Today is another day where we probably can’t win.
If I get my oil sell-off it will likely drag down the S&P which will drag down the other indices unless, miraculously, the Nasdaq takes the lead but that would be such a shock I would have to cash out anyway in confusion.
Asia was mixed to the downside while Europe is definitively down so there certainly isn’t much fuel for a rally to get us started. Iran’s response to Rice’s “offer” yesterday was more politicking so things are settling back to the normal state of confusion I though we had gotten comfortable with.
http://online.wsj.com/article/the_morning_brief.html
What we cannot be comfortable with is losses that breach the levels we discussed last night. A small down day is to be expected, especially if the oil sector sells off again but with an oil inventory and an OPEC meeting today almost anything can happen.
My big concern with oil today is that there will be hundreds of microphones in front of Chavez today and that’s never a good thing! We are hoping for a shock in the inventories with one or more segments building by 2M barrels or more and no drawdowns, this should be a solid indicator of lower demand, which is critical to get some downside momentum and get oil back below $70.
The price of oil has become totally disconnected from the laws of supply and demand. Last Summer oil was at $48 in May before hurricanes knocked out production and sent the price up to $70 in August. Throughout it all, there was never an actual shortage and many are arguing that that is the free market in action (pay enough and you’ll get it) but there is more oil in storage in the US today than there was in 2004, when oil was at $30 and there is more production on-line today than there was then and demand is only up 4% during that time, still at a lower level than production.
Much like the end of the housing market, we are at the end of the oil market and just like the realtors who came on TV every week to tell you there was no bubble and the fundamentals are strong, we have oil analysts and T Boone Pickens saying the same about oil. It is a little harder to change sentiment on oil than it is on housing because housing has to be sold to one person at a time while oil is constantly hedged in bulk (ie. as soon as it hits $60, some airlines will put in big orders) by mega consumers.
The same fear factor that is built into oil (30%) is also built into the price of gold and it is looking more and more like we are heading to my first target $100 correction at $630, perhaps today. A failure to hold $630 may set us up for the second leg where we could lose another $100 from here but, like oil, buyers will start stepping in at the $600 level and it will take some doing to break below that mark.
So it’s another cash day and a very good day to see which stocks are strong and which are weak in what will probably be an annoyingly flat or rangy market for the next few days. If the oil inventories come in strong we should lose about 3% in that sector (about half a point on the S&P) which means even a flat market day will be a victory as it will indicate a little rotation in play.
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I’m comfortable with the oil puts from last night but don’t chase morning drops! The best momentum play will probably be the XOM $60 puts which will be just out of the money and are very fluid but XOM can take sickening swings up and down so they are not for the feint of heart.
Chavez is calling for a production cut and it’s not politically possible for the Saudis so it will be a contentious OPEC meeting but we can expect them to set a floor price as Chavez’s big concern is that oil cannot drop below $50, where it is not very profitable for him to produce it compared to most other OPEC nations.
PD should have a down day as copper usually follows gold down. It has been rising along the 50 dma for the past week but could use a nice drop in order to consolidate for the next run. I like the $80 puts for $1.50 but I will also like the $85 calls when they get to the same price.
BHP just crossed their 50 dma yesterday so they may retest $40 and the $40 puts are just .45 but get out fast as I expect both of these to bounce back and it may never actually hit $40.
After bad numbers from WMT yesterday, TGT is coming out with an impressive 5.7% gain in same store sales. The missed earnings on cost problems so it’s not that exciting but it will be a good stock to watch to gauge retail sentiment as this news could be interpreted as a big plus. The $50s for .45 are a fun but dangerous play.
My favorite US bank, CBH got an S&P inclusion yesterday which should take them at least to $41. I like them long but I was hoping they would come in a little more, that may never happen now. We called a bottom on this when it showed strength against the market on 5/23!
http://finance.yahoo.com/q/bc?s=CBH&t=5d
Since TIF did so well I’m liking MOV in the luxury zone. They don’t have options but the stock is so far off it’s highs it’s like an option at $18.69!
HOV‘s earnings were down a whopping 2.3% from last year’s record and they beat the very low estimates by 10%. Since the stock was at $73 last July, I’m going to go crazy and pick up the Jul $35s for .90.
TOL is in the same boat so I’ll take the Jul $30s for $1.05 on that one.
ADBE is still going nowhere and the $30s are still .60.
Be very careful today, we need strong Nasdaq leadership to offset a bad oil day.
Good trading,
– Phil
