The Dow fell over 4% Monday and you could tell by the opening bell that we were headed much lower. Once 7,000 failed, the Dow found some support at 6,800 and that was the battle line going into the closing bell. The big number with the S&P is 700 and that level held. For the Nasdaq, the key level to watch for is 1,300.
There were a number of factors that dragged us lower from American International Group (AIG, $0.42, unchanged) to HSBC Holdings (HBC, $28.25, down $6.55) but there was no surprise or shock on Wall Street as the Dow fell below 7,000. As a result, the Dow lost 299 points and closed at 6,763 while the Nasdaw fell 55 to settle at 1,322. The biggest decliner was the S&P 500 which dropped 34 points to close right on 700.
On Friday, it was hard to go long or short before the weekend because of the possibility of a major rally due to short covering or some godsend type news. However, when we opened Monday morning, the bears were determined to send the market lower. Mission accomplished.
After lunch, the magic number that popped in my head was that the Dow would finish 300 points lower. At 2:30PM, I was thinking out loud that “we are headed much lower in the final hour. If we can get back to 250 down, then 270, 280…then 300 would be that “magic number”.
That is one reason I did the CBOE Market Volatility Index (^VIX, 52.65, up 6.30) trade which added another point after the blog came out at 1:15pm.
The threat of a bounce looms larger for every down day we had like yesterday. At least that is what the pros are saying. I buy that and do think that is a real possibility. However, the trend was lower Monday and we took advantage of it.
Celgene (CELG, $42.15, down $2.58) was trading at $42 right before lunch and traded as low as $41.34. On Sunday night I had mentioned the weakness in HealthCare stocks and profiled the Celgene March 40 puts (LQHOH, $1.30, up $0.50) as a possible way to ride the stock lower. Before lunch I provided an update and said to look for an exit of $2.00 but that $1.50 represented a 50% return and our initial target. The put options rallied to a high of $1.70 shortly after the blog and the stop of $1.25 could have been raised to $1.50 to lock in the 50% profit.
Sure, Celgene could fall further, but both parts of the trade were filled when the options returned 50% and the stock made a run down to $40. There was huge volume in these options as over 6,000 contracts traded hands on Monday. That was the good news.
The bad news is that the Freeport-McMoran (FCX, $26.49, down $3.93) trade from Friday got smashed. I mentioned the March 35 calls (FCXCG, $0.30, down $0.55) at around $1 on Friday and was nervous about holding them over the weekend. The calls traded as high as $1.20+ on Friday and I should have been a little quicker on the trigger finger if I felt this way.
However, the trade was kind of a way to play any “surprise” upside rally that might have happened on Monday. One of my rules of trading is that I normally set at 50% stop loss from the entry price so if you closed the trade at 50 cents then you have been paying attention. However, the calls opened at 70 cents and could have been closed right from the start.
I mentioned this could be a pivotal week and all signs from Monday point to such event. It’s important to note that in “transition periods” there are going to be some trades that we get whipsawed out of. FCX was one of them. The market is trying to find a low and we could continue lower over the next couple of days. The big test will come Friday when the unemployment numbers are released. No matter how you slice it, people are not going to spend money if they think their job is in jeopardy.
The wild cards for the market on Tuesday will be Bernanke who testifies on the U.S. economy and budget at 10AM. We get January pending home sales right as Bernanke speaks so that could weigh on the market before he even gets his first sentence out. Bernanke kind of soothed the market when he spoke last week but has a history of making the market nervous.
We also get the auto sales report which is another time bomb. Nobody is buying cars and people that have multiple ones are downsizing. The one thing that rings certain is that the housing and auto sectors are not improving and that is a problem.
Treasury Secretary Geithner speaks at 12:30PM and the bears love him. We also get the AutoZone (AZO, $140.03, down $2.20) numbers before the bell. Just another “normal” day on Wall Street, huh?
Rick Rouse
Rick@OptionsMentoring.com
