“The trend is your friend”
This past week was a good reminder that no matter what various indicators and price charts might be saying about the future direction of the market, the most important “indicator” of all is its current trend. Nothing illustrates this better than last week’s weekly trend analysis, which – despite weakening price action and other warning signs – correctly showed that the overall market’s intermediate-term uptrend was still intact.
The market’s strong rally this past week only reaffirmed this, as is shown by the current all-green status of the major indices. This isn’t to say the warning signs have gone away – the Russell 2000 is still giving negative divergences and the SMH is still in a downtrend – but they work best as confirming indicators, after the trend analysis has indicated a change in trend. Given the market’s latest action, I’m not holding my breath for that to happen right away.
Options expiration results
I went into last week’s options expiration short the following March options: 60-strike covered calls (which I sold early in the week) against my long position in Exxon (XOM), 17 1/2-strike puts on Lear Corp. (LEA), 22 1/2-strike puts on Sanderson Farms (SAFM), and 35-strike puts on General Maritime (GMR). In a mirror image of last month’s expiration, in which all of my short options expired out the money, all of these options expired in the money.
I decided to sell the covered calls against my XOM stock as I felt its intermediate-term trend was unclear, and I could exit with a decent overall net profit in the position. Given the recent relative strength of the DJIA, however, I’m still holding off selling calls against my long positions in other Dow stocks like DuPont (DD), Verizon (VZ), and JP Morgan (JPM), which I’ve owned for over a year.
Both GMR and SAFM will represent initial long stock positions, and I’ll likely sell more puts if they drop lower, or sell calls if they rally in the short term. LEA is acting very weak, having fallen through both the 20 and 17-1/2 price levels amidst more talk of additional bankruptcies among auto parts suppliers, so I’m watching this one closely.
Watchlist
Not surprisingly given the market’s recent strength, many interesting stocks showed up on the “upside strength” scans this week, a few of which included Abbott Labs (ABT), Avon Products (AVP), Family Dollar Stores (FDO), Fortune Brands (FB), Glaxo SmithKline (GSK), Home Depot (HD), New York Community Bancorp (NYB), Plum Creek Timber (PCL), Progress Energy (PGN), Target (TGT), and US Bancorp (USB). “Beaten down” stocks of interest this week include some “usual suspects” like Gannett (GCI) and General Motors (GM), as well as a new candidate in this category, St. Paul Travelers (STA).
