The S&P and Nasdaq rebounded from Tuesday's dip to return to resistance but the Dow and Russell 2000 remained laggards.
There was a really nice bounce from the Tuesday drop to initial support but it came on the lowest average volume in weeks of 5.9 billion shares per day. There was no conviction. You would have thought a decent dip to clear support would have prompted some hesitant traders to jump in the group swim but the participation was minimal.
The rally has earned the title of the "Most Hated Bull Market in History" because of the lack of conviction for months. The constant melt up on low volume has left many investors on the sidelines waiting for a real dip as an entry point. There has not been a dip of the magnitude they want since December.
Personally, I thought last week's dip was exactly what the doctor ordered with the S&P declining -2% and the Russell 2000 -5.3%. It was a perfect garden variety bout of profit taking. Evidently the doctor ordered a more severe case of the profit taking flu.
There were some qualifications on the rebound since we really did not know what was going to happen in Greece until Friday and then late Friday on the CDS decision. That could have kept investors on the sidelines while they waited for the smoke to clear. Weekend event risk is always a caution despite the strong jobs numbers.
Next week we have the Fed meeting on Tuesday. Investors may be worried the Fed will say something that will roil the market and that becomes another hesitancy for going long at what could be a top.
The problem remains that the indexes are at strong resistance that could be a market top for this cycle. March is a lull month where earnings are over and earnings warnings begin. We saw TXN and ALTR warn on Thursday.
Stock funds have finally started seeing positive inflows after many months of outflows. There may be a change in progress towards equities and out of fixed income investments but it has not yet caught fire. The fuse is smoldering but not yet fizzing. As kids we all played with Black Cat firecrackers. Sometimes the fuse would just smoke before eventually switching to fizz mode and finally explosion. Sometimes it would go out. The danger period was once it quit smoking. Picking up the firecracker to light it again could sometimes result in an unfortunate surprise.
We are at the point in the market where the fuse is smoldering and it may still catch fire or go out. A breakout over 13000, 1375, 3000 could provide the fizz factor. A failure at this resistance could see the rally fuse extinguished.
S&P futures are negative on Sunday night by -3.50 as I write this. Crude oil, gold and silver are down and the dollar is rising. There is a lot of darkness before morning and conditions could change on some news headline out of Europe but eventually the U.S. markets will have to stand on their own two feet.
I am cautious about Monday so I am only adding one play tonight. Depending on market conditions on Monday I will send an update newsletter.
Send Jim an email
Current Position Changes
New Short Put Recommendations
GMCR - Green Mountain Coffee Roasters
GMCR was crushed on Friday by the news Starbucks was going to sell a single serve coffee machine. The press went crazy and the stock lost -16%. If you actually read the announcement the new Verismo is an espresso and latte machine. Starbucks did not even say anything about a single serve coffee product and actually mentioned their partnership with GMCR in the Verismo announcement.
GMCR also expressed surprise that the Verismo was being discussed as a single serve coffee maker since Starbucks had only mentioned it to them as an espresso machine. GMCR has its own espresso machine in development as well. The Starbucks machine is not even due out until September.
I believe the selling in GMCR was way overdone. I am recommending a short put on GMCR in expectations of a bounce. I am recommending a short term insurance put rather than a stop since GMCR could be volatile this week. If GMCR is rebounding strongly at the open on Monday I would NOT buy the long put.
Do NOT enter this position if GMCR is negative at the open on Monday.
Sell short GMCR Apr $50 Put, currently $3.10, No stop
Buy Long GMCR Mar $48 Put, currently 55-cents only if GMCR under $54.
Chart of GMCR
New Covered Call Recommendations
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)
SD - SandRidge Energy (Long Term CC)
YHOO - Yahoo (Long Term Combo)
PHM - Pulte Homes (LT Leveraged Combo)
JEF - Jefferies (LT Leveraged Combo)
GLD - Gold ETF (Short Put)
WFC - Wells Fargo (Combination)
CRR - Carbo Ceramics (Short Put)
JJC - Copper ETF (Short Put)
WNR - Western Refining (Covered Call)
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean Offshore (Short Put Spread)
USO - US Oil Fund (Covered Call)
UGA - US Gasoline ETF (Short Put)
MMR - McMoran Exploration (Short Put)
BNO - US Brent ETF (Short Put)
ATHN - AthenaHealth (LT Short Put)
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.