 500 (SPX) had a nice run up from the 1120-1125 area and got above 1200 briefly. The fact that SPX got near but not above its 4% trading 'band'(part of the moving average envelope study or indicator) was typical of what to expect after a big waterfall type decline has knocked the sense out of sensible. Don't be surprised to see another low set up a bit above the last one. And, watch the 21-day moving average for a sense of direction. Closes below this key trading average suggest downside momentum predominates; closes above the 21-day suggest upside momentum as we saw coming into Thursday. Prices trading close to or at the 21-day average suggest a non-trending market.

Key support continues to be the 1100 to 1125 area in SPX. Below 1100, major support doesn't really look to begin until 1030, extending to 1000 even.

Key resistance is at 1230-1250 currently. A weekly close above 1250 is needed to suggest upside potential back to retest the prior 1350-1370 highs.

It looks like another period ahead where a failed rally and probably some more price weakness will build up bearish sentiment; a more oversold RSI also. This before SPX would develop some rebound potential again. Meanwhile, look for a further downside drift.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart has a key resistance around 560. No surprises that our last rally failed at 552 and couldn't quite reach bigger sellers. Why 560 as the biggest supply (of the basket of stocks) overhang? 560-562 was a previous support 'floor', the begin point of the last two major rallies. Buyers in this area will turn sellers if OEX comes back to this area as it gets them out 'whole' or even.

The 21-day average as 'acted as' both prior resistance and prior support. It becomes a pivotal level in the coming week. Trade below this key trading average suggests that the path of least resistance is DOWN. Trade above the 21-day, as was the case at the beginning of the week just ended, suggests further upside potential. As always, the second day of a moving average penetration is a key test as to follow through.

I anticipate more weakness ahead so would short rallies with preset objectives. Don't get in and 'see' what the market will bring you, rather exit at your targets instead.

Key support continues to be the low-500 area, key resistance at 550-560.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) had a good rebound from the 10800 area of 1300 points, which is a good sized rally for a market that saw a 2 thousand 100 point drop, peak to (intraday) trough, from 7/22 to 8/9. The retracement to 11675 became a 'normal' 50% retracement; MORE than that a 50% retracement suggests stronger underlying conditions for stocks than the one I've been watching the last 3 weeks! Friday's sharp decline suggests more disappointments ahead to the bulls and some further downside weakness; I anticipate short-lived rallies only as the market digests our latest dismal jobs number; rhymes with 'bummer'.

While the drop was fast and furious on Friday, I did take note that some support finally did come in around the 21-day moving average. More than a 1-day drop to below this key trading average suggests further downside objectives to the lower band even, at 10600 currently. I've highlighted initial support at 11200, then at 10900-10800; I considered whether to note 11000 as a next support but was less sure of that number. I'd consider the 10600 area as a must hold support for the bulls. 10000 continues to look like the start of major support.

INDU resistance is at 11600, extending to the 11700 area. 11800 begins fairly major resistance in my estimation.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

2600, the area of the most recent (up) swing high in the Nasdaq Composite (COMP) represented a rebound of half of the prior decline. A retracement of MORE than 50% is mostly characteristic of a market where, because of many still perceived bullish qualities, the prior decline was thought to be OVERDONE. This wasn't the case in our current market cycle as the investing public got quite bearish on the further outlook for stocks. Or, rather we could also say that the public got really spooked. Money managers were willing to come in buy cheap but when prices retraced half of what they were, the market was vulnerable to a bearish shock.

Bearishness rules this transitional segment of what is probably still a long-term bull market. While tech stocks could be building a major top, I don't see it yet. You do have to wonder however as the October '07 top was in the SAME area as at our May 2011 peak. If no higher highs are seen in the foreseeable future, the weekly charts are showing a huge double top.

Looks to me like 2400 will be tested and is where I've highlighted a first support.

Resistance comes in initially at the top of the (downside) price gap in the 2540 area. 2600 is more of a resistance point than you might think. Precisely because COMP saw important bottoms in this area, makes for a certain amount of stock (inventory) overhang as prior buyers in the 2600 area become willing sellers in the more bearish climate we're in currently.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) index chart is mostly bearish given the recent rally failure. This after NDX retraced a little more than 50% of its big prior decline. This looks about right for this market at this time as this most recent advance hasn't been a powerhouse rally on heavy heavy volume.

We may be in a longer term bull market for stocks in general and tech in particular but we're in the bearish doldrums for a few more weeks at least I think. The 5% trading bands have been helpful. Prices were under the lower band for some time and now prices will not repeat the same with 'above the line' action. The simple visual of more time below the line, and no time above the line, that the price skew will continue to be bearish; i.e., rallies are shorter, take what you can get, declines carry farther and faster.

2100 looks like a downside target but I've noted first support at 2150, suggesting the possibility that support is going to be found at the average.

2215 may offer initial resistance when the gap is 'closed'.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) looks headed lower and that it has established the high end of its range for a while. Resistance begins at 54.0 and extends to the area of the recent (55.7) high. It would take a move above 55.7-56.0 area to suggest a possible new up leg, such as to 58-59.

Support is highlighted as starting in the 52 area, with fairly major support at 50. A daily and certainly weekly Close below 50 would suggest a new down leg with next targets to the 48-47 area.

The recent decline was on relatively low volume which is a mild bullish plus if it means that sellers have dumped all they need to unless QQQ dives below 50.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) almost reached my upper trading 'band', otherwise known as a upper 5% moving average envelope, relative to a 'centered' moving average of 21 days; meaning that the upper line is a value equal to 5% above the closing 21-day moving average on a daily chart basis. 'Almost' is about as good as it gets in a recovery rally from such a steep waterfall type decline as was seen in late-July/early-August. Rallies are going to often be to below the line, not above it.

Speaking of the envelope bands, the lower one suggests a support target for the 650 area. Looks about right to me.

Resistance is at 706, extending to around 730.



GOOD TRADING SUCCESS!


New Option Plays

Discount Stores, Industrials, and Business Services

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Dollar Tree, Inc. - DLTR - close: 71.21 change: -0.57

Stop Loss: 69.45
Target(s): 74.50, 77.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Investors are worried about another recession in the U.S. They are betting that customers will try and stretch their dollar by visiting their local dollar store, like DLTR. This stock hit new all-time highs this past week. Shares tested prior resistance as new support near $70 on Friday morning.

The intraday bounce on Friday looks like a new bullish entry point. I am suggesting we buy calls now but only if DLTR and the S&P 500 index both open positive Tuesday. If triggered we'll use a stop at $69.45. I'm setting a conservative price target at $74.50 and a more aggressive target at $77.50.

We will list both September and October calls but bear in mind that Septembers will expire in less than two weeks. I prefer the Octobers!

*See Entry Details in Play Description*

- Suggested Positions -

buy the SEP $75 call (DLTR1117I75) current ask $1.30

- or -

buy the OCT $75 call (DLTR1122J75) current ask $1.85

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 3, 2011


Ingersoll-Rand Plc. - IR - close: 32.38 change: -0.15

Stop Loss: 30.75
Target(s): 34.75, 36.75
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Industrial names were sold pretty hard on Friday as trades worried over a new recession. Yet IR managed to pare most of its losses with a strong intraday bounce. The stock made a higher high last week compared so plenty of stocks that struggled with the mid August highs. If the market cooperates we could see IR rally toward its 50-dma.

I am suggesting bullish positions now but only if IR and the S&P 500 index both open positive on Tuesday morning. The low on Friday was $31.43 and the 10-dma is at $31.17. I am suggesting a stop loss at $30.75. Our first target is $34.75. Our second target is $36.75 (or its 50-dma).

We will list both September and October calls but bear in mind that Septembers will expire in less than two weeks. I prefer the Octobers!

*See Entry Details in Play Description*

- Suggested Positions -

buy the SEP $32 call (IR1117I32) current ask $1.35

- or -

buy the OCT $35 call (IR1122J35) current ask $1.05

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 8.0 million
Listed on September 3, 2011


NEW DIRECTIONAL PUT PLAYS

Moody's Corp. - MCO - close: 29.34 change: -0.95

Stop Loss: 31.60
Target(s): 26.50 , 25.25
Current Option Gain/Loss: Unopened
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The up trend in MCO was struggling prior to the market's sweeping losses in August. Now the stock is trading in a bearish pattern of lower highs and lower lows. In this market that's a common pattern. However, the financials are leading the market lower. This looks like a good spot to speculate on MCO falling to a new relative low.

I am suggesting small bearish positions now with a stop loss at $31.60, just above last week's highs. Our first exit target is $26.50 because the daily chart is suggesting MCO should find support there from late 2010. I'm setting a more aggressive target at $25.25 as well.

FYI: There are plenty of investors who are bearish on MCO. The most recent data listed short interest at almost 15% of the 183 million-share float. That does raise the risk of a short squeeze. We want to keep our position size small.

The Point & Figure chart for MCO is bearish with a $19 target.

We will list both September and October calls but bear in mind that Septembers will expire in less than two weeks. I prefer the Octobers!

* Small Positions *

- Suggested Positions -

buy the SEP $30 PUT (MCO1117U30) current ask $1.53

- or -

buy the OCT $27 PUT (MCO1122V27) current ask $1.43

Annotated Chart:

Entry on September xx at $ xx.xx
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on September 3, 2011



In Play Updates and Reviews

37 Years

by James Brown

Click here to email James Brown

Editor's Note:

The market's are showing the worst start to September since 1974. Just as we expected, the stock market sold off on the jobs report. A few of our bullish candidates were stopped out (BCR, CAT, FFIV, and UTX).

Don't forget that September options expire in nine trading days.

-James

Current Portfolio:


CALL Play Updates

Cabot Oil & Gas - COG - close: 74.24 change: -1.06

Stop Loss: 71.45
Target(s): --.--, 79.90
Current Option Gain/Loss: Sep.$75: - 5.3% & Oct.$75: +10.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03 update: The jobs data renewed fears of a recession. A recession means lower demand for oil. That send oil prices lower, which in turn weighed on the energy sector. The OSX oil services index was off -3.3%. COG outperformed its peers. Shares gapped open lower, dipped to $72.00 and bounced to close down -1.4% instead.

Readers could use this intraday bounce as a new entry point or you could wait for another dip near $72.00 as a new entry point.

Currently our final target is $79.90 but if you're launching positions now or near $72 then I'd be tempted to exit in the $78.00-78.50 zone.

- Suggested Positions -

Long SEP $75 call (COG1117I75) Entry $2.80

- or -

Long OCT $75 call (COG1122J75) Entry $4.80

08/31 new stop loss @ 71.45. Consider an early exit now!
08/30 new stop loss @ 69.75, adjust final target to $78.85
08/30 1st target hit at $75.85.
Sep. $75 call bid @ 3.70 (+32.1%)
Oct. $75 call bid @ 6.20*(+29.1%)
*option did not trade today. this is an estimate. 08/29 COG gapped open higher at $72.79

chart:

Entry on August 29 at $72.79
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on August 27, 2011


Deckers Outdoor - DECK - close: 85.90 change: -3.23

Stop Loss: 84.40
Target(s): 93.50, 97.00
Current Option Gain/Loss: -58.5%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
09/03 update: I am a little bit surprised that DECK actually held support near $85 and its 200-dma. Normally this volatile stock would see rally big moves on a day like today. Granted the -3.6% drop on Friday was worse than the NASDAQ's -2.5% decline but it could have been worse.

We are quickly running out of time for this trade. With Monday's holiday we are down to just nine trading days left for September options.

I am not suggesting new positions at this time.

Earlier Comments:
I do consider this an aggressive trade. DECK can be a volatile normally and in this market the moves get a little crazy. We definitely want to keep our position size small.

- Suggested (SMALL) Positions -

Long SEP $90 call (DECK1117I90) Entry $4.70

08/30 Readers may want to cut losses now (at -23.4%).
New stop loss @ $84.40
08/20 Remainder of our August $90 call position expires at $0.00 (-100%), We took profits on these on the 12th at +232%
08/18 DECK is down nearly 20 points in three days
08/12 1st target hit @ 93.50
bid on Aug. $90 call @ $5.05 (+232.2%)
bid on Sep. $90 call @ $8.45 (+79.7%)

chart:

Entry on August 11 at $83.53
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on August 9, 2011


Energy XXI Ltd. - EXXI - close: 25.20 change: -1.10

Stop Loss: 23.90
Target(s): 27.50, 29.75
Current Option Gain/Loss: + 34.6%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
09/03 update: EXXI gapped open lower at $25.34 and then spent the rest of Friday churning sideways in the $24.50-25.50 zone. Friday's morning drop should effectively fill the gap from August 29th. EXXI is a volatile stock so the -4.1% drop on Friday isn't a surprise. I was actually expecting a drop towards $24.00.

Readers could use this pull back as a new entry point but you may want to raise your stop loss toward the $24.50 area.

- Suggested Positions -

Long DEC $25 call (EXXI1117L25) Entry $2.60

08/31 new stop loss @ 23.90
08/30 new stop loss @ 23.40
08/29 new stop loss @ 21.90
08/27 new stop loss @ 20.90

chart:

Entry on August 22 at $22.00
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011


Lululemon Athletica - LULU - close: 53.15 change: -1.38

Stop Loss: 51.40
Target(s): 56.00, 59.50
Current Option Gain/Loss: - 23.4%
Time Frame: up to September 9th
New Positions: see below

Comments:
09/03 update: Traders bought the dip near $52.00 on Friday morning and they bought the dip again at $52.20 on Friday afternoon. This area also happens to be converging technical support with its 10, 20, and 100-dma all meeting together. Friday's pull back also fills the gap from August 29th.

The fact that shares did not drop to $50 or lower on Friday is a positive sign. We can use this dip as a new entry point to buy calls. Just remember our time frame.

NOTE: This is a short-term trade. We do not want to hold over the Sept. 9th earnings report. LULU reports on the morning of Sep. 9th. That means we need to exit on Thursday, Sep. 8th at the close.

- Suggested Positions -

Long SEP $55 call (LULU1117I55) Entry $3.20

09/03 only 3 trading days left
08/31 new stop loss @ 51.40
08/30 new stop loss at $49.75
08/30 1st target hit @ $56.00, option bid @ $4.05 (+26.5%)

chart:

Entry on August 29 at $54.05
Earnings Date 09/09/11 (confirmed)
Average Daily Volume = 4.2 million
Listed on August 27, 2011


Tractor Supply Co. - TSCO - close: 59.64 change: -1.54

Stop Loss: 58.75
Target(s): 64.75
Current Option Gain/Loss: Sep.$65: -78.5% & Oct.$65: -27.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03 update: TSCO is trading very technically right now. The stock gapped open lower on Friday morning at $59.93. Shares ignored potential support at $60.00 yet did not fall enough to hit technical support at the 10-dma. Instead the stock was trading on technical support at the 38.2% Fibonacci retracement of the current two-week bounce (mid-August lows to Thursday's highs).

If there is any follow through lower on Tuesday then we will likely get stopped out. At this point I'd rather see a new rally past $61.00 or a close over $61.00 before considering new bullish positions.

Earlier Comments:
The September options expire in about two weeks. If TSCO does not see any follow through higher these will evaporate fast. The spread is a larger percentage of the overall trade with the Septembers.

- Suggested Positions -

Long SEP $65 call (TSCO1117I65) Entry $0.70

- or -

Long OCT $65 call (TSCO1122J65) Entry $2.00

chart:

Entry on August 31 at $61.15
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 858 thousand
Listed on August 29, 2011


U.S. Oil Fund - USO - close: 33.64 change: -0.83

Stop Loss: 31.90
Target(s): $37.50, 40.00
Current Option Gain/Loss: +14.1%
Time Frame: 2 to 3 months
New Positions: see below

Comments:
09/03 update: The dismal jobs data fueled fears of another recession. A recession would mean lower demand for oil and thus oil prices fell today. The USO dropped -2.4% on Friday. Yet this ETF managed to rebound after filling the gap from August 29th. It is still trading with a short-term bullish trend of higher lows.

I'd rather wait for another dip near $32.50-32.00 before considering new bullish positions.

Earlier Comments:
Keep your position size small! This is a lottery-ticket style of play.

- Suggested Positions -

Long NOV $34 call (USO1119K34) Entry $2.05

08/27 new stop loss @ $31.90
08/27 removing 2nd trigger to add another position.
08/20 Adding a new buy-the-dip entry at $30.50, stop @ 29.00

chart:

Entry on August 9 at $31.97
Earnings Date --/--/--
Average Daily Volume = 10.7 million
Listed on August 8, 2011


PUT Play Updates

CBOE Volatility Index - VIX - close: 33.92 change: + 2.10

Stop Loss: n/a
Target(s): 26.00, 22.50
Current Option Gain/Loss: -98.7%
Second Position Gain/Loss: - 98.0%
Third Position Gain/Loss: -86.8%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
09/03 update: Friday saw the VIX gain +6.5%. Are investors growing temporarily numb to the market's volatile swings? You'd think a -2.5% plunge across the market would produce a bigger gain in the VIX. Of course the VIX was already at elevated levels.

We are not suggesting new positions at this time.

Earlier Comments:
I am not listing a stop loss on this trade. We should consider this a higher-risk, speculative trade. I'm setting our targets at 26.00 and 22.50.

NOTE: These VIX options expire on Wednesday, September 21st.

- Suggested Positions -

Long SEP $25.00 PUT (VIX1121U25) Entry $4.00

- Second Position, entered at the open on Monday, Aug. 8th -
(very small positions)

Long SEP $25.00 PUT (VIX1121U25) Entry $2.50

- 3rd Position, listed Aug. 8th, Open Aug. 9th @ open. -

Long SEP $30.00 PUT (VXI1121U30) Entry $5.70

08/17 August VIX options expire
1st position Aug. $25 put @ $0.00 (-100%)
2nd position Aug. $25 put @ $0.00 (-100%)
08/08 3rd position listed to buy at the open on Aug. 9th
08/08 2nd position was filled the open.

chart:

Entry on August 5 at $28.48
Earnings Date --/--/--
Average Daily Volume = ---
Listed on August 4, 2011


CLOSED BULLISH PLAYS

CR Bard Inc. - BCR - close: 91.85 change: -2.94

Stop Loss: 91.75
Target(s): 94.75, 98.25
Current Option Gain/Loss: Sep.$85: -56.7% & Oct. $95: -20.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03 update: BCR was caught up in the stock market sell-off on Friday. Shares hit $91.54 on Friday afternoon. That was enough to stop us out at $91.75. Readers may want to keep BCR on their watch list for a bounce from the $90.00 level, which should be round-number support.

- Suggested (small) Positions -

SEP $95 call (BCR1117I95) Entry $1.85*, exit $0.80 (-56.7%)

- or -

OCT $95 call (BCR1122J95) Entry $3.40*, exit $2.70 (-20.5%)

09/02 stopped out @ 91.75
08/31 new stop loss @ 91.75
08/30 new stop loss @ 89.90
08/30 1st target hit at $94.75
Sep. $95 call bid at $2.25* (+21.6%)
Oct. $95 call bid at $4.00* (+17.6%)
*these are estimates. options did not trade today
08/29 play opened. BCR gap open entry at $92.11
* these are estimates. options did not trade today
08/27 Adjusted back to old strategy. Buy calls now if both BCR and S&P500 open positive on Monday.
08/27 move stop loss to $87.40 and adjusted strikes to $95
08/25 New strategy. Buy the dip at $86.50, new stop 84.85

chart:

Entry on August 29 at $92.11
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.25 million
Listed on August 23, 2011


Caterpillar Inc. - CAT - close: 85.38 change: -3.17

Stop Loss: 85.75
Target(s): --.--, 94.50
Current Option Gain/Loss: Sep.$90: --.-% & Oct. $90: -26.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03 update: CAT was hit pretty hard on Friday. The jobs data set the market up for a plunge on Friday morning and CAT actually gapped open lower at $85.25. That was below our stop loss at $85.75 so the play was closed immediately.

At this point readers may want to wait for another bounce from support near $80.00 before considering new positions. While the $85.00 level is short-term support the stock is kind of in no man's land between $80 and resistance in the $93 area.

Earlier Comments:
We want to keep our position size small.

- Suggested Positions -

OCT $90 call (CAT1122J90) Entry $4.35, exit $3.20 (-26.4%)

09/02 stopped out @ 85.25, gap down exit
08/31 new stop loss @ 85.75. Exit Sep. calls now!
08/31 exit early Sep. $90 call (bid) @ $3.75 (+63%)
08/30 new stop loss @ 84.75, consider taking profits early now.
08/29 trade opened. CAT gapped open at $87.11
08/27 buy-the-dip trigger not hit. We will switch back to buying calls now if both CAT and S&P500 open positive on Monday.
08/27 new stop loss at $79.49
08/24 play was not triggered. New strategy to buy the dip at $80.50 with a stop at $78.75.

chart:

Entry on August 29 at $87.11
Earnings Date 10/24/11 (unconfirmed)
Average Daily Volume = 13.9 million
Listed on August 23, 2011


F5 Networks Inc - FFIV - close: 76.31 change: -2.82

Stop Loss: 76.25
Target(s): 84.50, 89.00
Current Option Gain/Loss: Sep.$85: -72.2% & Oct.$85: -39.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/03 update: Our play in FFIV survived the initial sell-off on Friday morning and then another spike down to $76.30 before 10:00 a.m. Yet as the market turned lower on Friday afternoon shares eventually hit our stop at $76.25. FFIV filled the gap from August 29th before finally paring it losses to -3.5%. Coincidentally FFIV bounced on Friday afternoon from the 50% retracement of the two-week rally. Readers will want to keep an eye on this stock. A bounce from here or a bounce from $74.00 might be a new bullish entry point.

Earlier Comments:
This is an aggressive trade. Any big dip is going to crush the September calls since they expire in just over two weeks. Readers may want to play the Octobers instead.

- Suggested Positions -

Long SEP $85 call (FFIV1117I85) Entry $2.16, exit $0.60 (-72.2%)

- or -

Long OCT $85 call (FFIV1122J85) Entry $5.05, exit $3.05 (-39.6%)

09/02 stopped out at $76.25

chart:

Entry on August 31 at $80.00
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 3.5 million
Listed on August 30, 2011


United Technologies Corp. - UTX - close: 71.04 change: -2.01

Stop Loss: 71.75
Target(s): 76.40, 79.75
Current Option Gain/Loss: (Sep. - 78.6%)
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
09/03 update: Industrial names were hit hard on Friday due to recession fears. UTX gapped open lower at $71.64. This was under our stop at $71.75 so the play was closed immediately.

Earlier Comments:
We want to keep our position size small.

- Suggested Positions -

SEP $75 call (UTX1117I75) Entry $1.83, Exit $0.39 (-78.6%)

09/02 stopped out @ 71.64, gap down exit
08/31 new stop @ 71.75, consider an early exit now (-18.0%)
08/30 consider cutting your losses now (-30%)
08/27 Adding a stop loss at $68.75
08/27 We have removed the buy-the-dip entry at $65.00
08/20 New entry point to buy calls on dip at $65.00
08/20 Our aggressive, higher-risk trade with August options has expired. Entry price on Aug. $75 call (UTX1120H75) was $0.29. exit 0.00 (-100%)

chart:

Entry on August 15 at $73.21
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on August 13, 2011