Global meltdown!
Nikkei off 462 (-3%), Hang Seng -366 (-2.5%), India – 460 (-5%), Pakistan -425 (-5%), Taiwan – 280 (-4%), India -460 (-5%)… In Taiwan just 3 stocks in the entire 800 company index were positive for the day! The catalyst for Asia’s decline was an unexpected rate hike by the Bank of Korea but any excuse will do to cause a sell-off in this market.
Europe is not looking too much better with 2% average declines as buyers are nowhere to be found.
Talk to me about the US markets after we gain 3 or 4%, until then they are on probation in my books. Even though we should get a little something today (I’m still hanging on to my Global rotation theory) it wouldn’t surprise me if this is yet another false start.
Chris posted a great article in comments this morning and I suggest you read it, it’s a great overview of the current market situation:
http://www.bopnews.com/archives/006457.html
We apparently killed Al-Zarqawi, another nail in the coffin of oil prices which should be a positive for the markets so maybe we’ll only drop 50 points today!
Oil is a very tough call. While I have long held the position that oil was way overpriced and due for a correction, the severity of the dip this week is very surprising. The oil stocks have dropped 17% since May 11th while the price of oil itself is down just 5%.
Gold is down 15% since May 11th and gold stocks are down about 20%, which makes more sense but oil is still at a level equal to last year’s high yet most oil companies are now trading below last year’s average. This makes it a very tough spot to short but we know there is still another $20 of “fear premium” built into oil prices so it would be easy to project another $10 of that to fall out quickly.
Supply is, as we have long discussed, not a problem and will not be a problem unless we have 2 major crises at the same time (Iran+Hurricanes). While this is looking less likely every day, the actual occurrence of one would certainly make the fear of another a major factor again.
Chavez was indeed the voice of reason in calling for production cuts at the OPEC meeting as the ensuing drop in commodities has trashed the global markets.
Cramer says looking for an intraday rally is like looking for a needle in a haystack, which I agree is generally true but that is exactly what is most likely to happen as we approach some critical bottoms. We are 3% from a 10% drop in the oil sector for the week and hitting the 5% rule on the indices. Dow 10,870 is the place to watch today as that will be the last 200 dma to fall. If the Dow drops below its 200 before the S&P retakes 1,260 then I will not only be fully in cash but I will also be talking to a realtor about selling my home before that crashes too!
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The Valero Rule has still been good to us but today will be extra tricky as oil will likely open below $70 which one would think would at least lend some psychological support. A break below $70 will give me great confidence in the puts but only along the rules and, as with any trade this week, with a very itchy sell finger on any position!
With all these potential trades, I look for one that goes furthest the wrong way and then wait for a turn to pick it up below my target. In this market I am happy to let it get away from me and stick with my cash.
My gut feeling is we will get an opening drop but a possible rally in oil if the gas inventory at 10:30 shows demand is not falling off a cliff so I will be more inclined to watch for opportunities to jump in with the calls on the oversold issues.
Oil below $70 and VRule pointing down, no chasing over 10%!:
BAS $30 puts at .55.
BHI $80 puts for $1.55.
MDR Jul $40 puts for .90.
MUR $50 puts for .45.
OII $75 puts for $1.70.
SLB $60 puts for $1.15.
SU Jul $70 puts for $2.
Oil bouncing back over $70, Nat gas over $6 and VRule pointing up:
XOM $60s for .40.
XOM $57.50s for $1.50 (target).
COP Jul $65s for $1.10.
NGS $15s for .35.
SUN Jul $70 for $2.15.
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Even though you would think the combination of lower oil, a strenghtening dollar and low rates would be great for the market, I’m not buying anything today but these are the things I’m looking.
It will be up to TXN to save the markets tonight as they release their mid-quarter report. Expectations are very high though so I don’t see an increase in guidance coming as they are already projected to be 25% ahead of last year.
IBM $80 puts are not bad for $1.40 as you can count on the stock to follow behind the Nasdaq so on a continued move down, this one may gather steam.
http://finance.yahoo.com/q/bc?t=5d&s=IBM&l=on&z=m&q=l&c=qqqq
CSCO has been high on my buy list and, unfortunately for me, they announced another stock buyback today so the Jul $20s will probably open higher than .75.
KO is taking a nice healthy dip today due to a lover’s spat with Wal-Mart over shipping issues. When the dust settles I will look closely at the Jul $42.50s, maybe at $1.25 or less.
How low can Apple go? If this isn’t it (maybe $57.50) then who knows but it should be a good early indicator of any turn.
TXN is irresistible to me if I can pick up the Jul $32.50s for .50, even though poor guidance tonight could knock it way down.
AU is going to open at a ridiculous low not seen since November when gold was $450 an ounce. If gold bounces back I will be looking at the Jul $45s for perhaps $1.50.
NEM $50s (was $1.60) might make a good momentum play if gold moves back up on global inflation fears.
If our market recovers today (big if) then TM is way oversold and the Jul $100s should be about $4. This trade can be protected with SNE Jul $40 puts for .45 in case of a major meltdown in Japan.
