More downside likely: Buy the retest?
Following last week’s downside action, the major market indices appear headed for a retest of their March lows, and perhaps lower (in fact the DJIA is already there, while the Nasdaq still has quite a ways to go). Key near-term support levels on the S&P 500 are 1290-1300, 1275-1280, and 1250-1260.
Meanwhile, other technical indicators continue to improve, with sentiment and oversold indicators approaching levels that typically signal an intermediate-term buying opportunity. When market trend and sentiment indicators started giving warning signs of a possible “top” a few weeks ago I became more cautious about initiating new positions (and more defensive overall), but now I’ll increasingly begin to view further declines as potential put-selling opportunities on selected stocks of interest.
New positions
No new positions were added this week.
Options Expiration Results
- Ameren (AEE) – The June 45-strike puts I sold against AEE on 05/05/08 expired in-the-money (ITM) and I was put the stock for a net cost basis of about $44.30 per share.
- American Capital Strategies (ACAS) – The June 30-strike puts I sold against ACAS on 05/28/08 expired ITM and I was put the stock for a net cost basis of about $29.20 per share.
- Allstate (ALL) – The June 47.5-strike puts I sold against ALL on 05/07/08 expired out-of-the-money (OTM) for a 6-week net return of about 1.5%.*
- Bank of America (BAC) – Early last week I was assigned the June 37.5-strike puts I had sold against BAC on 05/02/08 and put the stock for a net cost basis of about $36.15 per share. I had been on the verge of rolling that position down and out (i.e., by buying back my short puts and selling an equal dollar amount of some longer-term puts at a lower strike) but I was beaten to the punch when the options were exercised.
- BCE, Inc. (BCE) – Given the uncertainty surrounding the proposed buyout of BCE and not really wanting to own the stock at this point, on Thursday I chose to buy back the June 30-strike puts I had sold against BCE on 05/01/08 for a reduced 7-week net return of about 1.7%.*
- Developers Diversified Realty (DDR) – The June 40-strike puts I sold against DDR on 05/21/08 expired ITM and I was put the stock for a net cost basis of about $38.50 per share.
- Diana Shipping (DSX) – The June 30-strike puts I sold against DSX on 05/22/08 expired OTM for a 4-week net return of about 1.9%.*
- Frontline (FRO) – The June 30-strike puts I sold against FRO on 05/08/08 expired OTM for a 6-week net return of about 2.8%.*
- General Electric (GE) – The June 30-strike puts I sold against GE on 05/23/08 expired ITM and I was put the stock for a net cost basis of about $29.40 per share.
- Sunoco (SUN) – After observing this stock’s recent price action, I decided I’d rather not end up being put the stock and on Friday I bought back the June 40-strike puts I had sold against it on 05/8/08 for a reduced 6-week net return of about 1.4%.*
Watchlists
New stocks of interest showing up on this week’s “upside strength” scans include Northwest Natural Gas (NWN) and Wyeth (WYE).
Many interesting dividend-growth candidates are showing up on this week’s “oversold” scans including AT&T (T), Bemis (BMS), Carnival Corp. (CCL), Cintas (CTAS), Colgate-Palmolive (CL), Johnson Controls (JCI), Kraft (KFT), Luxottica Group (LUX), Masco (MAS), 3M (MMM), National Grid PLC (NGG), Nokia (NOK), Pepsi Bottling Group (PBG), Procter & Gamble (PG), Rohm & Haas (ROH), Sun Life Financial (SLF), and US Bancorp (USB).
* 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.
