After a rocky start stocks rallied late in the afternoon after news broke of a plan to supercharge the European Financial Stability Fund (EFSF) and end the crisis in Europe.
Unfortunately just having a basic plan is a long way from implementing it. The new EFSF plan can't even be discussed in public until the EFSF is approved by all 17 euro zone nations. Those votes are far from guaranteed.
The details of the plan were leaked on Monday and profiled in a news alert on CNBC. They include creating a Special Investment Vehicle (SIV) out of EFSF funds and then leveraging those funds up to 8:1 to provide up to three trillion euros in buying power. They can use that capability to buy bonds from the nations in trouble and provide a bargain interest rate that is much less than those countries are currently getting from the open market. In theory the plan is a step in the right direction since it would provide guaranteed financing and obtaining that financing would require continued adherence to austerity plans. Time will tell if it actually gets implemented before Greece defaults. There is a rumor they don't want to implement it until after Greece defaults so they can provide financing of the new Greek debt at a much lower level after the restructuring.
When the news was announced the Dow was positive about 80 points and declining and the Nasdaq was negative by about -20 points. Those indexes ended higher with the Dow posting a +272 point gain and the Nasdaq +33. What a difference some good news can make.
Commodities turned positive on hopes the problems, although not over, were at least heading in the right direction.
I suspect the news caused some shorts to cover after some weak economics earlier in the day was providing those same shorts with added conviction. The morning negativity reversed and those trying to add short positions quickly found themselves on the wrong side of the trade.
The Texas Manufacturing Survey headline number for September declined to -14.4 from -11.4 in August. The Chicago Fed National Activity Index for August declined to -0.43 from -0.06. New home sales for August fell to an annualized 295,000, a drop of 7,000 from July and the fourth consecutive month of declines.
That kind of economic results is expected to continue for the rest of the week so I don't know how excited traders are going to get about buying stocks.
One point in the bulls favor is the dramatic difference in the performance of stocks and bond for the quarter. Bonds are at record highs while stocks are right on the edge of a bear market. For the thousands of balanced funds this represents a problem. If your charter says you have to keep 75% equities and 25% bonds and because of the shift in valuations you now have 60% equities and 40% bonds then the fund manager has to bring that balance back into compliance at the end of the quarter (Friday) by selling bonds and buying stocks. Given the dramatic shift in valuations this "could" mean a significant amount of portfolio rebalancing over the next four days.
Could, should, would, etc, are all the terms analysts use when they describe how the market or a stock should react. Nobody ever knows for sure and the market is not a place to look for logic. While the news of progress in Europe is positive and it should remove some of the bearishness from the market there is no guarantee of market direction. There is still a significant worry over the return of recession conditions.
I believe we are close to a rebound that last more than a couple days. It may begin this week or it could take several weeks but I do believe we could see one soon. I am going to plan on adding some plays this week to participate in that rebound but timing is always tricky. If it appears we are going to move higher I may add more rapidly but if it appears we are still going to see additional volatility then we will just hold what we have.
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Current Position Changes
TSCO - Stop was raised
New Short Put Recommendations
SLV - Silver ETF $29.77 (Short Put)
Silver dropped nearly 30% last week to close at $30 an ounce but continued that decline on Sunday night to $26.15 intraday. That was strong support at January and the contract bounced more than $4 to trade at $30.52 late Monday. I believe we have seen the bottom in silver and it will move up from here. The potential improvements in Europe will push the euro higher and the dollar lower and commodities should rise.
Do NOT enter this position unless SLV and S&P are both positive before 10:AM
Sell short SLV OCT $26 Put, currently $0.93, stop 27.75
Chart of SLV
LVS - Las Vegas Sands $43.71 (Short Put)
The gaming stocks with exposure to Macau all cratered at the open on Monday after Macau's tourist bureau said visits from several countries plunged by double digits in August. Fortunately that is what you get when you only listen to the headlines. Overall visits from all countries rose +5.8% month over month and +14.4% over the same period in 2010.
The month over month numbers for Singapore fell -13.7%, Thailand -17.1%, Vietnam -17.1% and Americas -12.2%. Those countries only accounted for 55,000 visitors in August compared to 66,000 in July. A minor drop of -11,000. However, overall visitors rose to 755,000 from 720,000 from all countries. That means despite the 11,000 decline from those above the total visitors still rose +35,000. The decline was completely meaningless and could have been related to holidays, storms, travel outages, calendar dates, etc. Macau is still booming. The stocks fell sharply at the open but once the news was disseminated they rebounded strongly.
Do NOT enter this position unless LVS and S&P are both positive before 10:AM
Sell Short LVS OCT $39 Put, currently $1.20, stop loss $41.75
Chart of LVS
PRU - Prudential $46.11 (Short Put)
Prudential has $883 billion in assets under management and produces a wide array of financial products including life insurance, annuities, retirement services, mutual funds, investment management and real estate services to institutional customers. They have been using the recession to acquire additional assets and recently acquired AIG Star Life Insurance and AIG Edison Life Insurance to boost their presence in Japan.
The Fed's operation Twist is a negative for insurers since those companies rely on stable cash flow from their investments for decades into the future. They typically buy long term U.S. Treasuries with 50% to 70% of their investments in Treasuries.
The insurance stocks took a hit after Twist was announced. Prudential appears to have found a bottom at $44 and rebounded strongly today. I am recommending we sell a $43 put.
Do NOT enter this position unless PRU and S&P are both positive before 10:AM
Sell Short PRU OCT $43 Put, currently $1.64, stop loss $43.75
Other stocks you might want to consider
These are not official recommendations but I thought they had potential.
Symbol, Price, Strike, Premium
CI $43.28 $40.00 $0.93
JJC $43.27 $40.00 $0.80
HIG $16.58 $15.00 $0.63
USO $32.47 $29.00 $0.81
HANS $90.45 $85.00 $2.75
RVBD $22.33 $19.00 $0.84 earnings Oct 19th After Close
New Covered Call Recommendations
New Long Term Recommendations
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
BAC - Bank of America (Long Term)
BAC - Bank of America (Update 8/31)
BZH - Beazer Homes (Long Term)
MDR - McDermott International (Long Term)
BK - Bank of New York Mellon (Long Term)
NVDA - Nvidia (Long Term)
TSCO - Tractor Supply (Short Put)
SD - Sandridge Energy (CC + Long Term Combo)
YHOO - Yahoo (Long Term Combo)
HPQ - Hewlett Packard (Aggressive Short Put)
PHM - Pulte Homes (LT Leveraged Combo)
There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.
Here is the most common margin calculation for naked puts.
100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))
For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.