Market bottom: Are we there yet?
Despite the market’s continued move lower, there still aren’t any clear signs yet of a bottom. Certainly the market is “oversold,” and some recent sentiment indicator readings, such as Mark Hulbert’s Stock Newsletter Sentiment Index, are showing extreme bearish sentiment – a bullish sign.
Still, the market can become even more oversold, and market participants can become even more bearish. In fact, one of my favorite sentiment indicators – the equity put/call ratio – has been in a holding pattern at high, but not extreme, levels for the last couple of weeks, even as the market “plunged” lower. This suggests that while the market could certainly bounce at any time, a real bottom probably still lies ahead somewhere.
The “market” is currently holding at/near support levels of 1250-1260 for the S&P 500 and 11,200-11,300 for the DJIA. Near-term downside support from here appears to be at 1220-1230, 1190-1200 and ~1170 for the S&P 500; and ~11,000 and 10,700 for the DJIA.
New positions
Ameren (AEE) – Last Tuesday I sold some December 2008 45-strike covered calls against my long position in AEE (purchased 6/23/08) as the stock rallied:
Currently AEE is in a clear short-term downtrend, but its intermediate-term trend is unclear and the stock is clearly oversold. Normally I’d be buying at these levels, but my entry point wasn’t ideal, and given current market conditions I decided to hedge the position against a potential further decline. This will lower my cost basis in the position while still locking in a profit if the stock is eventually called. Meanwhile the stock pays a 6% annual dividend.
GlaxoSmithKline (GSK) – Last Thursday I sold some February 2009 50-strike covered calls against my long position in GSK (purchased (6/07/07) as the stock rallied:
Here’s another case of a bad entry point – I sold puts on GSK just before it sold off sharply from the 56 level about this time last year and ended up getting put the stock for a cost basis of around 56. (This could have been avoided simply by waiting to sell puts until the stock reached oversold levels.) That said, I was never too concerned about the stock’s long-term prospects and could plan on collecting a 4+% dividend in the meantime. Still, I’m taking this belated opportunity to reduce my cost basis in the position. A move to the 49-50 resistance level seems likely. If the stock goes higher and is ultimately called, I’ll take a small loss in the position once dividends are considered.
Watchlists
Stocks of interest showing up on this week’s “upside strength” scans include AstraZeneca (AZN) and Novartis (NVS).
Interesting “oversold” candidates this week include Altria Group (MO), Canadian National Railway (CNI), Manulife Financial (MFC), RealtyIncome (O), and Sunoco Logistics Partners (SXL).
