Further decline likely
The overall market trend picture is now clearly negative for all major U.S. indices. And many signs suggest that the market will need to pull a rabbit out of its hat if it’s to avoid what now seems to be a very likely probability of a further decline:
- The trend picture has clearly resolved to the downside after many weeks of indecision
- Important support levels have already been broken, and another is now on the verge of being broken
- Price oscillators are “oversold,” which in an uptrend (or sideways market) is usually a buying opportunity, but in downtrends is simply a sign of strength in the direction of the trend
- Sentiment indicators are not at extremes – in fact they’ve barely moved during the decline so far
The market indices are currently sitting at important support levels: ~12,800 for the DJIA, 1400-1410 for the S&P 500, and 2500 for the Nasdaq. Assuming this is broken in the coming days/weeks, then it seems likely that the markets will retest the August/March lows of last year: ~12,500 for the DJIA, ~1370 for the S&P 500, and ~2390 for the Nasdaq – all representing a further decline of anywhere from about 2.5% to 4%.
Below that, the following key support levels bear watching: 12,000 and 11,600 on the DJIA, ~1330 and 1290 on the S&P 500, and 2340 and ~2200 for the Nasdaq. Bottom line: I’m still actively watching for put-selling opportunities (and finding more as the market comes down) but am also setting my put limit orders to reflect prices further below the current market than I normally do.
New positions
CBS Corp. (CBS) – On Friday I sold some January 25-strike puts on CBS as the stock sold off along with the rest of the market:
CBS broke through its support at the ~26 level and is approaching its next support at 24-25. The stock remains in an intermediate-term downtrend, but is once again becoming “oversold.” Valuation seems reasonable here, and a ~4% dividend yield makes it palatable as a longer-term hold if I end up being put the stock.
Paychex (PAYX) – On Wednesday I sold some January 35-strike puts on PAYX as it dropped on weakness in the rest of the market:
PAYX is currently in a strong short- and intermediate-term downtrend and has fallen to support at the 34-35 level. It seems likely that it will fall to support in the low 30s. Valuation is okay here relative to historical levels, but not great. The 3.4% dividend yield makes the prospect of being put the stock less of an issue.
Wachovia Corp. (WB) – On Friday I sold some January 35-strike puts on WB as it fell with the market, and the rest of the financial sector:
WB is currently in a strong short- and intermediate-term downtrend and is approaching support at the 34-35 level. A break below that would suggest a test of support at the 31-32 level. As with most financials, WB is “oversold” and trading at a reasonable valuation. I will be looking to add further in this sector if/as prices continue to drop further.
Watchlists
“Upside strength” candidates of interest this week include Becton Dickinson (BDX), Marsh & McLennan (MMC), and Olympic Steel (ZEUS).
Plenty of new and returning candidates on the “oversold” scans this week, including Arkansas Best (ABFS), Ashland (ASH), Automatic Data Processing (ADP), Bristol Myers Squibb (BMY), Conagra (CAG), Dow Chemical (DOW), JAKKS Pacific (JAKK), J.C. Penney (JCP), Limited Brands (LTD), Mueller Industries (MLI), Nordstrom (JWN), Sonic Automotive (SAH), Taiwan Semiconductor Mfg. (TSM), Terex (TEX), United Parcel Service (UPS), Wells Fargo (WFC), and Whirlpool Corp. (WHR).
