Market rally: More to come?
With gloom and doom everywhere and most stocks trading at extremely oversold levels, last week began with the perfect combination of ingredients for a rally, and the market didn’t disappoint. The strength of the move up so far is impressive, and while its sustainability has yet to be determined, for now it appears to have further – possibly quite a bit further – to go.
Near-term upside resistance appears to be at about 1270, 1290-1300, and 1320 for the S&P 500, and 11,700-11,800 and 12,000-12,100 for the DJIA. Meanwhile, a break back below near-term support of ~1220 in the S&P 500 and 11,000-11,100 in the DJIA would certainly call the positive near-term picture into question.
New positions
Bank of America (BAC) – Last Thursday I sold some February 2009 30-strike covered calls against my long position in BAC (purchased 06/17/08) as the stock rallied strongly along with the rest of the financials for the second day in a row:
I was early, as the stock rallied yet again on Friday, but I wanted to put on a defensive position ahead of the company’s earnings announcement, which is due on Monday morning when I’ll be traveling and unable to react to any strong move in the stock at that time. The strength of the rally off of the extremely oversold bottom is impressive, and suggests that the move isn’t finished and that there will be follow through sooner or later. Depending on BAC’s price action in the coming weeks/months I may end up buying the calls back, rolling them out, letting them expire OTM, or – if the stock keeps going straight up from here and I do nothing – letting the stock get called away in February (or potentially sooner) for a modest loss.
Microsoft (MSFT) – Last Wednesday I sold some October 26-strike covered calls against my long position in MSFT (purchased 02/17/08) as the stock rallied ahead of its Thursday earnings announcement:
I was skeptical of the almost universal bullishness on MSFT and was waiting for a pre earnings opportunity to either exit my position or at least to sell covered calls to significantly further reduce my ~$28 per share cost basis. This stock no longer fits with my investing strategy as it offers neither a high dividend yield (it’s only 1.6% at these levels) nor prospects of significant dividend growth, although another special dividend payment is always possible. Meanwhile the stock remains mired in all of the various possibilities of an on-again/off-again Yahoo deal. Technically it’s oversold and still holding above its 24-25 support level. Next lower support appears to be at ~22 to 22-1/2 and ~19-20.
Options Expiration Results
- Copano Energy, L.L.C. (CPNO) – The July 35-strike puts I sold against CPNO on 06/26/08 expired in-the-money (ITM) and I was put the stock for a net cost basis of about $33.50 per share.
- Energy Transfer Partners LP (ETP) – The July 45-strike puts I sold against ETP on 06/27/08 expired ITM and I was put the stock for a net cost basis of about $44.20 per share.
- Enterprise Products Partners LP (EPD) – The July 30-strike puts I sold against EPD on 06/26/08 expired ITM and I was put the stock for a net cost basis of about $29.30 per share.
- Magellan Midstream Holdings, L.P. (MGG) – The July 22.5-strike puts I sold against MGG on 06/06/08 expired ITM and I was put the stock for a net cost basis of about $21.95 per share.
- Plains All American Pipeline LP (PAA) – The July 45-strike puts I sold against PAA on 06/27/08 expired out-of-the-money (OTM) for a 3-week net return of about 1.3%.*
Watchlists
The following stocks showed up on this week’s “upside strength” scans, suggesting that they may be headed higher and may represent good buying opportunities on weakness: Otter Tail (OTTR) and Safety Insurance Group (SAFT).
The following stocks showed up on this week’s “oversold” scans of beaten-down quality stocks, suggesting that likely further near-term weakness may represent a buying opportunity: Aflac (AFL), BP plc (BP), Colgate-Palmolive (CL), Eaton Corp. (ETN), Enterprise Products Partners LP (EPD),** Ingersoll-Rand (IR), Manpower (MAN), Microsoft (MSFT),** Mine Safety Appliances (MSA), National Retail Properties (NNN), Plains All American Pipeline LP (PAA), and Southern Copper (PCU).
* 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 the possible assignment of the stock.
** I currently own and/or have an options position on this stock.
