Downside risk ≥ upside potential?
In the last two weeks the major indices have managed to rally back up to the nearest upside “resistance” levels of about 1280 on the S&P 500, 11,200 on the DJIA, and ~2200 on the NASDAQ. This is probably the minimum we might have expected for this up-move off the 6/14 lows.
There are reasons to think that the market still has further to go on the upside. For example, sentiment indicators (like the put/call ratio) are still showing a lot of bearish sentiment (a contrarian indication), and the market trend analysis still remains mixed/neutral for the most part.
On the other hand, the continuing underperformance of the NASDAQ – whose trend spectrum chart is once again awash in red – is certainly a cautionary sign. The bottom line: for now, the higher the market goes from here, the more I’ll view downside risk as increasingly outweighing upside potential.
New activity
UST Inc. (UST) – Last Thursday I opportunistically sold some July 45 calls against my long position in UST after I noticed that the stock was trading up over a point and approaching upside resistance at the 47 – 48 level. A short while later the stock reversed and actually went negative on the day, at which point I decided to buy back the short calls, for a nice short-term net return of over 3% on the position:
I found out later that the spike was due to news of a favorable court tobacco ruling. I wouldn’t be surprised to see the stock revisit the 47 – 48 level in the coming days/weeks, and I’ll probably look to sell covered calls against it (again) if it does.
Watchlist
“Upside” candidates that caught my attention in this week’s scans include Alberto Culver (ACV), Chevron Texaco (CVX), Consolidated Edison (ED), Merck (MRK), NiSource (NI), and UST (UST). (Note: I currently own some UST.)
New “oversold” candidates of interest this week include Harrah’s Entertainment (HET), ICICI Bank Ltd. (IBN), L-3 Communications Holdings (LLL), and Lennar (LEN).
