Another bear market leg down, or just a retest?
The market’s break last Thursday below key technical support at 1250-1260 (S&P 500) and 11,300 (DJIA) calls into question the up move that has been underway since the July lows. At the same time, it could be argued that a retest of the lows occurred on Friday at the ~1210-1220 and ~11,000 levels, respectively, and that the stage is once again set for another move higher – an argument that would be more convincing if sentiment indicators were showing greater bearishness here rather than being neutral.
Certainly news of the U.S. government’s takeover of Fannie Mae and Freddie Mac could provide a catalyst for a significant market move – whether it’s ultimately up or down, however, remains to be seen. A move below Friday’s lows would be negative, while a move back above key resistance levels at 1250-1260 (S&P 500) and ~11,300 (DJIA) would be positive.
New positions
BP plc (BP) – On Friday I sold some January 50-strike puts on BP in my IRA as the stock continued to fall along with crude and the rest of the oil sector:
BP is clearly in a strong short- and intermediate-term downtrend, but is also clearly in “oversold” territory here as it approaches near-term support at the 52-53 level. In the short term a bounce may be in order, but an eventual move down to around the 45-50 level seems quite possible in the coming weeks/months. I would be quite comfortable owning BP at the 47-48 price level – which would be my cost basis (along with a 6+% annual dividend yield) – if it’s eventually put to me.
Frontline (FRO) – On Tuesday I sold some November 45-strike puts on FRO on weakness:
FRO is in a strong short- and intermediate-term downtrend but getting oversold as it heads toward support in the 45-50 area. I won’t mind owning FRO at under 45 if it’s put to me, but given the volatility of stocks in this sector, I’m also prepared to potentially roll out this position to a later date/lower strike if the stock shows more weakness than expected in the coming days/weeks.
TEPPCO Partners LP (TPP) – On Wednesday I sold some January 30-strike puts on TPP on weakness as the stock dropped ahead of an announced secondary offering of shares (to presumably help pay for a joint venture in a new crude oil port and pipeline system):
The shares of this Master Limited Partnership (MLP) have been falling since early last year and are now both short- and intermediate-term oversold. A move down to the 26-27 support level over the coming weeks/months seems possible, but I would be comfortable owning this MLP at these levels (at a 28-29 net cost basis and an almost 10% annual distribution yield) if it’s put to me.
Watchlists
The following stocks showed up on this week’s “upside strength” scans of stocks of interest, suggesting that they may be headed higher and may represent good buying opportunities on weakness: Home Depot (HD), Lowe’s (LOW), and Sherwin-Williams Co. (SHW).
The following stocks showed up on this week’s “oversold” scans of beaten-down stocks of interest, suggesting that likely further near-term weakness may represent a buying opportunity: Alcoa (AA), Allianz SE (AZ), Ameren (AEE)*, Archer Daniels Midland (ADM), BP plc (BP)*, Cadbury PLC (CBY), Eaton Corp. (ETN), Freeport McMoran (FCX), Frontline (FRO)*, National Grid PLC (NGG), Nokia (NOK), Taiwan Semiconductor Mfg. (TSM), and TEPPCO Partners LP (TPP)*.
* I currently own and/or have an options position on this stock.
