The market returned to its “normal” ways after a see-saw week in which the Dow had three up days and two down. Normal meaning volatility. After a solid winning streak to close November above 8,800, the Dow struggled to hold 8,000 and finished Friday at 8,635. All things considered it was a pretty impressive feat considering the number of crappy economic news reports we got.
The Manufacturing report on Monday was a dozy, dropping the Dow nearly 9% from 8,829 to 8,149. Prior to that, the Dow had a six-session winning streak that saw the index rally from 7,400 to a high of 8,840. For the week the Dow lost 2.2%.
The Nasdaq finished at 1,509, or -1.7%, while the S&P 500 closed at 876, or 2.3% lower.
The Dow is facing near-term resistance at 9,000 and a break below 8,000 is what we’re watching. The Nasdaq’s struggle will be to hit 1,600 and stay above that while a break below 1,400 could lead to another run lower. As for the S&P 500, a rally to 1,000 certainly appears unlikely which would be bullish and a break below 800 would bring the bears out in force.
We could get some clarification this week on what the government plans to do for Ford (F, $2.72, up $0.06) and General Motors (GM, $4.09, down $0.03). There are still talks of a GM-Chrysler merger but more importantly Washington will throw the dogs a few bones. Auto sales were dismal in November, highlighted by a 41% decline in GM’s sales and things aren’t going to get any better. I don’t see how any bailout money is going to help or save either of these companies because buying cars is not on the top of anyone’s list.
Despite the uncertainty that still clouds the market, we did really well with a few of our trades.
Chesapeake Energy (CHK, $11.32, down $0.52) dropped every day of the week, starting at $17 and falling to a low of $9.84 on Friday. The December 17.50 puts (CHKXW, $6.45, up $0.25) are technically still open as our $5.75 stop was never hit on Friday. However, when the stock fell below $10, the options traded to a high of $7.70 and that was the signal to get out. I profiled these puts at $1.65 and we sure had the tiger-by-the-tail. If you are still in the trade, raise stops to $6.20.
Potash (POT, $53.39, up $3.79) rebounded sharply and was another position that I had said to keep tight stops on. The December 50 puts (PVZXJ, $2.65, down $1.95) traded to a high of $5.40 which represented nearly a 100% gain with entry prices averaging $2.75. The December 40 puts (PVZXH, $0.55, down $0.65) made a run to $1.50 and most of you got in for 75 cents. This trade was also a double.
The Exxon Mobil (XOM, $76.60, up $0.33) December 75 puts (XOMXO, $2.50, down $0.70) made a high of $4.95 before falling back as the Dow rallied. The volatility was intense but nimble traders still made 50% as these options were profiled at $3.25 last Thursday.
There are a few familiar names reporting earnings this week. H&R Block (HRB, $20.18, up $0.39) kicks things off on Monday.
We were recently successful in an AutoZone (AZO, $121.48, up $7.10) put option trade which announces earnings on Tuesday. We rode the stock down on November 19 when it was at $100, all the way to $85 a few days later. Since then, the stock has added 35 points. The December 75 puts (AZOXU, $0.40, down $0.20) went from $1.80 to over $6.00 and we got out when the stock started to rebound. It’s too risky to enter a trade before earnings but if AutoZone disappoints, the December 100 puts (AZOXT, $1.65, down $1.65) could be a homerun. For what it’s worth, Pep Boys (PBY, $4.53, up $0.16) also reports on Tuesday.
Wednesday we get CKE Restaurants (CKR, $8.01, up $0.30) and FuelCell Energy (FCEL, $3.93, up $0.15) while Thursday will be a big day for Costco Wholesale (COST, $55.58, up $2.83). Krispy Kreme Doughnut (KKD, $2.50, up $0.01) and Lululemon Athletica (LULU, $10.79, up $1.22) will also be in the mix.
The volatility has made one thing clear. Any “aggressive” positions you take in the market should only be expected to last a week and sometimes less than two days or 24 hours. Of course, we’ve known this for quite some time and like a chameleon, we’ve adapted.