Finally A Buying Opportunity
When I look at all the carnage in the markets today I am surprised by the minor damage to the indexes. The reason for the minor drops is the relatively narrow dumping window that was confined mostly to the high dollar momentum plays of the last three months. Big cap techs, which have provided a safe place for finds to park their money since August, are still getting hammered as those same funds liquidate dump those positions. It is not profit until you turn it back into cash and that is exactly what they are doing today. They saw gains of about 25% going into the October fund year-end and now they are running for the exits just in case the sudden recession worries get worse. The selling is accentuated by an 18-month high in the Japanese Yen. Those funds still in the Yen carry trade are getting killed by the falling dollar, rising yen. Those funds are being forced to unwind those equity positions they bought with borrowed yen.
Oil prices fell -$2 on the indecision out of OPEC about the agenda for the coming OPEC meeting. First there was not going to be any discussion about raising production then there were comments they would discuss it. That scenario reversed about six times over the last 24-hours and tonight it appears they might discuss it but there will be no decision to raise production. Why should they bother to raise again. There is plenty of oil around the world and what they pump tomorrow won't get to the refiners for 30-45 days or nearly Jan-1st. If they agreed to hike production it would likely be Jan-1st and Feb-15th before it gets to refiners. By then the demand rush is nearly over. There is plenty of oil and OPEC is loving the prices. Of course they want to look like they are worried sick about $100 oil but we all know it is cash in the bank for them.
I do expect oil prices to continue to weaken with crude options expiring tomorrow and crude futures expiring on Friday. There should be some serious volatility as the various players in the market adjust their holdings. We have producers in the market selling future production to capture the high prices or selling out of the money calls and buying puts with the proceeds. There are more strategies and more players than I want to get into tonight but rest assured the funds have made a lot of money being long oil and I don't think they are done yet. Those who missed the last spike will be looking for the next dip.
The momentum selling is definitely visible in the energy sector. Couple that with weakness in China and three of the largest energy companies were down huge. For instance Sinopec (SNP) -11 today, -43 in the last two weeks. Petrochina (PTR) -16 and -78, CNOOC (CEO) -15 and -56. Having those stocks falling in such big percentages is a virus that was transmitted to the American energy sector. You have heard the saying, "When America catches a cold and the world sneezes." Well this week the reverse was true with China's market correcting. What goes around comes around and it is our turn for profit taking.
I want to stress that it is a pure case of profit taking or maybe profit saving would be a better term. Those funds with large profits are unloading every big cap momentum stock regardless of whether it is oil or tech. I think there are some amazing opportunities being created not only in energy but in the tech sector. Look at Apple (AAPL) -$40 in only four days. RIMM -35 from its recent highs, GOOG -115, DRYS -47 and BIDU -128. The solar stocks were exploding last week on positive press but this week they are being taken to the woodshed for a beating. Look at FSLR -53 and SPWR -54. All of these stocks I listed had been the pure momentum plays for months now. If the rest of the market was down as much as these high flyers the Dow would have been off -1000 points today instead of the -55 it gave back.
Obviously nobody knows where this will stop. The big cap tech index, the NDX, is off -275 points or -12% from its Nov-1st high. That is a correction in anybody's book. The Nasdaq Composite is only down -9%. The NYSE composite is only off -7% because there are fewer large cap momentum stocks on the NYSE. If we have to wait for all the indexes to correct to -10% or more than this is going to be an ugly week. Personally I think it is about over. The NDX is the index we have to use because it is the most representative of the momentum stocks that took us higher over the last three months. If the decline continues it will hit the 200-day average at 1935 in about 48 points. I would be a dip buyer at that level. Actually I am a dip buyer now but I think we could still see that 1935 level. Worst case I don't think the NDX will break 1900, which is very strong support. I am going to recommend some tech plays tonight simply on the oversold conditions and the nearness of major support.
We were fortunate to see a lot more of our downside triggers hit today and this could be either good news or bad news depending on your risk profile. We did buy them a little higher than I would like but with the sector moving closer to the start of winter demand in about two weeks I think we are in good shape. Once the profit taking eases we should see a rebound that could be just as strong as the drop.
Positions triggered today were:
JEC @ $80
VLO @ $67.50
COP @ $80
CNQ @ $75.50 Email alert
CLB @ $130 Email alert but $130 was hit later in the day
FTI @ $57
Petrobras (PBR) $94.94
Our Petrobras entry target at $80 was not reached with $95 being the lowest level today. I am going to recommend we enter a position on Petrobras when the market opens on Tuesday. Their new 8 billion barrel discovery plus various other recent positives makes me believe they are a good value here and will be bought hard when the rebound begins.
Buy 2009 $110 LEAP Call XVQ-AB currently $16.30
Transocean (RIG) $117.95
I would like to buy RIG here but with the stock change on the closing of the GSF merger we can't do it. The symbols and the premiums will be out of phase when that merger completes sometime in December.
Shaw Group (SGR) $61.06
The Shaw Group is not currently on the watch list but I am going to make it a play tonight. The Shaw Group is service provider to the energy, chemical, environmental and infrastructure industries. Basically they build things like power plants, pipelines, platforms and lots of infrastructure to the energy sector. Reportedly they are currently bidding or preparing bids on over $1 trillion in projects. The mammoth scale of the current requirements around the globe is staggering. They have been one of the sleeper momentum stocks with very little press. They are off about 22% in the last three days at $61. There is strong support at $60 and the 100-day average at $57. I am recommending Shaw Group for an entry tomorrow morning. Because they are not specifically oil based they do not react directly to the volatility in oil prices. I am going to suggest spending the extra $6 to go to 2010 instead of 2009 LEAPs.
Buy 2010 $70 LEAP Call YCW-AN currently $20.40
Apple Computer (AAPL)
I considered buying Apple calls at this level ($154) but the options are too expensive in my opinion and I would rather not add them as a covered call because of my view for January. I expect them to sell off after the holiday buying rush passes. Therefore they would not make a good long term play in my book. If you can stomach the $20 premiums for short-term options you could possibly score a short-term trade into December but I can't justify adding them to the portfolio.
VMWare Inc (VMW)
Options are also very expensive on VMW even despite their 36% drop from last week's highs. I don't have enough of a track record to suggest adding them as a covered call or LEAP play but you might want to try a short-term trade on VMW.
Cisco Systems (CSCO) $29.11
Cisco gave back almost 20% post earnings but was actually positive on Monday. I think Cisco is in the right spot globally even if U.S. sales are lagging. The stock is cheap and the options are cheap. I am adding them to the portfolio at the open tomorrow.
Buy 2009 $30 LEAP Call VYC-AF currently $5.00
RIMM $102.60 Research in Motion
RIMM has been knocked back from $137 to $102 on absolutely no news. RIMM options are extremely expensive and that gives us the opportunity to profit by adding RIMM as a covered call. RIMM is $102, the $150 LEAP is $18.50. If RIMM moves over $150 by next January that gives us $48 in stock appreciation and $18 in premium received. That is $66 profit on a $102 stock. I cannot conceive that RIMM will not continue higher since they are just breaking into the Asian markets and their new products in the U.S. are selling like hotcakes.
Buy RIMM currently $102.60
Sell 2009 $150 LEAP Call XTB-AJ currently $18.50
I looked at several dozen others for plays tonight but I could not achieve the comfort level needed to buy the dip on things like SPWR or NVDA. After today out current portfolio has taken a large jump in the number of positions. Let's wait and see what the rest of the week brings before stepping in the front of a correction bus.