For us it presents two opportunities. We have several winning plays that should benefit from any market bounce and we are looking to get into long term oil plays on any dip back to the 100-day average. It could be a win-win situation.
Another opportunity would be new short possibilities in equities once they rebound on falling oil. Transportation stocks should get a boost if oil declines as well as GM. I had looked at GM as a long term short twice in the last month but kept thinking I was early. When I wrote about it last Tuesday night I was already kicking myself for not taking the entry back in early March. After the massive drop on Wednesday I was really kicking myself. I believe GM has a lot further to fall but a drop in oil prices should provide a dead cat bounce and a new entry opportunity.
The only airline worth shorting is Continental at 10.50 or Jet Blue at $17. Shorting DAL or AMR in the single digits is not worth the effort in a leap. It is my opinion that airlines will also see a bounce on the seasonal drop in oil and that will give us our entry.
For long possibilities on equities the only game in town is oil. I believe the market is facing a long-term decline to levels not seen in years once the real oil story is told. $70, $80 or even $100 oil will be very negative for the consumer and for stocks and that is our immediate future. Oil over $100 is within sight and it will be the death knell for equities. The next couple years could see levels back under 9000 for the Dow and 1750 on the Nasdaq as trader psychology adjusts to the new way of life.
The oil sector is the new bubble only this bubble will not burst for a long time. We will continue to look for entries in oil for long term holds and entries in equities for short term trades.
Adobe rewarded our patience last week with a $5 bounce to a new four-year high. If the Nasdaq recovers next week as expected the shorts will be hit once again. We are up +$5 on the trade.
The XLE continues to move higher but with far less excitement than before despite record levels for oil. I believe it is the anticipation of the seasonal Q2 decline weighing on the stock and I am tightening the stop to prevent any loss when it rolls over. We are up +200% on the trade.
EBAY was hit very hard by the de-weighting on the S&P with 16% of the stock held by insiders. The insurance put is now worth more than the loss on the Leaps and we can either exit now for a profit despite the drop or hold on to see if a rebound appears. I am choosing to exit in light of Meg Whitman interviewing for the job at Disney.
DGX broke over $100 again and a positive market next week could start a new leg higher.
Interest rates continue to weigh on the homebuilders and the insurance put on TOL expired $3 in the money. This partially offset the drop in the leap but now we have to decide what to do about the future.
Overall it was not a bad week despite the drop in the market. The insurance puts are doing their job and I believe the worst is behind us.