Market sell-off: It’s about time
The broad market has finally succumbed to an increasing array of negative factors – including subprime worries, investor complacency, extended price levels, and negative technical divergences – that it had seemingly been ignoring for the last several weeks/months. A significant correction was due, and the current downturn certainly qualifies – for example, the S&P 500 index is already down 6% from its highs.
Not surprisingly, the intermediate-term trend picture is now negative, although not all industry sectors are completely awash in red. Although they’re negative, the energy, technology, and industrial sectors are showing the most relative strength.
On a positive note, the speed and extent of the sell-off so far has already brought some short- and intermediate-term price oscillators to levels close to those seen near the bottoms of several previous corrections, including that of last March. While this certainly suggests that a bottom of some sort may not be far away, it pays to keep in mind that such oversold conditions may also be signaling just the beginning of a larger and/or longer-term market downtrend.
Last week’s sell-offs triggered quite a few of my limit orders to sell puts. Given the market’s weakness and the potential for more downside, I’m going to become less aggressive and more selective in my put selling. As always though, I’ll only sell puts against stocks that I’m comfortable owning as an investor if I end up being “stuck” with them for a while.
Key downside support is now about 1450, 1440, and 1410-1420 for the S&P 500; 840-845, 835, and 825 for the Russell 3000; 2535, 2505, and 2475 for the Nasdaq; and 13,250, 13,000, and 12,800 for the DJIA. Overhead resistance is now about 1475 and 1490 for the S&P 500; 855 and 870-875 for the Russell 3000; 2580-2590 and 2620 for the Nasdaq; and 13,450 and 13,700 for the DJIA.
New positions
Alcoa (AA) – Last Monday I sold some August 40-strike puts on AA as the stock continued to sell off on the news that BHP Billiton had decided not to buy Alcoa:
The stock has fallen all the way back to its long-term linear regression trendline, and might be expected to find support around here at the 36-37 level. A break below 36 might suggest a move back down to the 32-33 level.
Allstate (ALL) – Last Tuesday I sold some August 55-strike puts on ALL as the stock dropped with the rest of the market:
ALL is in a short- and intermediate-term decline, along with most of the rest of the financial sector, and clearly “oversold.” Near-term support is at around the 52-53 and 50 levels, and barring a complete market collapse, I’d expect some sort of a bounce from at or above those levels over the coming days/weeks.
Citigroup (C) – Last Tuesday I sold some August 47.50-strike puts on C as as the stock dropped with the rest of the market:
This is another example of an “oversold” stock in the financial sector. Near-term support appears to be at about the 46-47 and 45 levels.
Conagra (CAG) – Last Thursday I sold some August 25-strike puts on CAG as the stock sold off along with the rest of the market:
Although in a clear short-term downtrend, CAG remains – barely – in an intermediate-term uptrend. A break below 25 would change this, and would suggest a move back to the 23-24 area.
Merrill Lynch (MER) – Last Tuesday I sold some August 75-strike puts on MER as the stock dropped with the rest of the market:
Yet another example of an “oversold” financial stock, MER has fallen 25% from its highs back down to its long-term linear regression trendline at around 75. Near-term support is here and at around the 71-72 level.
U.S. Bancorp (USB) – Last Tuesday I sold some August 30-strike puts on USB as the stock dropped with the rest of the market:
USB is another extremely oversold financial stock, and – barring a meltdown in the sector – might be expected to find some near-term support at around the 29-30 or 27.5-28 levels.
Vodaphone (VOD) – Last Tuesday I sold some August 32.50-strike puts on VOD as as the stock dropped with the rest of the market:
VOD is experiencing short-term weakness, but currently remains in an intermediate-term uptrend. A break below the 28-29 level would change this picture.
Wal-Mart Stores (WMT) – Last Thursday I sold some August 47.50-strike puts on WMT as the stock sold off with the rest of the retail sector in the weak market:
Despite a recent attempt to break out above the 50-51 level, WMT is once again trading back in the middle of the 43-51 trading range it’s been in for the last two years. Still, the overall intermediate-term bias is currently pointing slightly up – however, a break below the 45 level would change this picture.
Watchlists
Only a few new stocks of interest showing up on this week’s “upside strength” scans, including Aflac (AFL), Beckman Coulter (BEC), Cymer (CYMI), Dynamic Materials (BOOM), Goodrich (GR), Owens & Minor (OMI), and PerkinElmer (PKI).
New candidates on the “oversold” scans are plentiful, as might be expected. Some of the most interesting include Altria Group (MO), Anheuser Busch (BUD), Automatic Data Processing (ADP), Avery Dennison (AVY)Bemis (BMS), Cemex (CX), Citigroup (C), Deutsche Telecom (DT), Dow Chemical (DOW), DuPont (DD), Eagle Materials (EXP), Foot Locker (FL), General Mills (GIS), JAKKS Pacific (JAKK), Kroger (KR), Leggett & Platt (LEG), MetLife (MET), Moody’s (MCO), Sysco (SYY), and Weyerhaeuser (WY).
