EOT Position Update – November 14, 2012
November 14, 2012
Market Snapshot
Investors are preparing to go over the cliff…
No, there’s not some cultish suicide pact on Wall Street. But the impending fiscal cliff of automatic Federal Government spending cuts and tax hikes is essentially economic suicide.
In order to prevent the fiscal cliff from becoming a reality, politicians must put aside their partisan differences and reach a compromise.
But in the week after President Obama’s reelection, politicians have given no indication that they’re willing to give on the sticking points that have prevented an agreement up to this point.
You know the story…
Republicans are unwilling to accept tax hikes, want to focus on reducing government spending, and encourage economic growth by reforming the tax code to drive an increase in tax revenue.
And the Democrats want to raise taxes on the richest 2% of Americans and focus on building a stronger middle class. And the only way they’ll put government spending cuts on the table is if Republicans are willing to accept higher taxes.
It’s a no win situation that neither side has indicated a willingness to reach a compromise.
As a result, the stock market selloff that began after President Obama won his bid for reelection has accelerated to the downside.
In fact, the S&P recently plunged below the key support zone of the 200-day moving average. That’s bad news for the bulls.
It will likely lead to a retest of the long term uptrend off the 2009 lows. That’s an additional downside of 1% to 2% for the S&P from where it’s trading today.
It’s safe to say the bears are now in control of the market. And they’ll likely stay there until some sort of agreement is reached on the fiscal cliff.
And don’t overlook the fact that the selloff has begun to drag down even the strongest sectors. Even homebuilders that had bucked the recent downtrend are being dragged lower over the last few days.
Fortunately, options give us the ability to profit whether the markets are sinking or soaring.
Let’s move onto the updates…
Position Updates
Just a quick note: Remember, we won’t update every open position every week. I try to focus on the positions that have some significant news or price movement.
YELP February 2013 $20 Calls
YELP is our latest trade. The online review site’s stock has had a rough run lately. But it’s near support of the low end of the trading range. And with the rollout of advertising on their mobile app expected sometime this quarter, YELP and our call options should start moving higher in short order. Resistance is at $24.00 and $28.00. Support is at $15.00 and $13.50.
OPEN December 2012 $40 Puts
OPEN has been drifting lower since they reported earnings a few weeks ago. The stock is down 6%. But our options have lost some value after a relatively tame response to their earnings announcement. However, the challenges to OPEN’s business are mounting. It should lead to a breakdown in stock price in the week ahead. Continue holding… Resistance is at $49.00 and $50.00. Support is at $40.00 and $36.00.
PHM April 2013 $19 Calls
PHM has been dragged down over the last few days. But not because of anything PHM has done. The CEO of competitor D.R. Horton (DHI) threw cold water on homebuilder stocks. He doesn’t think the economy will improve enough for the housing market recovery to continue. But that flies in the face of reality. Housing starts jumped 15% in September to an annual rate of 872,000 new homes. If the improvement continues, PHM and the entire homebuilding industry are going much higher. Continue holding… Resistance is at $25.00 and $30.00. Support is at $15.00 and $13.50.
Category: EOT Update
