Fear, panic levels suggest market bottom
Last week’s extreme levels of fear and panic over the possibility of a freeze-up in the U.S. financial system appear to have marked a significant market bottom. In fact Thursday and Friday’s sharp rally – with financials notably leading the way – has already confirmed a bottom of some significance.
The upmove so far has itself been extreme enough to perhaps have marked a short-term top, although it should be remembered that such short-term “overbought” conditions are often a sign of strength and likely to portend further eventual movement to the upside. Sentiment indicators over the coming days/weeks should also provide a clue as to the uptrend’s sustainability.
Meanwhile, there is plenty of room on the downside for the market to consolidate within the current uptrend. Near-term support is about 11,300 and 11,000 for the DJIA and 1220-1230 and 1200 for the S&P 500. A break below 10,700-10,800 (DJIA) and 1170-1180 (S&P 500) would probably change this positive picture.
Options Expiration Results
- Precision Drilling (PDS) – The September 17.5-strike puts I sold against PDS on 09/08/08 expired out-of-the-money for a 2-week net return of about 1.8%.*
New positions
Archer Daniels Midland (ADM) – On Thursday I sold some March 15-strike puts on ADM in my IRA as the stock fell below 20 as it continued its long slide from last April’s highs:
ADM is clearly in a strong short- and intermediate-term downtrend, but extremely oversold and approaching the bottom of its longer-term uptrend channel. As with the market in general, the latest lows are showing positive divergences on price oscillators, suggesting the possibility of a potential intermediate-term bottom. ADM is a dividend grower, and if I end up being put the stock at $15, I’ll be receiving a ~3.5% annual yield on the shares with expectations for that to grow going forward. On the other hand, if ADM rallies significantly in the coming weeks/months, I may simply buy back the puts for a quicker profit and await other opportunities down the road.
Plains All American Pipeline LP (PAA) – On Wednesday I sold some February 35-strike puts on PAA as this master limited partnership (MLP) plummeted along with other MLPs and the broad market:
PAA’s current intermediate-term trend is unclear after last week’s sharp sell-off and then equally sharp upside reversal. Since more upside progress seems likely over the coming days/weeks, I’m going to hold off taking immediate profits on my put position until/unless the put premium shrinks significantly further. On the other hand, if I’m ultimately put this MLP, I’ll own it at a price in the low 30s and at an annual distribution yield of about 11%.
ProLogis (PLD) – On Thursday I sold some April 30-strike puts on this industrial REIT in my IRA as the stock fell to new lows along with the general market:
As with the market in general, it appears likely that PLD may have made an intermediate-term bottom late last week. As a result, I’m going to hold off taking immediate profits in my short put position and wait to see what develops. Near-term upside resistance appears to be at about the 45, 47-48, and ~50 levels. If I’m ultimately put the stock, I’ll own it at a cost basis of around 26-27 and with a corresponding dividend yield of almost 8%.
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: Bemis (BMS), Kimco Realty (KIM), RealtyIncome (O), and Whirlpool Corp. (WHR).
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: Buckeye GP Holdings LP (BGH), Energy Transfer Equity LP (ETE), NuStar Energy (NS), TOTAL SA (TOT), and Crosstex Energy LP (XTEX).
* As always, the return on “cash secured” put sales was based on the premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for their possible assignment (i.e., my being put the shares of the stock).
