Market still looking for a bottom
The exuberant rally following the initial announcement of the bailout plan proposal over a week ago turns out to have been just another bounce in an ongoing decline. While that rally exhibited short-term extreme optimism (and was therefore negative), the longer-term picture continues to show bearish sentiment at high levels (a positive sign), but which is not yet back to the extremes typically seen at market bottoms.
While more downside appears likely, the high bearish sentiment levels and extreme oversold conditions suggest the downtrend is in or nearing its terminal phase. Key near-term downside support levels are now 1080-1090, 1050-1060, and 1020-1030 for the S&P 500; and 10,100-10,200, ~10,000, and ~9,600-9,700 for the DJIA.
New positions
Note: In addition to new positions added this week (below), I exited from my short put position in Hartford Financial Services Group (HIG) at a loss after seeing the stock drop 10 points on Tuesday following a credit rating downgrade. Under the current extreme financial circumstances, and after seeing what happened to AIG, this was a simple decision of exiting first and asking questions later.
Anglo American plc (AAUK) – On Thursday I sold some October 15-strike puts on AAUK in my IRA as the stock continued its free-fall along with other mining and materials-related stocks:
I’m taking advantage of the massive sell-off in materials stocks to add some stocks in this sector to diversify my holdings. AAUK is in a strong short- and intermediate-term downtrend, but is becoming increasingly “oversold” as it approaches the bottom of its long-term linear regression channel and might be expected to find support at the 14-15 and 12-13 levels. The company has a history of paying dividends (although they vary due to the nature of the business), and I would be comfortable owning it longer term at around these levels or lower.
Eaton Corp. (ETN) – On Monday I sold some April 50-strike puts on ETN in my IRA as the stock fell with the market and other stocks in the industrial sector:
ETN continued to fall along with the market for the rest of the week and is now extremely oversold and trading at multi-year lows. It seems likely to find significant support in the mid-forties (which would be my net cost basis if eventually put the stock) or upper 30s. The company has a history of consistent dividend growth and at current levels (~49) yields 4%. If put this stock I’m comfortable owing it as a long-term dividend growth position in my IRA.
Freeport McMoran (FCX) – On Thursday morning I sold some February 35-strike puts on FCX as the stock continued its free-fall along with other commodities-related stocks:
This is an additional position in FCX (I initiated a position in FCX in my IRA a couple of weeks ago with some 45-strike puts). I may adjust these positions depending on the price action in the coming weeks and months, but it seems likely that the stock should find strong support in the 30-40 price area. Again, this is another example of a position in a dividend-paying stock for a possible longer-term holding.
Nucor (NUE) – On Monday I sold some April 25-strike puts on NUE in my IRA as the stock fell with the market and along with other stocks in the basic industries and materials sectors:
NUE remains in a strong short- and intermediate-term downtrend, but is also becoming increasingly “oversold.” A further eventual drop into the 20s seems likely at some point, where, if it occurs, the stock should find some strong support. This company has a good history of paying dividends (it’s currently yielding over 3.5%) and appears to be approaching levels that represent a good value for a long-term holding.
Southern Copper (PCU) – On Wednesday I sold some October 15-strike puts on PCU as the stock continued its free-fall along with other commodities-related stocks:
PCU is in a strong short- and intermediate-term downtrend, but – as is the case for all stocks in this sector – is becoming increasingly oversold. A further near-term decline below 15 appears likely, with support levels of about 14-15 and 12-13. Depending on the price action in the coming days I’ll decide whether to adjust the position or let it ride. I’m comfortable owning PCU at below 15, although I’m certainly not counting on its dividend yield remaining at current levels (i.e., over 14%).
Watchlists
The following stocks showed up on this week’s “upside strength” scans of stocks of interest, suggesting that they may be headed higher and may represent good buying opportunities on weakness: JP Morgan (JPM).
The following stocks showed up on this week’s “oversold” scans of beaten-down stocks of interest, suggesting that likely further near-term weakness may represent a buying opportunity: Anglo American plc (AAUK)*, Bank of Montreal (BMO), Bunge (BG), Diageo (DEO), Emerson Electric (EMR), Genuine Parts Co. (GPC), Honda Motor (HMC), Illinois Tool Works (ITW), Ingersoll-Rand (IR), Oneoke Partners LP (OKS), Pennsylvania Real Estate Investment Trust (PEI), Sunoco (SUN), Sunoco Logistics Partners (SXL), Taiwan Semiconductor Mfg. (TSM), Toyota Motor (TM), and United Technologies (UTX).
* I currently own and/or have an options position on this stock.
