We had a feeling the bears weren’t done and we said Spain’s bailout, “loan”, relief aid, or whatever you want to call it, looked questionable to us before Monday’s opening surge on Wall Street. It was a classic “buy the rumor, sell the news” session as the market started off strong but folded like a cheap lawn chair as the suit-and-ties doubted the latest efforts to fix Europe’s debt crisis.
The overseas markets also had strong opening gains of 2+% but faded as well and ended mixed after bond yields rose. Germany’s stock market rose just 0.2% while France saw it stock exchange end 0.3% lower which was a clue the U.S. indexes would not hold their gains.
The yield on Spanish 10-year bonds jumped 0.3% to nearly 6.5% while Italy’s 10-year bonds jumped the same amount to 5.84%. Anything over 6% on a 10-year bond means the market is losing faith on the country’s finances. If Vegas had odds on the next country to ask for a bailout, we would put $50 on Italy as the fifth country that will get a bailout.
The Dow dropped 143 points, or 1.1%, to finish at 12,411 on Monday. The blue-chips reached a peak of 12,650 but fell to a low of 12,398 which was a 250-point swing. The bulls were trying to clear and hold the 12,600 level but the losses have the bears eyeing support at 12,350-12,200 again.
The S&P 500 fell 17 points, or 1.3%, to settle at 1,308. The index kissed a high of 1,335 but never had the momentum to challenge 1,350 after futures were cut in half before the bell. The low was 1,307 and the close opens the door for a test back below 1,300 to 1,275. If the latter support level fails, selling pressure will pick up steam and 1,257 becomes the make-or-break point which is where the S&P started the year at.
The Nasdaq declined 49 points, or 1.7%, to close at 2,809. Tech tested 2,882 at the open but fell below the 2,850 level shortly afterwards. The low for the session was 2,806 and support at 2,800 is looking weak. A close below 2,750 would not be good.
The Russell 2000 got hammered for 18 points, or 2.4%, to end at 751. The small-caps tested 776 on the high which was short of brick wall resistance at 780 while the low came in at 750. A break below 740 would be super bearish.
Meanwhile, the S&P Volatility Index (VIX, $23.56, up $2.33) surged 11% and closed back above 22.50. The VIX tested a low of 19.63 on the open and we said a test to 20 could come on further upside action by the bulls. In the same breath, we also said the bears would be targeting a close back above 22.50. We also mentioned in our Weekly Wrap if the VIX pops above 25, the market could be setting up for a violent pullback.
Solazyme (SZYM, $12.10, up $0.99) bucked the trend and broke resistance after announcing its plans with Bunge (BG, $58.34, down $0.97) to build a sugar/oil plant in Brazil was still on track. The two companies are building a facility to convert sugar to oil capable of producing 100,000 metric tons.
The chart from our weekend homework showed a major move was coming as shares surged 9% on Monday to close above $12. More importantly, Solazyme was able to clear both its 50-day and 200-day MA’s.
As far as the option pits, these are the types of more that can make near-term call options triple-digit winners. Many investors don’t know that just a 5% move in a stock can produce a 100+% move in the right option.
Shares of Solazyme opened at $12.10 on Monday and reached a high of $12.55. The July 12.50 call options (SZYM120721C00012500, $0.45, up $0.25) opened at 25 cents and surged 125% on the news.
The June 10 calls (SZYM120616C00010000, $2.20, up $1.10) opened at $1.05 and there was some decent buying despite the fact they expire this Friday. We have been bullish on this stock for quite some time and it is a current recommendation for our Weekly Wrap covered call portfolio.
While the market remains choppy, there are still good option trades out there on stocks with momentum. Solazyme remains a very interesting long-term “Buy”.
As we head to press, futures are showing a higher open and look like this: Dow (+49); S&P 500 (+3); Nasdaq (+8).