EOT Position Update – July 23, 2008

| July 23, 2008

July 23, 2008

Market Snapshot

The Dow Jones Industrial Average just closed at 11,632.38.  This is the second week in a row we’ve closed higher.  Great news for all of you bulls out there.  This is no doubt giving the short sellers heartburn.

REMINDER:  I’m working on a new trade alert for Friday morning.  Watch your e-mail closely.

Big news this week.

In just the last few days Fannie Mae and Freddie Mac went from one foot in the grave to rallying strong.  The stocks are up significantly since Treasury Secretary Paulson hatched an “if needed” rescue plan, and the SEC announced a new crackdown on naked shorting.  I’m not sure what had the biggest impact, but either way we’re up significantly.

In the Biotechnology Industry news of Roche’s buyout offer for Genentech seemed to cause the entire industry to rally.  Unfortunately it seemed to blindside the Genentech management team.  The stock’s up big, but management comfort level is falling quickly.

Oil prices have fallen below the $130 mark for the first time in a while.  Great news but what does this mean?  See the “Parting Shots” section below for more thoughts on the subject.  Airline stocks have been rallying on the fall in oil.  The Airline industry is up huge.  In just the last week the entire industry is up 40%.  The industry’s being lead higher by UAL (UAUA), US Air (LCC), and AMR (AMR) which have all posted 100% gains.

Icahn / Yahoo! kiss and make up . . . kind of.

Carl Icahn and Yahoo! have managed to meet in the middle and avoid a nasty mud slinging proxy fight.  Icahn and two of his “Friends” get seats on the board . . . in exchange for dropping the proxy fight.  Let’s see if he can strong arm the management team into the open arms of Microsoft.

The Banks are starting to rally on news that’s better than expected.  Funny thing is the news is still horrible, but everyone is expecting the worst.  So beating expectations isn’t hard.

Now for the trade updates.

Position Updates

    GT January 2009 $15 Puts (GTMC)
Goodyear Tire (GT) rallied this week on falling oil prices.  Unfortunately we were looking for the stock price to fall.  The stock broke our first resistance level of 20 today.  Support levels are 15 and 12.50.  Resistance is 20 and 22.

  ROST November 2008 $42.50 Calls (REQKT)
This week Ross Stores (ROST) briefly touched our first resistance level of $40 a couple of times.  For those of you who took profits congratulations!  This trade was up almost 60% in just the first 20 days.  We still have some time on the option.  More aggressive traders might consider holding on a bit longer or taking partial profits. Resistance is 40 and 45.  Support levels are 34 and 31.50.

Parting Shots…

Black Gold and the fall of oil.

I’ve been keeping my eye on oil prices lately.  Not just because they recently set new highs, but because they’ve been falling.  I know it seem strange, but I’m more interested in how lower oil prices impact the market.

The answer seems to be not at all.

It looks like the damage from high oil prices is finally starting to rear its ugly head in the economy.  This means that now we are feeling the impact from high oil prices a few months ago.  It’ll be a few months more before the recent lower oil prices help the economy.

Other opinions.

I try to ignore the talking heads on TV but just the other day I heard some commentary on CNBC.  One of the market prognosticators announced that oil was heading down toward $100 a barrel.  This week Boone Pickens also announced his thoughts on oil.  He says it’s headed for $300 a barrel.

So, who’s right?

In my opinion. . . . They both are.

But, there’s a more important question.  “What does it mean for the market?”

This is not such a simple question to answer.  Despite oil falling from record high levels over the last two weeks the impact’s still being felt.  We are just now starting to see high oil prices curbing consumption.  Foreign governments that supported artificially low fuel prices in their countries are now starting to increase prices.

As these price increases take hold demand is going to fall.

But all of this is short term.  As humans we’re made to adapt.  Before long we’ll shuffle around some expenses and cut a few costs.  Before you know it fuel consumption will be creeping upward again.  This trend will start in the US, but you’ll see it happen all around the world.

That means lower oil prices in the near term.  But higher prices in the long run.

Following that thought even further.  I believe we’ll see inflationary pressures from rising energy and commodity prices for some time to come.  The focus of central bankers and investors will shift from economic growth to controlling inflation.  That means one thing . . . investing in an inflationary environment.

I’m keeping my eyes peeled for ways to take advantage of this expected change in the market.

Category: EOT Update

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