Tuesday Morning

Cash, cash, cash. I rarely get paranoid but I am right now as the market does not feel right to me at all. Let’s remember that I am the guy who called for a bull market with record highs last time the market looked like it was topping. At the time, I said I expected a pullback but the minor drop we got that first week of August hardly qualified. http://stockcharts.com/gallery/?spx This did not stop us from going with the flow and taking a record number of open positions which yielded a record level of profits for the month but, just for this week, I have decided to get protective and move back to mostly cash. If it’s a real rally, we will have months to get in and take new positions but, if we have another Black Monday ahead of us, well – it’s a little hard to recover from that when you are heavily invested. OK, enough doom and gloom – let’s have some fun with the markets! It’s easy to be bullish with the markets looking like they do but Asia finished lower with the Hang Seng taking a 238 point hit as a “corruption probe” sweeps through China. “People are being pretty cautious, there is a sense of the economy slowing down in Japan and the U.S.,” said Yoji Takeda, fund manager with RBC Investments Asia. Europe is up in anticipation of a strong US market and it would be a real shame to disappoint them. We have the consumer confidence index at 10 am this morning and it is expected to be well over 100 with falling oil prices easing tensions. A lot of bets are being placed on the continued strength of the US consumer as $60 oil is projected to give us an extra $100Bn to spend over the holidays (as we have been expecting). As it is only a survey, it will be potluck as to whether the timing of the poll caught the right people at the right time. Another potential pothole at 10 am in the road today is the Richmond Fed Manufacturing Index. It was the Philly index that killed the markets last week and a confirming downtrend from Richmond (just 150 miles away) would not be good. We start the morning with retail sales and if they don’t trend positive, that sector may suffer. The Dow is still under 11,600, having tested it for the 4th time in 7 sessions. On the bright side, it has also tested 11,500 4 times so we are looking for a break either way. http://stockcharts.com/gallery/?djia The S&P has finally held 1,325 and gives us the most hope for follow through but I really want to see an authoritative move above 1,330 to stop pining for a pullback. The NYSE, like the Dow, is range bound between 8,300 and 8,400 but well below it’s August open of 8,456. Our pals at the Nasdaq have firmly held above the 50 dma at 2,222 yet again but I am concerned about the psychological barrier at 2,250. Let’s not forget that the Nasdaq was at 2,378 in April so we should not be overly impressed with a 67% retracement from the July low of 2,012. 2,280 was our uncrossable barrier last fall. http://stockcharts.com/gallery/?comp While the SOX had a great day, with a 2.5% bounce, finishing right on the 460 line but it was the TRANQ that bothered me in comments as it slid down along the rapidly declining 50 dma. With the transports running 15% below their May and July highs, they should be leading a proper rally, not trailing it! Until the transports break last fall’s 2,500 ceiling, I will have a hard time getting behind this run. http://stockcharts.com/gallery/?%24tranq Oil made an anemic (and very fake) bounce to $61.45, finishing just .24 shy of my 5% rule target. Failure to break out over $61.49 can lead to a test of the $59 mark with the next 5% drop around $58.60 but it is very obvious that THEY are pulling out all the stops to keep oil above $60, at least until tomorrow’s inventory. Gold is just making the anti-dollar move at the moment with a slight rise yesterday but it looks like it will continue to have a hard time at $595. Another tricky day is in store for us so let’s be careful out there!
===================================== The dominos continue to tumble while Wall Street keeps its head firmly in the sand as Pirate Capital is now under investigation for possibly violating securities law. According to the Times “these so-called activist hedge funds are beginning to see their strategy backfire as some investments falter, sending the stocks on a bumpy ride and bruising investors big and small along the way… This strategy’s shortcomings highlight the challenges facing some hedge funds — investment pools for wealthy individuals and institutions — as they stretch for returns amid a crowded field. There are more than 8,000 hedge funds managing about $1.2 trillion — double the assets of five years ago — clamoring for investment ideas” “Still, Pirate Capital, with $1.9 billion of assets, has had so many of its investments sour lately that it took steps to reassure investors, including a conference call last month, people close to the situation say.” Meanwhile my MS and GS puts are being crushed! I took more MS $70 puts for .65 yesterday but today they are making progress on their Blackrock deal so I watch that one nervously. Speaking of hiding our heads in the sand: The Earth is still getting warmer! ===================================== I have no new picks, here’s a few of our open items we should be watching: BBBY Oct $37.50s never really pulled back yesterday and we rode them up to $1.95 (up 95%) at the day’s end but I’m stopping out at $1.75. BBY Dec $57.50s hit $3.10 (up 55%) on a strong retail day and we should protect this very successful role with a .50 trailing stop. C $50 puts are back to $1 (up 25%), just a nickel shy of where we should stop out. CAT made a nice comeback yesterday with the Oct $70s climbing back to .35 (down 30%) and the Nov $70s making it back to .8 (down .10). Keep a tight (.30) reign on the DD $40s as they have made plenty at $3.30 (up 313%) and we have the roll of the $42.50 at $1.15 (up 130%) to fall back on! Our Dell Jan ’08 $27.50s are back to $1.60 (up 23%) and I’m taking another round if it pulls back a little. FRK made a nice comeback. GCI gathered strength. INTC $20s came back a bit to .35 (down .10) and I’m willing to hold this if the SOX hold 450. JNJ made a heck of a comeback and the Oct $65s suddenly look reachable at .50 (down 40%). If the market holds up I will double down on these. KMI made a surprising (well, not to me) drop yesterday but the Jan ’08 $105 puts remained at $1.95. I notice there are almost 9,000 put contracts below me at $100 and $95 as well as 19,000 Feb puts at the same levels! LEN lowered guidance yet again! Lets see if TOL goes up on this news… It is getting to the point where I expect to see articles like “Asteroid to destroy the Earth, TOL up 5%.” MHS is fighting the trend in a decent sector so let’s be careful with our $60 puts at $3.20 (up 220%) with a .40 trailing stop. As I said, I reentered the MS $70 puts yesterday at .65 (now .60) to bring my basis down to .95 and I will be glad to get out even at this point! NOK went crazy yesterday and we have 3 active trades on the $20s, now .60 (again). This is an earnings play and I am in it to win it! PD took a huge bounce off the 200 dma at $78.96 yesterday so I am being cautious with the $82.50 puts at $9.40 (up 125%). SBUX is being sued for crushing competition – Yawn! I asked Bill Gates if I should worry and he fell off his chair laughing. If they want to sell me more $35s below our original entry at .60, I will buy them! SHFL showed some signs of life but our Nov $30s look very sad at .45 (down 33%). They are in a bad position so I have no taste for doubling down on this one. We had to lose the SNE $40 puts at they dropped from .80 to .65 (up 18%) during the day but I will be liking these cheap plays again back at .50. TM may pull back a bit with Asia but I’m not worried about our Nov and Jan calls. UPS went against the transports and our Jan $75s are holding up well at $2.35 (up 18%). When I take the longer calls it is because I expect choppiness so I have a little more tolerance. YHOO is a gut check, especially as we fled out of Google. The $27.50s are very iffy at .40 (down 33%), the Jan ’08 $25s are holding $5 (down 30% after we bought out the $32.50 calls we sold) and the Jan $27.50s are $1.45 (flat after buying out the Nov $32.50s for .75 – up .20).