"I’ll take the quiet life….. No alarms and no surprises, no alarms and no surprises" – Radiohead
OptionSage submits:
In last Thursday’s article “Thumping Thursday & Ominous Omens” I wrote:
“The NASDAQ corrected from a high of 2725 to a low of 2525, then retraced 50% to 2625 before today’s correction to 2,556 – the low of the day! The DOW dropped from 14,000 to 13,200, then retraced 50% to 13,600 before being strongly rejected also today, down almost 400 points!
THIS IS A BAD OMEN IF YOU ARE LONG THE MARKETS!”
Indeed in comments today I posted
“Happy and I were discussing last week’s 50% retracements in the Dow and NASDAQ back to 13,600 and 2625 following initial corrections (14,000 to 13,200 and 2725 to 2525 respectively) and the subsequent rejections from those retracement levels late last week. Often we see a few flat days before the next leg down and that seems to be playing out as per the script right now….Dow down 183, NASDAQ down 36 and still an hour and 15 to go.”
In fact, that last hour and fifteen minutes led to the further demise of both indexes as the Dow closed down 207 points while the NASDAQ closed down 43 points and the S&P 500 closed down 26 points.
At PSW, we have been flagging our concerns almost on a daily basis so fair warning has been given ever since Phil highlighted a few weeks ago that he had moved to 80% cash in his short-term virtual portfolio. Since its peak in July, the Dow is down almost 1000 points and the NASDAQ is down about 225 points, landing today at its 200-day MA while the Dow still has a few hundred points to go before reaching its potential 200-day MA support level.
Our man optrader was ahead of the breakdown today when he posted at 1.26PM:
“Just looked at all charts on my watch list, and I don’t see much of anything I like . Not a very good sign. We are breaking down out of bear flags on almost all indices.”
The brokers had an awful day today. Goldman Sachs closed near its low for the day at $169.75. Its decline has been so severe that I called up an ex-HBS (Harvard Business School) MBA with experience in investment banking at Morgan Stanley and Goldman Sachs to secure his view on the valuation of the company at these levels to which I received the response “just too bloody hard to figure out how they make money
and so tough to figure out forecasts”. If a top analyst with two Harvard degrees and almost a decade of experience at the world’s leading investment banks can’t discern a valuation then it’s going to prove a real challenge for those of us on the outside to know how low they can go!
So, my decision was to scan for stocks that had been discarded but still had strong fundamentals and one that popped up on my list was OptionsXpress. I noted in comments
“OXPS just begging me to buy them at these levels so I think I’ll have to oblige”
Market Cap (intraday)6: 1.47B
Enterprise Value (14-Aug-07)3: 1.07B
Trailing P/E (ttm, intraday): 18.28
Forward P/E (fye 31-Dec-08) 1: 13.96
PEG Ratio (5 yr expected): 0.85
Price/Sales (ttm): 7.33
Total Cash (mrq): 454.64M
Total Cash Per Share (mrq): 7.223
Total Debt (mrq): 0
Growth Estimate OXPS
Current Qtr. 34.6%
Next Qtr. 22.6%
This Year 25%
Next Year 16.0%
· Mrq = most recent quarter
· Fye = Fiscal Year end
· Ttm = Trailing Twelve Months
· Data courtesy of Yahoo!
I also qualified that this was an investment not a trade. Indeed the strategy employed involved purchasing the stock at $23.50 and shorting calls in September at strike 25 for $0.80. I will be surprised if they drop below $22 but anything is possible in this market and my plan as always is to scale in at various levels. Notably, the company has a PEG < 1.0 suggesting it is undervalued by that metric and with almost $500M in cash and trading with a Market Capitalization of close to $1.5Bn and growing at 25% this year and 16% next year I think the long-term future is bright despite the foggy short-term visibility.
Phil found the trade “tempting” but thought it more prudent to “see a bottom first”. If it were a trade I’d be uncomfortable too! But to paraphrase Buffett: The only place people don’t take advantage of a sale is in the stock market and I believe OptionsXpress is on sale right now and if it goes lower I’ll be more than pleased to pick up some more.
For me the day just isn’t complete without a contribution from our maestro trader Phil, currently in Italia and en route to Monte Carlo, and as always he is right on the money:
“Very ugly day! A/D was almost unanimous, HD finished at 5% rule, UBS at 5% rule, probably tons of others… Financials ugly, ugly and ugly. Sentinal fund a catastrophe… Ouch and ouch.
“Looks like program trading gone wild as the quant funds hit the “Bail” button and oil holds up of all things.
“It’s very important in this kind of market to remember you are trading against machines – so things that you are used to seeing, ie. tops and bottoms, may not apply, even on stocks you know well. Very bad that the S&P is down more than the Dow but the Russell is most disturbing. I said quite a while ago we need to watch them as those size companies are very affected by lowered capital availability.”
As an aside for those of you trading Blackstone, here is an interesting article that discusses their exposure to real estate.
Well today the Fed abstained from injecting liquidity and we saw the result. Personally, I hope for some panic selling so we can shake out the last of the nervous investors clinging by fingertips to existing positions. Time will tell and I am sure Happy will lead the way with some valuable technical analysis. For now, I am still heavily hedged, Phil is still heavily in cash and the markets are still moving down as expected!
Trade Safely!
OptionSage
