Monday Mop-Up

Come on bears, is that all you have? In comments today we discussed how I would rather see a pullback so we can remove some doubts about the true market direction but, if this is the extent of the sell-off, we may have to get downright bullish soon! The Dow barley budged down after wiggling up and down 20 points during the day. The S&P closed over 1,320, pretty much above it all day. The NYSE was positive all day long peeking above and finishing just under 8,400, giving us a great indicator for tomorrow. The Nasdaq got a rejection at 2,250 but finished almost dead flat for the day. Investopedia Says: “The levels of resistance and support within the consolidation are created through the upper and lower bounds of the stock’s price. Once the price of the asset breaks through the identified areas of support or resistance, volatility quickly increases and so does the opportunity for short-term traders to generate a profit.” So bears, it’s not even a proper consolidation when the S&P breaks through resistance! Let’s try it again tomorrow shall we? The only real resistance the markets encountered was the price of oil. As this chart indicates, all the indices sold off as the oil pumpers worked their magic in the afternoon and rallied back as oil trailed off after the 2:35 NYMEX close. So when someone asks you what the markets are really afraid of, you know that it isn’t Bernanke! The dollar gave up a quarter point today but also may be consolidating for a move up but commodities should get a respite from dollar pressure for a couple of days as traders digest the very low foreign demand for US securities in July. Oil did manage to finish down slightly at $63.80 a barrel but you would have thought crude retook $70 from the way the sector reacted, running up about 2.5%, giving us great (we hope) entries on our VLO and SLB puts. Gold also had a party and made a leap at the 200 dma of $592 to finish at $586, another test to keep an eye on tomorrow. Any sort of firm statement from the Fed will give us a great short on some gold stocks, which also jumped 2.5% on a sliver of good news. Closer examination of the contracts indicates that the gains were posted on the dead September and November contract periods while the very active October and December contracts were down and flat. The next contract out, February, also lost ground. Always remember when you see these figures on TV that they are subject to gross manipulation, which doesn’t stop hedge funds from throwing Billions of dollars at them. ===================================== Speaking of hedge funds, on the weekend I said about oil: “…a 5% (so far) drop in September may have hedgies heading for the exits before they wipe out last year’s profits.” First hedge to cry uncle is already in and it’s (drum roll please) Amaranth! On their web site, Amaranth states: “Amaranth’s investment professionals deploy capital in a broad spectrum of alternative investment and trading strategies in a highly disciplined, risk-controlled manner. Our ability to effectively pursue a variety of investment strategies combined with the depth and strategic integration of our equity, credit and quantitative teams, supported by a world-class infrastructure, are some of the key strengths that distinguish and define Amaranth” This must be a form of highly disciplined, risk control that I am unfamiliar with as it allows a fund to lose 45% of its assets in 2 weeks. That’s 45% of $9.2Bn for those of you playing along at home! This is one of the smartest funds on the planet and they got clobbered by oil’s move last week, the carnage may be indescribable as this thing continues to unwind. The CEO of Shell estimated that there is $100Bn of speculative plays on oil alone. When you add in gas (Amaranth’s downfall), gold and other metals, we could be looking at upwards of $500Bn on the wrong side of a trade! It is easy to see the temptation, we’ve heard it ourselves from the oil bulls for 2 years now, natural gas was $12.25 this time last year – it’s September, so gas should be $12, not $5! The problem is that this sort of logic does not take into account that, for 99 out of 100 other Septembers, natural gas was $4. The statistical aberration does not become the norm in one, two or ten years… The premise oil and gas bulls are operating under is that for 100 years of being traded as a public company, through 2 World Wars, a Cold War and a depression, every investor, trader and analyst who ever lived undervalued Exxon by 150%. That’s right, the people buying oil stocks now think that, not only are they worth close to 2x more than at any point in history but that here, at the high point, they remain undervalued. Since April of 2005, Exxon has outpaced the S&P by over 100% – with half of that gain coming in the past 60 days – this is after tracking within 5% of the S&P for 100 years. How did Warren Buffet miss this one??? For the record, Mr. Buffet also seems to have missed out on the home builder craze as well… ===================================== To avoid last week’s mess, we are just going to comment new calls and interesting plays of older ones on a daily basis and do a full run down in the Weekly Wrap-Up. Tight stops (20% of profits) are taking us out of some of last weeks plays and all our old oil plays… The Valero Rule did such a good job of keeping us out of oil trades that we decided, in comments, to short Valero with the $50 puts at $1.10 and the SLB $55 puts for $1.10 as both gained over 4% on the day. We also added the BP $65 puts as $1.15 seemed fair. Other than that, we are waiting to see what happens tomorrow to make our oil plays but this is exactly what we hoped would happen, a new round of effective pumping setting the sector up for another great fall after inventories. Also in comments, we picked up the NOK $20s for .40, too cheap in my opinion Tight stops this morning took us out of a some of last weeks winners with few regrets, especially on our oil plays, as it is certainly time to reposition anyway. CAT finally got it in gear today and the Oct $70s are just a penny out of the money at $1 (up 33%) and the Nov $72.50s ran up to $1.10 (up 40%) already. BC was very timely and the Mar $30s finished in the money but unloved at $3.10 (up 15%) despite today’s 2% run-up. FO had a nice opening drop which kept us out of the trade but I do still like the Oct $75s, now at $1.60. SHFL had a good first day and the Nov $30s moved up a nickel to .70. NAK gave us a nice, low open at $6.77 and finished the day up 5% at $7.07. MRB opened at $2.92 and rose just .06 for day one. WM Jan $45s dropped a dime to .90. BXP did what I wanted VNO to do last month and the Jan $95 puts finished at $2.20 (up 20%). GENZ opened low and headed lower but that’s why we take insurance. The $65 puts gained .35 while the $70s dropped .55 to $1.25 where I would now buy more without the spread. UPS went nowhere but I was wrong about FedEx, they report on the 21st. AMCC climbed 4% today, bad if you sold the Nov $2.50s which are now in the money! DELL and DOW both gave us great entries, a little excitement and no real movement in the end. SRE dropped 1.5% and the $50 puts moved up to $1.70 (up 20%) and the Jan (my mistake this morning) $45 puts hit .65 (up .15).