The unexpected improvement in the ISM certainly played havoc with everyone that shorted the market on Friday in expectations for an October decline.
The ISM for September came in much better than expected at 51.5 compared to the contraction level of 49.6 in August and expectations for 49.7 in September. The new orders were strong and the sudden improvement was a shock to the market.
The Dow rallied +161 points at the open but slammed into solid resistance at 13,600 and could not break through. The Nasdaq also spiked at the open but retreated to lose -8 points thanks to declines in Amazon and Apple.
Apple is poised to break support at $660 and it could trigger a serious decline in tech stocks. Apple is 18% of the Nasdaq and nearly 10% of the S&P so any major decline in Apple will produce a market decline.
I have been vocal in my expectations for some market volatility in October as fund managers restructure their portfolios ahead of their fiscal year end on Oct 31st. If this restructuring is going to happen I would expect it in the second and third weeks. I believe any dips will be short, sharp and quickly bought.
The Teflon market has been able to shake off almost every headline in recent weeks although the problems just keep growing. The election uncertainty is not likely to produce any material market impact. It is the uncertainty after the election that is going to be the killer. Once the election is over the fiscal cliff will become the number one headline and whether or not there will be a hike in the capital gains tax at year end. If that hike appears likely there are a lot of investors that will be taking gains off the table before year end.
If President Obama is reelected we can count on gridlock and that will mean showdowns like we saw in August 2011 over the debt ceiling increase. The showdown over the fiscal cliff could be really ugly because the outcome will color politics in Washington for the next four years.
The problems with Greece and Spain are only going to grow larger. Spain is on the threshold of becoming Greece before year end and Spain is too big to bail. The three major AAA rated countries in the eurozone, Germany, Holland and Finland, spoke out last week against the independent bailout of Spain's banks. The outlook for the Spanish banking system is very dark thanks to the implosion in the housing sector. There are more than two million homes for sale in Spain and growing. Unemployment is 24.2%, youth unemployment is nearly 50%.
There is no easy answer to the Spanish problem and the world has not yet come to grips with the fact that Spain is going the way of Greece and moving rapidly in that direction. This trouble spot is going to explode into the headlines over the next three months.
You remember how Greek headlines whipsawed our markets for months on end. Spain could be ten times worse because they have over a trillion euros of debt where Greece only had 300 billion. Spain is more intricately tied into the European banking system. They already owe the ECB more than 450 billion euros.
The only option for Spain is default and that is going to roil global investors significantly. I am sure the EU will try to kick the can down the road several times but it will only get worse. Spain can't pay its bills and their budgets are now thought to be a sham that were put together simply to please the Troika in anticipation of asking for a bailout.
I know this is a lot of background for this newsletter but I seriously believe there are some major potholes in our future.
The Teflon market may continue to try and ignore the headlines and may be successful for sometime but eventually we are going to get the final headline that breaks the back of the market. It could be in the coming weeks or maybe even in early 2013 but investors should be skeptical of any further market rallies. We will try and capture some gains in the weeks ahead but readers need to keep position sizes small and use stop losses where possible.
Fortunately, if we do get a decent dip it will greatly improve the number of short put targets and the potential profitability.
Send Jim an email
Current Position Changes
BMRN - Biomarin Pharma (Short Put - Stop Loss)
Please add a stop loss on the BMRN short put. The prior trend is intact but the stock declined all week. Any further declines could jeopardize that trend.
BMRN Short Nov $37 Put, add stop loss at $39.25
WLL - Whiting Petroleum (Short Put - Stop Loss)
Whiting also declined all week and I am adding a stop loss on this position. Crude prices weakened and energy stocks faded. The stronger ISM provided support for crude but I doubt it is going to last.
WLL Short NOV $44 Put, add stop loss at $45.50
FFIV - F5 Networks (Short Put - Stop Loss)
FFIV hit a high of almost $110 on Tuesday but faded as the week progressed to close at $104.75. The $104 level is initial support so I am placing a stop loss at $103.50. The big decline has already put us in a loss position so I am making the stop tight to avoid letting it grow.
FFIV Short Nov $95 Put, add stop loss at $103.50
New Short Put Recommendations
NUS - Nu Skin Enterprises (Short Put)
On Sept 19th a short seller, Citron Research, issued a report on NuSkin saying it was in violation of the rules for doing business in China. The stock tumbled from $42 to $36 on the news. TO make matters worse Citron wrote a letter to the FDA claiming the labeling on NuSkin products was illegal. I understand being a short seller and capitalizing on headlines about a company but Citron has gone out of its way to create headlines that were conjured up out of thin air. This should be illegal.
Over the last week several other analysts came out contradicting the Citron report. NuSkin is licensed in China and has been since 2005. The letter to the FDA was a play on a FDA complaint against L'Oreal for exaggerating its claims. Citron took advantage of a recent headline. However, NuSkin has always adhered to the guidelines and the letter was just a bogus headline.
Shares of NuSkin have rebounded since the attack. Fortunately the attack gave us what appears to be a tradable bottom and the opportunity for a decent play in the current market.
Sell short NOV $35 Put, currently, $1.45, stop loss $37.65.
INFY - Infosys (Short Put)
I chose INFY not because of its put premiums but because of the chart. The company broke out over the 200-day average on Monday after fighting that resistance for three weeks. The stock broke out on news the CEO will deliver the keynote address at Oracle OpenWorld on Tuesday afternoon. The speech will be on "Radical Progress." The company will lead more than 15 sessions at the conference. This is great exposure for Infoysys and should keep them moving higher.
Unfortunately the put premiums are skinny.
Sell short NOV $45 Put, currently $1.05, no stop.
Chart of INFY
Other Possible Short Puts
The following plays were on my short list if you are looking for more candidates. They will NOT be followed in the newsletter.
Symbol, price, strike, premium (all November)
NTES $55.79, $50, $1.30
WYNN $115.55, $105, $1.94
ONXX $85.35, $75, $1.80
HLF $50.20, $45, $1.85
N $62.88, $55, $1.30
New Covered Call Recommendations
Long Term Recommendations
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)
CRR- Carbo Ceramics (Short Put)
GG - GoldCorp (Short Put)
ADSK - Autodesk (Short Put)
BMRN - Biomarin (Short Put)
FFIV - F5 Networks (Short Put)
WLL - Whiting Petroleum (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.