Uptrend intact, except for SMH, healthcare, and Japan
The market’s move back up last week after the previous week’s sell-off confirms an ongoing intermediate-term uptrend, as does the all-green status of the weekly trend spectrums for most major stock indices and sectors. The only exceptions are (see below) the iShares MSCI Japan Index (EWJ), Semiconductor HOLDRS (SMH), and the Health Care Sector SPDR (XLV):
The current weakness in semiconductor stocks and in Japan shares is something to keep an eye on. Meanwhile, it seems likely we’ll ultimately see higher prices in most other indices and sectors, but the risk of more consolidation and greater volatility also seems high.
The S&P 500 is currently right at its ~1370 support/resistance level. Near-term support below that is around 1350-1360; upside resistance is around 1400 and 1420.
New positions
DuPont (DD) – Last Thursday I sold some December 47.5 calls against my long position in DD (purchased 5/23/05) as it traded up over 47:
The stock has been performing well recently and may be headed back up to the 49-50 level over the intermediate term. After debating whether to wait for the stock to (maybe) go higher in the short term, I decided to sell calls now for two reasons: 1.) With five weeks remaining until December’s options expiration I could get a decent premium for them, and 2.) even if my shares are called, I’ll still collect the latest dividend payment (ex date 11/13) and exit the position with an overall gain.
Merck (MRK) – Last Thursday I sold some December 42.5 puts on MRK as it and the rest of the healthcare sector continued to sell off after the Democrats won control of the U.S. congress:
I may buy these back if the stock bounces short term. Although, as always, I wouldn’t mind owning the stock if it’s put to me, it seems likely that there may be opportunities to sell puts at lower prices in this sector over the intermediate term.
Pfizer (PFE) – On Thursday I also sold some December 25 puts on PFE as it too sold off on the election results:
I placed the limit order on PFE midday after seeing all the weakness in the healthcare sector, forgetting about my standing limit order to sell puts on MRK, which I’d placed before the open that morning (I often place anywhere from a handful to two dozen day-only limit orders each morning before the open). Nonetheless, despite now being slightly overweight big pharma (I also still own some GSK), I’m comfortable owning PFE below 25 if it’s put to me.
Whole Foods Market (WFMI) – Also on Thursday I bought back the November 45 puts that I’d sold on WFMI a week earlier after it dropped over 20%. The stock has been bouncing since, helped along by a couple of upgrades:
The stock certainly has plenty of room to bounce higher, and it’s looking pretty unlikely that I’d have been put the stock. However, the options I’d sold had lost almost 90% of their value, so rather than look a gift horse in the mouth I closed the position for a net return of 2.2% in less than a week.*
Watchlists
New (and recently re-added) additions to the “upside strength” list include Aegon (AEG), Allstate (ALL), American Standard Companies (ASD), Boeing (BA), Colgate Palmolive (CL), Comerica (CMA), Compania Anonima Nacional Telefonos de Venezuela (VNT), Countrywide Financial (CFC), Diebold (DBD), Disney (DIS), Edison International (EIX), Fluor (FLR), H&R Block (HRB), 3M Company (MMM), Nicor (GAS), Sonic Automotive (SAH), and St. Paul Travelers Companies (STA).
New and re-added additions to the “oversold” list include Abbott Laboratories (ABT), Health Management Associates (HMA), Hitachi (HIT), Manor Care (HCR), Matsushita Electric Industrial Co. (MC), New Century Financial (NEW), New York Community Bancorp (NYB), Oshkosh Truck (OSK), Steel Technologies (STTX), Texas Instruments (TXN), and YRC Worldwide (YRCW).
* As always, the return on these “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.
