Market outlook: Good news and bad news
There’s both good news and bad to report about the major stock market indices this week. The good news is that fear and panic clearly seemed to reach some sort of a climax last Thursday as the markets fell to intraday levels representing declines of over 10% from their recent highs.
This high level of bearishness is reflected in the sentiment indicators, and suggests that an intermediate-term bottom of some sort may be either near or already in place. For example, the chart below of the 21-day moving average of the equity-only put/call ratio (the red line) versus the S&P 500 (in blue) shows this indicator back to the levels that it reached at the bottom of last March’s correction.
The bad news is that, although the indices remain in a long-term uptrend, the nature of the recent decline suggests that caution about the short- and intermediate-term outlook may still be warranted from a technical perspective. For now, at least, the trend picture is still negative, although again finding fewer actual trends to identify, reflecting the current level of “noise” in the market and the increased possibility of both significant up and down moves.
Key downside support is now at about 1430, 1400-1410, and 1380-1390 for the S&P 500; 825, 815, and 800-805 for the Russell 3000; 2470-2475, 2430, and 2380-2390 for the Nasdaq; and 12,800 and 12,500-12,600 for the DJIA. Overhead resistance is now about 1450-1460, 1470-1475, and 1490-1500 for the S&P 500; 840-845 and 855-860 for the Russell 3000; 2540, 2570-2580, and 2610-2620 for the Nasdaq; and 13,200-13,300, 13,450-13,500, and 13,700 for the DJIA.
Options Expiration Results
- Alcoa (AA) – The August 40-strike puts I sold against AA on 7/23/07 expired in the money (ITM) and I was put the stock for a net cost basis of about $38.75 per share.
- Allstate (ALL) – The August 55-strike puts I sold against ALL on 7/24/07 expired out of the money (OTM) for a 3-1/2-week net return of about 1.3%.*
- Conagra (CAG) – The August 25-strike puts I sold against CAG on 7/26/07 expired OTM for a 3-week net return of about 0.9%.*
- Citigroup (C) – The August 47.50-strike puts I sold against C on 7/24/07 expired OTM for a 3-1/2-week net return of about 1.7%.*
- ConocoPhillips (COP) – The August 85-strike puts I sold against COP on 7/16/07 expired ITM and I was put the stock for a net cost basis of about $83.20 per share.
- International Paper (IP) – The August 40-strike puts I sold against IP on 7/16/07 expired ITM and I was put the stock for a net cost basis of about $38.80 per share.
- Merrill Lynch (MER) – The August 75-strike puts I sold against MER on 7/24/07 expired OTM for a 3-1/2-week net return of about 3.3%.*
- Progress Energy (PGN) – The August 45-strike puts I sold against PGN on 7/16/07 expired OTM for a 5-week net return of about 1.6%.*
- U.S. Bancorp (USB) – The August 30-strike puts I sold against USB on 7/24/07 expired OTM for a 3-1/2-week net return of about 0.7%.*
- Vodaphone (VOD) – The August 32.50-strike puts I sold against VOD on 7/24/07 expired ITM and I was put the stock for a net cost basis of about $31.65 per share.
- Wal-Mart Stores (WMT) – The August 47.50-strike puts I sold against WMT on 7/26/07 expired ITM and I was put the stock for a net cost basis of about $46.45 per share.
- Whole Foods Market (WFMI) – The August 40-strike calls I sold on 7/17/07 against my long position in WFMI (purchased 1/22/07) expired ITM and my shares were called for a total 7-month net return, including two dividend payments, of about 10.7%.
New positions
Weyerhaeuser (WY) – Last Thursday my limit order to sell some September 55-strike puts on WY was triggered as the stock fell to its 60 support level during Thursday’s intraday market plunge:
WY has sold-off dramatically in recent weeks in typical third wave fashion and is now – like many stocks related to the housing market – becoming very oversold. The intermediate-term trend picture remains down, but the stock might be expected to bounce from support at the 60-61 level, or, failing that, at around 55.
Watchlists
Stocks of interest showing up on this week’s “upside strength” scans include Cubic (CUB), Fluor (FLR), Tootsie Roll Industries (TR), and Wells Fargo (WFC).
New candidates of interest on the “oversold” scans include Church & Dwight (CHD), Corus Bankshares (CORS), Eaton Corp. (ETN), Ecolab (ECL), General Cable (BGC), The McGraw-Hill Companies (MHP), MeadWestvaco (MWV), Microsoft (MSFT), Oshkosh Truck (OSK), Oxford Industries (OXM), Paccar (PCAR), Companhia Vale do Rio Doce (RIO), Schering-Plough (SGP), Companhia Siderurgica Nacional (SID), The Stanley Works (SWK), Texas Instruments (TXN), Unilever (UL), and Union Pacific (UNP).
* As always, the return on these “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 the possible assignment of the stock.
