Market rally: Too good to last?
Last week the markets again postponed any consolidation and continued to advance, aided by upward momentum in the Nasdaq (no doubt helped by a now-positive SMH) and new all-time highs in the Russell 2000. And the weekly trend picture for stocks is about as positive as it gets, with only a still-negative Japan index and somewhat mixed oil sector not in sync.
Viewed from a “glass half empty” perspective, being “about as positive as it gets” could be interpreted as “it can only get worse from here.” 
While it’s true that the market’s current upside momentum won’t be sustained indefinitely, it could easily continue for some time.
And another still-positive – or at least not yet overly negative – sign for the uptrend is the relative lack of excessive bullishness in sentiment indicators, like the put/call ratio, and the lack of attention being paid to the stock market’s new highs by the popular news media. (The popular news media BTW like the network television news I watch each evening, which – in an all-too-familiar display of poor judgment – gave far more air time this past week to the deaths and accomplishments of a former football coach and an R&B singer than to those of economist Milton Friedman – who barely rated even a passing mention.)
For now, the probabilities continue to suggest higher prices ahead over the intermediate term. Until the technical signs indicate otherwise, I’ll continue to view downdrafts as put-selling opportunities.
New positions
Avery Dennison (AVY) – Last Monday I sold some December 65 puts on AVY when a slight dip in the stock price triggered the limit order that I’d placed before the opening that morning:
AVY has been performing well lately, and appears to be headed back up to the top of its multi-year trading range of between 50 and 70. A move above 70 would suggest a retest of the old highs at ~78.
Merck (MRK) – Last Friday I bought back the December 42.5 puts I had sold on MRK a week earlier as the stock continued to bounce back after last week’s sell-off:
The stock looks like it could easily go higher here over the short term, but the intermediate-term picture is less clear and since I have other positions in this sector (PFE and GSK) I decided to take profits here. I repurchased the puts for about 20% of my original selling price, for a net return of 1.9% in about a week’s time.*
Options Expiration Results
- Caterpillar (CAT) – The November 60 puts I sold against CAT on 10/20 expired out of the money (OTM) for a 4-week net return of 2.0%.*
- Chevron (CVX) – The November 65 puts I sold against CVX on 10/30 expired OTM for a 3-week net return of 1.0%.*
- Molson Coors Brewing (TAP) – The November 70 calls I sold on 10/31 against my long position in TAP (purchased 5/19/06) expired in the money (ITM) and my shares were called, for a 6-month total net return (including covered call sales and two dividend payments) of 10.9%.*
- Walgreen (WAG) – The November 40 puts I sold against WAG on 11/01 expired OTM for a 2-1/2-week net return of 0.6%.*
- Wal-Mart Stores (WMT) – The November 47.5 puts I sold against WMT on 11/02 expired OTM for a 2-1/2-week net return of 1.4%.*
Watchlists
New recent additions to the “upside strength” list include American Home Mortgage (AHM), Dollar General (DG), KB Home (KBH), Kinder Morgan Energy Partners (KMP), Korea Electric Power (KEP), M.D.C. Holdings (MDC), New York Times Co. (NYT), Synovus Financial (SNV), Tidewater (TDW), United Parcel Service (UPS), and U.S. Bancorp (USB).
Current and new additions to the “oversold” list include Archer Daniels Midland (ADM), Briggs & Stratton (BGG), Caterpillar (CAT), First American Corp. (FAF), First Bancorp Puerto Rico (FBP), Fording Canadian Coal Trust (FDG), McClatchy Co. (MNI), Oshkosh Truck (OSK), Popular (BPOP), Walgreen (WAG), Wal-Mart Stores (WMT), and Whole Foods Market (WFMI).
* 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.
