Stocks: Looking vulnerable
For the first time in quite a while the market is looking vulnerable on an intermediate-term basis. Several key developments are of concern:
- From a technical perspective, the market (so far) appears to be following the “worst-case scenario” I mentioned in my post two weeks ago, where at least some of the major indices and sectors appear to be reversing to the downside after establishing negative divergences in the oscillator indicator I follow
- Technology stocks – as represented by the Nasdaq and Semiconductors HOLDRS ETF – have been under performing the broad market, a condition that often precedes weakness in the broader market
- Put/call ratio sentiment indicators have just given sell signals, according to the Option Strategist
- Rising interest rates, as mentioned in last week’s post, also appear to be a factor
That said, the weakness experienced so far has not yet been enough (in terms of magnitude or duration) to confirm a reversal in the intermediate-term trend picture, which is now mixed for most indices and sectors. And not all sectors are looking weak – Consumer Staples, Financials, and Health Care are still holding up.
Last week I continued to add to my options positions (see below), but will now become less aggressive and more selective based on the higher probability of lower prices over the near and/or intermediate term. Near-term downside support levels are about 1390 and 1375 for the S&P 500; about 12,200 and 12,000 for the DJIA; and about 2380, 2350, and 2300 for the Nasdaq.
New positions
ACE (ACE) – Last Tuesday I sold some January 60 puts on ACE as it dipped to the 60 level:
The stock has been performing well recently and appears likely to have further to go on the upside, although a break below the 58-59 level would probably not bode well for its intermediate-term outlook.
Alcoa (AA) – Last Thursday I sold some January 27.5 puts on AA as it sold off following a report of weaker-than-expected manufacturing data:
The stock has been showing strength recently, and while it has certainly now turned negative short term, its intermediate-term trend remains positive. This picture would change if AA fails to hold above 28 or so.
Biogen Idec (BIIB) – Last Tuesday I sold some January 45 puts on BIIB as it sold off after the company issued a warning about its Rituxan drug:
BIIB has been performing well recently and – despite the short-term weakness – remains in an intermediate-term uptrend. A break below the 46-47 level, however, would change this view.
Cemex (CX) – Last Tuesday I sold some January 32.5 puts on CX as it dipped after the company declined to give 2007 earnings guidance:
The stock demonstrated continued weakness during the rest of the week, and is now clearly in a short-term down trend and appears on the verge of going negative on the intermediate term as well. A move below 31 or so would confirm this.
Occidental Petroleum (OXY) – Last Monday I sold some January 50 puts on OXY as the stock dipped on news related to its arbitration suit against Ecuador:
Like many other commodity related stocks, OXY is now short-term negative and looking vulnerable on the intermediate term. A drop below 46-47 would not be good for the intermediate-term picture.
Southern Copper (PCU) – Last Thursday I sold some January 50 puts on PCU as falling copper prices weighed on stocks in the sector:
PCU has been a very strong performer, and, like many other commodity related stocks is experiencing short-term weakness that’s threatening to spread to the intermediate term. For its intermediate-term picture to remain positive, PCU probably needs to remain above the 49-50 level.
Watchlists
New stocks of interest showing up in the “upside strength” scans include Aetna (AET), Brinks (BCO), Clean Harbors (CLHB), Safeway (SWY), State Street (STT), United Health (UNH), and Washington Mutual (WM).
New additions to the “oversold” list this week include Black & Decker (BDK), Jabil Circuit (JBL), and Eli Lilly (LLY).
