EOT Position Update – September 10, 2008
September 10, 2008
Market Snapshot
The Dow Jones Industrial Average just closed at 11,268. The last week’s been quite a roller coaster.
The big news: Government takeover of Fannie Mae and Freddie Mac.
Many of you are subscribers to my free e-letter, The Dynamic Wealth Report. On Monday I wrote about Fannie and Freddie and the government takeover. You can find the entire article here.
In a nutshell, the government’s lying about the reasons behind the takeover of the mortgage giants.
The party line is simple. The takeover was to help credit spreads and speed the recovery of the real estate market. In reality, the losses at Fannie and Freddie were getting worse. (If they were getting better why intervene?)
If the government hadn’t stepped in we may have seen bond defaults like never before. The failure or bankruptcy of Freddie or Fannie would have a very scary impact on the US Economy.
Investors at first cheered the news with the market rallying almost 300 points.
The next day they gave it all back.
Today, we find ourselves reading about the next bank failure. This time Lehman Brothers looks like it might not survive the week. Apparently negotiations between Lehman and Korean Development Bank fell apart. Their need for capital is apparent. Will they find it? Only time will tell.
Washington Mutual ousted their CEO . . . too little too late. The stock’s trading around $2. A cup of coffee at Starbucks is more expensive.
Lost in all the financial news this week was the strike at Boeing. The machinists voted to strike and walked off the job over the weekend. The company is going to lose millions every day.
Oil keeps sliding lower along with other commodities. The US Dollar is continuing to show strength.
Now for the trade 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.
CVX December 2008 $75 Puts (CVXXO)
Our last trade alert – puts on CVX – is working out really well. The option value is up just shy of 50%. The stock’s fallen almost 2 points on softening oil prices. I’m expecting this trend to hold for a while. Remember we want the stock to fall in value. Support levels will be at $76.50 and again at $71. If the stock moves higher it will reach resistance around $88.50 and again at $92.50.
CSCO January 2009 $27.50 Calls (CYQAY)
Over the last few days, CSCO has fallen with the market in general. Not good as we want it to go up! The company is hosting an analyst’s day on September 16. Hopefully good news and press will drive the stock higher. Support is at $22.50 and $21. Resistance will be at $27 and $28.75.
JCP January 2009 $30 Puts (JCPMF)
JCP continues to show strength in a weak economic environment. We traded up near our first resistance level this week. Keep an eye on this one. Support is at $35 and $30. Resistance will be at $45 and $48.
CLHB January 2009 $95 Calls (QPBAS)
CLHB was all set to benefit from massive hurricane clean-up fees. Unfortunately the hurricanes missed (at least from a CLHB perspective). The stock’s down on the news and trading near our first support levels. Resistance will be found near $85 and $90. Support will be at $72 and $68.
Parting Shots…
Timing of Trades.
Part of the secret to options selection rests with timing.
Sometimes you hit a bulls-eye. And sometimes you miss the board entirely.
Just take a look at a trade we recommended back in July. The Goodyear Tire company was facing some big hurdles. Oil prices – one of their biggest variable costs was at record high levels. Sales were sliding from the softening economy. And replacement rates were falling as $4 gas caused people to drive less.
So what happened to the stock?
It traded up for the next 4 weeks. It just didn’t make any sense. Oil prices were falling, but the company was selling fewer and fewer tires. People were still driving less. And they’re less likely to spend big bucks on premium tires.
It was frustrating to see the market move away from common sense.
So what happened this week?
This week we got our revenge. An analyst for Key Bank cut his rating and highlighted some struggles the company was facing.
And the stock traded down more than 10% . . . in a single afternoon of trading. We’re into our third day of declines on the stock. Let’s hope the trend continues!
Position Updates
JCP January 2009 $30 PUTS (JCPMF)
JCP reported same store sales for August . . . you know, the all important back to school shopping season. Guess what? Sales were down! But the stock continues to move the wrong direction. I’d hold this for a little while longer to see if shareholders get a clue how bad the retail environment is. Support is at $35 and $30. Resistance will be at $45 and $48.
CLHB January 2009 $95 Calls (QPBAS)
CLHB has settled firmly above the $80 level. The stock tried to reach new highs of over $83. We’re still early in this trade. Resistance will be found near $85 and $90. Support will be at $72 and $68.
ROST November 2008 $42.50 Calls (REQKT)
ROST continues its slow climb. The stock reached above $41 for the first time in several weeks. We still have lots of time on these options, hold on tight. Resistance is 45. Support levels are 34 and 31.50.
Parting Shots…
The changing of the seasons . . .
Just this week a colleague of mine started talking about the months of September and October.
He pointed out that on a historical basis September is traditionally the biggest losing month (on a percentage basis) for the S&P, Dow and Nasdaq. Good information to have if you’re trading the markets.
It’s not always true.
But in the last 57 years the Dow has been down in the month of September more than 36 times (about 63% of the time).
October’s not much better. It’s known as the month of fear . . .and it’s not because of Halloween. October witnessed the Market Crashes of 1929 and 1987, as well as huge moves down in 1997, 1978, 1979 and 1989.
The worst October on record posted a loss of greater than 23%.
It’s this kind of knowledge that’ll help make you a better trader.
Category: EOT Update
