The market started off strong but has given back most of those gains as I head to lunch. The Dow is up 14 to 9,376 while the Nasdaq is trading at 2,005, up 6. The S&P is at 1,009, up 3 points. I wanted to expand more on this morning’s blog because it is important to understand where we are and where we have come from. That will help you keep things in perspective.
Before I started the blog, I wrote daily articles in another sector of OptionsMentoring.com that got me prepared to do the blog. You can still find those articles. The point I want to make is that everything is archived and any stock that you may want to research or any trade that you want to follow, you can by doing some homework.
Look, research is important and I use this blog to go back and research my own trades or my thoughts on the market. I will quote myself to remind you of things that are important and so that you can start getting a read on the market. When I said the bulls were targeting Dow 9000, Nasdaq 2000, and 1000 for the S&P 500 on July 19th, no one in the circles I run with had these targets.
That is what I meant by climbing the wall of worry. The reason I was so bullish is because I had written down a note that I kept posted on my computer for a year. On May 29th, 2008, I did an article that you can read and it was titled “Wachovia Continues Slide”.
The ONE thing I was looking for was from this paragraph:
“I still don’t trust Financial sector and there will be a time when these stocks will appear to be dirt cheap. Maybe they are right now but I would wait for two consecutive quarters of good earnings before even thinking about buying a bank stock right now.”
Well, in March the market started its comeback and in April we got incredible first-quarter earnings from the financial sector. So, what? They were going to report a blowout quarter and THEN report a lousy quarter? Nah, wasn’t going to happen…
When I did that article back in 2008, the financials were a mess. In fact, a week later I profiled two Lehman Brothers trades that returned 100% in a 8 days. The big hurt really started to come later in the fall when Merrill Lynch, Lehman Brothers and AIG started to tank. Only one of those companies is left standing…
Now, I still think the back end of the year is going to look good and there will continue to be pockets of strength in this market. But, after reaching those lofty goals of Dow 9000 and Nasdaq 2000, I’m trying to get a read on the short-term. Long-term, we end the year higher than current levels I would think.
When I see patterns like this, I often step back and reduce my exposure. Which we have. We were recently stopped out of a number of trades but the homework has been spot on. Cisco (CSCO, $21.49, up $0.06), Ford (F, $7.80, up $0.10) and IBM (IBM, $119.27, down $0.02) all stalled and we got out of those trades with maximum profits. Visa and a few others stalled which is why they didn’t do well.
So, I still like the long term prospects of Bank of America (BAC, $16.80, up $0.87) and even Citigroup (C, $4.09, up $0.11) is starting to get my attention. Citigroup LOOKS cheap at these levels but is it a buy under $5? Does it have a chance at $10?
LEAPs are options that can be used to bet on a stock direction and they can be pretty cheap. I am going to add three trades today but realize they are high risk/ high reward and I won’t cover them EVERY day because the options have plenty of time before they expire.
The Citigroup January 7.50 calls (CAQ, $0.14, up $0.01) are trading for 15 cents folks. Talk about a cheap out-of-the-money call option. So far, over 5,000 contracts have traded today. Open interest stands at over 100,000 contracts. The Citigroup January (2011) 10 calls (VRNAB, $0.40, up $0.02) are trading for 40 cents and 3,500 contracts have traded. The 2011 calls do not expire for another year-and-a-half!
As far as Bank of America, the January 20 calls (BYOAT, $1.18, up $0.28) can be used but I still think we may get these cheaper. So, start half positions. This means if you normally buy 20 option contracts, buy 10. This way, if the calls trade lower, we can look at the situation and decide if we do another half or get out.
We have Wells Fargo (WFC, $27.73, up $0.56) as a hedge in case the financials take a breather.