The market opened sharply lower this morning and proceeded to pick up momentum to the downside as the bears have pushed the major indexes back to current support levels. There have been some solid earnings announcements and economic news has come in mixed but the bulls seem complacent after the conflict between North and South Korea went to another level last night.
Existing home sales fell more-than-expected as the National Association of Realtors said sales of previously owned homes dipped 2.2% last month to 4.43 million units. The median price for a home sold in October was $170,000, which is down 1% from a year ago, as prices continue to be depressed by tough economic conditions and a huge inventory of unsold homes. We don’t even need to mention the foreclosure crisis.
Elsewhere, the government reported a good Gross Domestic Product (GDP) number as it showed an increase and came in at 2.5%, which was better than the 2.0% that had been forecast. And finally, the Richmond Fed manufacturing report was better-than-expected.
Turning to earnings, J.Crew Group (JCG, $43.78, up $6.12) is up 16% after being halted for much of the morning session after announcing earnings and saying it will be taken private by TPG and the firm’s CEO for $43.50 a share.
We listed them in our earnings watch in the Weekly Wrap and we thought there was a chance for a strangle trade but we have been bullish. Strangle option trades can be used when you think there is a big move coming in a stock but you aren’t quite sure of the direction.
We didn’t feel J.Crew was going to have a good quarter, and they didn’t, as profits fell to $37.8 million or $0.58 a share, from $43.9 million, or $0.67 a share, from the year ago period. However, we didn’t feel like getting short or strapping ourselves with a put option because the retailers have been doing well and we are expecting a higher market this week.
In any event, a December strangle trade would have done well. The J.Crew December 40 calls (JCG101218C00040000, $3.80, up $2.55) are up 200% on the news while the December 35 puts (JCG101218P00035000, $0.05, down $1.10) tanked 95%.
This basically means that you would have still made nearly 60% had you used this strategy and were banking on a big move in the stock. You would have paid $1.25 for the call options going into yesterday’s close, while paying $1.15 for the puts for a total of $2.40 for both. If you close both positions at current prices you get $3.85.
Elsewhere, Brocade Communications Systems (BRCD, $5.22, down $0.48) is down 9% after reporting profits of $66 million, or $0.14 a share, on revenue of $550 million. Wall Street was expecting earnings of $0.13 a share on revenue of $536 million.
Shares are lower after the company gave a weaker-than-expected outlook. Brocade said it expects revenue for the current quarter to come in between $535-$550 million, below estimates for revenue of $555 million.
As far as the market, the good news is the first level of support seems to be holding but there is a chance the bears push a little harder. If the bulls can’t rebound into the close then things could get ugly.
The Dow is currently down 150 points, or 1.3%, at 11,028 while the S&P 500 is off by 17 points, or 1.4% as well, to 1,180. We are looking for 11,000 and 1,173 to hold and further support lies at 10,800 and 1,150 for the indexes.
The Nasdaq is showing a decline of 42 points, or 1.7%, and is at 2,490. The first line of defense – 2,500 – has been busted again but there is a nice floor at 2,450.
Most of our trades have held up well and we mentioned last week that this week could get volatile with the holiday. The market will be closed Thursday for Thanksgiving and is open a half day on Friday so volume will be lighter than normal. This can have a major impact on trading so it’s important to remember this if you have longer-term option trades.
We have an important update as one of our current trades is up 114% so we are taking profits on half to protect profits. Subscribers, check for the updates in the Members Area.