Options Trader: Wednesday Outlook

Can it really be this easy?

Will the energy markets die not with a bang (or a pop as it were) but with a whimper?  While we would love for that to happen, we’ve had some other very nice drops that have turned back up on us. But it’s very encouraging that oil fell under the 50 dma at $133.60 on Thursday and has had no luck getting back over and is gathering steam to the downside.  As Tom2oc said in his post, yesterday was a helluva great day for the markets and the tide is certainly turning, both technically and fundamentally.

We have our housing deal, oil is down (and NOW Cramer is starting to figure out the market’s inverse relationship to oil) and the dollar is strengthening - these are the three things I said we needed for a market turnaround and they are finally happening!  While we are not ready to go crazy just yet, this is the early stage of what we hope will be the post-earnings turnaround I predicted in our 2007 Index Round Up on New Year’s Eve.  At the time I said: "The best case scenario would be a commodity sell-off leading the index down while retail (probably consumer staples) and financials hold things together as that would address what’s wrong with the S&P at the moment."

We are miles below the 2,700 level we had on the Nasdaq back in December and I’m loving the QQQQs as a long-term play right now as well as the DIA calls (we’re done with puts for now).  If my theory holds up, which means oil needs to get below $100 again, then the March ‘09 $45 calls at $4 should prove a hell of a bargain and we can sell calls against them along the way, hopefully the Aug $47s for $1, now .35 but, if I were gambling with the short-term call I would choose the Sept $46s at $1.33 and we will take 10 of those for the $10KX Portfolio.

I hit it on the head yesterday at 10:04, when I said to members: "Qs held $44 nicely.  QID puts will be interesting if GOOG breaks up.  XXX"  Right at 2:30, GOOG took off and the QID’s started dropping like a rock, these are still our favorite momentum plays but very, very dangerous!  We are, of course, very heavy in Google (GOOG) and Apple (AAPL), as I said at 9:50, with Apple at $151.15: "AAPL has certainly opened the discount window on their stock and if it wasn’t for the Jobs issue I’d be transferring much of my wealth to them today.  As it is I’m DD and rolled on my longs.  I guess we’ll have to pay $2 to take out the $165 caller in our Applefly, I thought we’d do better but I’d rather free up the spot than wait.  XXX"  While we were prepared for a long siege on AAPL, the speed of the turnaround caught us by surprise as we stopped out of our $155s early but, on the whole, we are thrilled with the comeback as it’s a very heavy position for us.

We need follow through to get fully out of the woods but we should be thrilled to cover at these levels after staring into the abyss in the morning yesterday and coming out in such good shape.  It’s still a very long way back to 13,000 (12%) and we are still in the middle of a huge earnings week.  We need the dollar to stay strong, we need oil to keep going down and we need meaningful action on housing.  A week ago, at 10,800 with oil at $145, that did not seem very likely and we still need the breaks to keep going our way to pick up some meaningful momentum.

Asia gained a little momentum today and the Nikkei followed through on that last minute buying yesterday with an early rally that took the index up another point to 13,300, but just barely at the close.  The Nikkei and the Dow usually run neck and neck but the Nikkei broke down last summer and has fallen far behind.  We already have Toyota (TM) (good news today) and Sony (SNE) plays and the iShares Japan (EWJ) is a nice way to play a recovery over there with the March $12s very thinly traded at $1.15.  The Hang Seng jumped 2.7%, India picked up 6% as their government survived the no confidence vote and even Pakistan was up 2% this morning.  All this was despite the disappointments in the semis that are very big players in Asia.

Europe is up about a point ahead of our open as EU investors are a little pessimistic still and sending most of their investment money to Asia and America, taking advantage of the Euro’s relative strength while it lasts.  Volkswagen (VLKAY.PK) had a 35% jump in net profit as they are playing the BRIC market perfectly, and investors may have been disappointed with Vodafone's (VOD) results but the board isn’t and the company will buy back $2Bn worth of shares (1.5%) that should put a nice floor on the stock at $26.

Our futures have fallen off as AT&T (T) came in with in-line earnings and Boeing (BA) missed, although, if you check out the advanced notes for the 10:30 Conference Call (way better than waiting to listen to it) you’ll see that they project an increase in cash flow to go from $2.5Bn this year to over $6Bn this year (thanks Fredrang!).  That means we buy out our callers, and pick up some cheap September $65s, maybe for $3 at the open while people panic over the headline miss.  With any luck, we may pick up 50% before lunch…

Northwest Airlines (NWA) had a huge miss but it’s not bothering pre-market investors, nor is a miss from Unisys (UIS) (but it bothers me).   ATI had a nice beat but lowered guidance but APD, CNH, COP, ETH, EXC, GD, HSY, MCD, NYT, PEP, PFCB, PFE, PM, PX, R, SLM, SOV, TRV, WLP, WHR and WYE are the hits that keep on coming as generally low expectations are being beat in the vast majority.  Guidance remains very conservative across the board but, if oil falls below $110, then guidance is WRONG and we can place our bets accordingly. 

Things are certainly looking up, let’s hope the oil inventory report doesn’t blow it for us!

 

Comments

[BSchecker]

Phil- good faith on both GOOG and AAPL.