Last week’s rally: Trick, or treat?
The relative out-performance of the tech sector noted in last week’s post seems to have ended as quickly as it began, but not before ushering in a decent rally in the broader market. In particular, many larger-cap stocks – including some of the big Dow Industrials like 3M (MMM), Dow Chemical (DOW), DuPont (DD), JP Morgan (JPM), and Verizon (VZ) – did especially well last week, continuing to move up from deeply oversold levels.
However, the rally wasn’t quite strong enough to turn the weekly trend analysis of the major indices to positive. While a strong follow-through this coming week might do the trick, the trend picture for now continues to reflect a negative/neutral overall bias. And with technology stocks once again under performing, this has to be seen as casting a spell of doubt on the sustainability of the current rally.
Last week I initiated another options position when I sold some November 40 puts on Anheuser Busch (BUD) when the stock fell to the $40 level after the company reported poor third-quarter earnings and lowered its full-year forecast. I also placed a variety of other limit orders during the week – on stocks like Amgen (AMGN), Gannett (GCI), General Motors (GM), Lear (LEA), Merck (MRK), and Verizon (VZ) – but none triggered.
My watchlists have also changed a bit. I’ve removed some stocks that have rallied significantly and are no longer oversold (I prefer to sell puts into declines in oversold conditions), and added stocks that have either shown good recent strength (like Adobe (ADBE) and Automatic Data Processing (ADP), or dropped to levels that have begun to attract my interest (like Cendant (CD), International Rectifier (IRF), Liz Claiborne (LIZ), Triad Hospitals (TRI), and Tyco (TYC):
| UPSIDE “MOMENTUM” CANDIDATES | |||
| Stock | Industry | Current Price | Downside Target |
| ACE | Financial – Insurance | 51.55 | ~48 |
| ADBE | Software – Computer/Desktop | 32.31 | ~30 |
| ADP | Financial – Business Services | 46.84 | ~45 |
| AMGN | Health – Biotech | 75.78 | ~69 |
| CAH | Health – Wholesale Prod/Svcs | 62.65 | ~60 |
| NVS | Health – Drugs | 53.4 | ~52 |
| ODP | Retail – Wholesale | 26.42 | 22-24 |
| PEP | Food – Misc | 58.83 | 56-57 |
| PD | Materials – Mining | 121.34 | 100-105 |
| BEATEN DOWN “VALUE” CANDIDATES | |||
| Stock | Industry | Current Price | Downside Target |
| BMY | Health – Drugs | 21.14 | 19-20 |
| BUD | Food – Alcoholic Beverages | 40.57 | 39-40 |
| CD | Leisure – Services | 17.64 | 15-16 |
| DIS | Leisure – Services | 23.82 | 20-22 |
| FDO | Retail – Chain | 21.51 | 16-17 |
| GCI | Media – Newspapers | 62.48 | 58-60 |
| GM | Auto – Mfg | 27.26 | 24-25 |
| HDI | Leisure – Products | 48.72 | ~47 |
| IRF | Electronics – Semiconductor Mfg | 27.86 | 23-25 |
| LEA | Auto & Truck – Parts | 30.25 | 27-28 |
| LIZ | Textile – Apparel | 34.93 | ~30 |
| MRK | Health – Drugs | 27.54 | 25-26 |
| TAP | Food – Alcoholic Beverages | 60.90 | 58-60 |
| PFE | Health – Drugs | 21.5 | 17-19 |
| TRI | Health – Hospitals | 41 | 35-37 |
| TRB | Media – Newspapers | 31.55 | 29-30 |
| TYC | Capital Goods/Services – Diversified | 26.25 | 17-18 |
