The markets struggled to post gains the last two weeks with window dressing keeping them in the green.
Everyone knows the drivers for the last several weeks. Highly liquid, big cap techs drove the averages higher. With the quarter over and fund managers sitting on large gains we have to wonder if that trend will change in April.
The earnings cycle is likely to be disruptive. Tech stocks are the only sector where earnings revisions have been higher. All other sectors have been marked down, some significantly. Earnings for the S&P are expected to show growth of barely +1%. It won't take but one or two misses or warnings to push that estimate into negative territory.
With investors used to seeing double digit earnings growth, which after nine quarters dropped to single digits in Q4, how will they react to negative earnings growth?
Adding in the cyclical factor you should note that the market topped in 2011 on April 8th and on April 26th in 2010. That should cause fund managers more than a little concern about holding a boatload of long positions.
The first week of April normally open up as quarterly retirement funds hit the market. The futures are up +6 points on Sunday night after China's PMI for March jumped to an 11 month high of 53.1. This is the government number for its largest factories. On the surface that suggests China is going to skip a hard landing. If you look a little farther the news is not that good.
Data from 2005-2010 showed a +3 point jump in the PMI in March as a result of seasonal factors. If you remove that three point seasonality the PMI is only barely positive at 50.1.
Secondly the HSBC PMI for smaller factories declined to 48.3 for March, down from 49.6. That is the fifth consecutive month under 50 and the worst quarter in three years.
The general investing public does not bother to research the actual numbers and rely on the headline for their direction. Fund managers do pay attention and the numbers from China do suggest the economy is slowing further.
Here in the U.S. the Fed is still supporting the stock market and they are expected to add further economic stimulus at the April 24th meeting. However, failure to do so would almost certainly result in a market decline. If the market does maintain its levitation act until the meeting and nothing new is announced I fear the sell in May crowd will all exit at once.
The trick will be to keep them in the market until that meeting. Using that 6-month strategy from Nov-1st until April 30th has produced some very strong gains over the last five months. The markets are up an average of more than 30% since October. I seriously doubt these cycle traders will be willing to give back much of their gains while waiting on the Fed. That should have them putting tight stops on winners and sitting with itchy trigger fingers on the sell trigger.
My outlook for April makes me a little leery about adding to many plays. Also, I hate to add plays when we are set to gap open on Monday. However, I found two I am willing to risk.
Send Jim an email
Current Position Changes
ATHN - AthenaHealth (Short Put)
I raised the stop on ATHN to $73.35. The stock shot up to more than $78 last Monday but then declined all week. We are profitable in this position and I don't want to give it all back. The put is well below at $65 but once support at $74 breaks we could see the premium spike in a hurry.
Change stop on Short June $65 put to $73.35
RVBD - Riverbed Tech (Short Put)
I am raising the stop on RVBD to $26.85. The trend is still moving higher but the stop was too far away.
Raise stop loss on RVBD short April $26 put to $26.85
XOP - Exploration SPDR (Short Put)
We were stopped out at $56.50 when oil prices imploded last week.
Stopped XOP June $55 Put, entry $2.00, exit $2.91, -.91 loss
Chart of XOP
CRR - Carbo Ceramics (Short Put)
Carbo dropped to hit our stop the prior week and I forgot to write up the exit in last week's newsletter. The position was stopped when the stock hit $95.95 on March 21st. Of course it has rebounded to almost completely erase that drop but we can't be whiners.
CRR April $90 put @ $3.18, stopped at $3.70 for -0.52 loss.
Chart of CRR
New Short Put Recommendations
DANG - DangDang (Short Put)
DangDang is an e-commerce website in China. It is commonly referred to as the Amazon of China. The stock IPOed with big fanfare in December of 2010 at $30 and then declined for all of 2011 to a low of $4. Since January 1st DangDang has suddenly found respect. On Friday they announced a new alliance with Gome Online, a leading electronics and computer products company, where DangDang will market their extensive line of electronics online. I believe the worst is over for Dangdang and a breakout over $8 will trigger further buying.
Do not enter this position unless DANG and the S&P are both positive at the open.
Sell short DANG June $8 Put, currently $0.90, Stop $7.35
Chart of DANG
CZR - Caesars Entertainment (Short Put)
Caesars, formerly Harrah's, IPOed in early February at $15 and promptly dropped to $10.50 before building a base at $11 and then another one at $12.50. Caesars is my favorite chain when I stay in Vegas. I have used almost all of their properties at least once. Vegas gaming fell off a cliff after a record number of visitors in 2007. Moody's said the number of visitors in 2011 (38.9 million) almost matched the record numbers in 2007. Attendance is expected to grow by 5% in 2012 and it will set a new record.
Harrah's was taken private in 2008 in a leveraged buyout for $18 billion. Clearly it was some very bad timing on their part. Investors put in $6 billion and borrowed the rest. Caesars has $11.5 billion in debt from an acquisition binge and several very notable building projects. All they need now is for traffic to return and that is what is finally happening. I think investors are catching on that Caesars is a good buy at these levels for speculative investors.
Do not enter this position unless CZR and the S&P are both positive at the open.
Sell short CZR May $15.00 Put, currently $1.30, stop $18.15
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)
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)
EXXI - Energy XXI (LT Covered Call)
UGA - US Gasoline ETF (Short Put)
BNO - US Brent ETF (Short Put)
ATHN - AthenaHealth (LT Short Put)
RIG - Transocean (Short Put Spread)
RVBD - Riverbed (Short Put)
GDP - Goodrich Petroleum (Short Put)
XOP - Exploration SPDR (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.