The minor market decline today was just a bump in the road. We need a real dip to get bullish.
Monday's -40 point Dow dip was not even profit taking. Monday's market fell more due to a lack of interest rather than profit taking. Volume of 5.5 billion shares was -3 billion less than Thursday and Friday. Actually, I am a little concerned about the Friday volume. At 8.4 billion shares it was higher than Thursday's FOMC volume spike at 7.9 billion. If you recall the Dow rallied triple digits on Thursday and only 60 points on Friday despite the higher volume. That is a warning sign.
When markets fail to move on higher volume it can be seen as a bottoming or topping process. While I don't think the market has topped we have to pay attention to the warning signs. If enough of them appear then what we believe to be true may be just a mirage.
I am not predicting any specific market direction tonight. We are overbought but don't fight the Fed. Actually, the more correct term would be don't fight the central banks since there has been a long list of banks announcing stimulus over last couple weeks. In theory that should mean the markets are going higher at least into month/quarter end. After the quarter ends the market will be focused on earnings and those earning may not be so hot.
The jobs report for September will be ignored since the Fed has already moved against unemployment. However, should it turn negative that could produce an entirely new set of problems, especially for the president. What are the odds of a government report showing a negative number a month before the election? I would say it would be slim since they can always revise down later to reflect the correct number. I am not a conspiracy theorist, just a realist.
So where does the news of the last couple weeks leave us today? We had a +550 point rally in the Dow in anticipation of QE3. Now that it has been announced there was no sell the news event and only a minor decline today, which most people attribute to the Rosh Hashanah holiday. That is the Jewish New Year, currently 5773.
Actually there is a market axiom that says sell Rosh Hashanah, buy Yom Kippur. In 2012 Yom Kippur begins at sundown on Sept-25th and ends at sundown on Sept-26th. There are a lot of other economic cycle that just happen to coincide with that holiday cycle and that is why September is normally a down month with market lows seen in October except in election years.
That seems to be the key this year. Even though the election is a dead heat the market sentiment appears to be bullish. Consumer sentiment last week jumped sharply as a result of the convention speeches.
Can we count on that sentiment to carry into month end? I seriously doubt it since the anti American demonstrations currently underway in 25 countries and blanketing our news broadcasts will likely counteract that convention bounce.
Predicting direction for the next couple weeks could be a challenge but I think greed will win out. Fund managers need to window dress for quarter end. Since most were under invested and expecting the Fed to disappoint there will be a few billion dollars that need to be put to work before the quarterly statements are mailed.
That and the overriding background of QE3 should keep the markets positive. Maybe not every day but at least on trend unless we are suddenly buried under a mountain of negative headlines from earnings warnings, economic news or geopolitical events.
The NY Empire State Manufacturing Index fell from -5.8 to -10.4 in September. That is the lowest level since November 2010 and the internal components imploded. New orders fell from -5.5 to -14.0 and backorders from -10.6 to -14.9. Employment fell from 16.4 to 4.3. Those types of numbers would be hard to swallow were it not for the recent QE3.
I am going to err on the side of caution today and recommend closing some winners. If some major headline appeared, say Israel attacking Iran, the market could drop -1000 points. It never hurts to take a profit.
I am only adding two new plays. I would like to get a slightly bigger market dip and then add a couple more for month end. I had to stretch to January on strike prices because volatility is so low in this market that premiums are very low.
Send Jim an email
Current Position Changes
CRR - Carbo Ceramics (Short Put - Close)
We have a Sept $65 short put on Carbo Ceramics that is well out of the money but Carbo can move quickly. For instance it was down -3.31 today. I want to close that September put and leave the December $55 put open.
Close CRR Sept $65 Short Put, entry $2.52, currently 0.15, +$2.37 gain
CRM - SalesForce.com (Short Put - Close)
CRM has rallied to $158 from our entry point at $145. I sure wish I had done an ITM recommendation on that stock. However, we still made a nice gain. The Nov $120 put has declined from our entry point at $4.50 to $1.10 today. I know there is still a couple month to go but we should be happy with a $3 profit and eliminate the risk. You never know when a $20 drop will inflate the premiums again. There is a 99% chance it will expire worthless but you never go broke taking a profit.
Close CRM Short Nov $120 Put, entry $4.50, currently $1.10, +$3.40 gain
Chart of CRM
EBAY - Ebay Inc (Short Put - Close)
Ebay has rallied +$5 from our entry point and the short Oct $42 put is now 14 cents. There is nothing to be gained from keeping that position open and a lot to be lost if we have a sudden market event. Close this play.
Close Ebay Short Oct $42 put, entry $1.09, currently 0.14, +0.95 gain.
New Short Put Recommendations
New Covered Call Recommendations
Long Term Recommendations
Goldcorp Inc (Short Put)
Goldcorp is a fast growing, low cost miner with many development projects in "politically stable" countries. For miners lately that is the key ingredient. In Q2 they produced 578,600 ounces of gold and generated revenue of $1.1 billion. Earnings were 41 cents. Cash costs were $370 per ounce.
All of the earnings news is icing on the cake because QE3 is going to push gold prices higher and that will make the miners more profitable. The miners had lagged the actual metals prices through the summer but they should be catching up in the months ahead.
QE3 may lift stocks but more than anything it should push the dollar lower and gold prices higher. Because the miners have such low volatility I had to go out to January to get any decent premiums. I believe this is a relatively safe play, if such a play exists, since QE3 is our insurance policy on the precious metals.
Sell short GG Jan $43 Put, currently $2.34, no stop
Goldcorp Inc (Short Put)
Autodesk is a company that provides software and design services for engineering, manufacturing, etc. They have traditionally been a volatile company since their fortunes tend to follow the economic growth cycle. On August 24th they reported earnings of 48 cents, up +9% but missed estimates by a penny. They said they were cutting 520 jobs or 7% of their workforce. They guided for revenue to rise +5% for the full year compared to prior estimates of 10%.
The company took full blame for the declines saying we did not execute properly given the slower growth environment in Europe, Asia and Brazil. They said expenses were up because they were shifting to cloud based computing but that would lead to significantly lower costs in the future.
Shares took a serious hit falling to $28 intraday. But instantly rebounding to long term support at $30. After a week of consolidation the upward trend began and they closed at a four week high on Monday.
I believe the worst is over. The bad news is priced in and they will do better in the current quarter which will be reported in November.
I am recommending a long term $32 put. With $30 as strong support any major decline should put us right back to level ground.
Sell short Jan $32 Put, currently $2.24, no stop.
New Aggressive Recommendations
Existing Play Recommendations
Links to original play recommendation
EXXI - Energy XXI (LT Covered Call)
RIG - Transocean (Covered Call)
SBUX - Starbucks (Short Put Spread)
FFIV - F5 Networks (Short Put)
BBY - Best Buy (Short Put)
CRR- Carbo Ceramics (Short Put)
EBAY - Ebay Inc (Short Put)
CRM - SalesForce.com (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.