Option Investor

Rising Tide

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They say a rising tide floats all boats and this week was no exception. Despite oil prices hovering around $68 the transportation index rallied to a new all time high and managed to stop us out of the two transportation shorts. The midweek drop in oil prices to $65.50 coupled with some good earnings from UPS and the railroads was just too much fuel for the sector.

Earnings from most companies reporting last week were substantially better overall then the first week of the season when several high profile disappointments were seen. This brought investors back into the market and shorts were squeezed on both Thursday and Friday.

With the oil companies reporting stellar earnings once again many of the leaders continued to move higher. However, some companies did miss estimates simply due to over eager analysts not taking into account the 50% haircut in gas prices over the last eight weeks and the extreme volatility in November. Still the news was full of "record oil earnings" alerts and talk of windfall profits taxes.

Next week is a strong week for energy earnings with oil hovering just under $68. I would be surprised if prices rose over 470 but then I have been surprised with the gains over the last month. The Iran news is given as the main excuse for the +$10 rise in prices but there is really no immediate threat. Any action on Iran is still months away and there have been recent events that could be seen by some as a prelude to a settlement. However, having generals on TV pointing out sites that would be bombed and discussing decapitation of the Iranian government is not conducive to falling oil prices.

I had hoped the -$4 drop in prices early in the week would give us an opportunity to pick up some oil stocks cheap but it was just not enough of a drop to hit my targets. I continue to refrain from entering energy plays at this level. Oil is only $2 from an all time high with the end of winter demand slump just ahead. On Friday oil prices rose +1.50 but many energy stocks finished the day well off their highs. Some several dollars off their highs. I know it is frustrating to not be adding additional energy plays but the timing is just not right.

Timing on adding other than energy plays is also bad since there is a historical pattern of declines after earnings. I hate to be entering new puts with the market giving the appearance of a breakout in progress and for that same reason I hate to go long at new highs. Again, our patience will be rewarded.

February Natural Gas expired at $8.18 and right at an eight month low. Unseasonably warm weather simply killed the gas rally and supplies are well above normal and 20% above the five-year average. It would take a new ice age to appear to make a dent in the current levels sufficient to move prices materially. Supplies are at the second highest level ever for this time of year.

OPEC meets next week and comments from their leaders indicate there are no plans to consider production cuts. This could be the signal speculators need to begin unloading some positions. If OPEC is going to keep producing at these levels ahead of the spring demand slump there should be a real surplus of oil shortly. Fundamentalists continue to say there is more than $10 of speculation in the current price and the clock is ticking away on winter demand. There should be a dip in our near future as long as Iran does not become a bomb magnet.

I am dropping KKD this weekend as I mentioned last week. The NYSE gave them another 90-day extension to file financials. This gives them until the end of April. The original play was entered to take advantage of their pending delisting from the NYSE. They won their appeal and it is time for us to leave.

I considered adding some LEAPS on Affiliated Computer after they made the extremely surprising move of announcing a buyback of 45% of their stock. This comes only a week after they broke off talks on an acquisition by a buyout firm. Something is fishy here and I will look to enter some calls on any pullback. The Dutch auction is from Feb until early March. That should give us time to get an entry.

Valero - Be sure to read the update on the Valero position ahead of earnings on Tuesday.

Natural Gas Chart - Daily

Crude Oil futures Chart - Daily


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