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Words can’t describe the excitement we’ve seen in the market over the past few weeks and Friday was a classic example of what could be described as “running for the hills”. Wall Street was in full fledged panic mode Friday as the Dow went back and forth in a 1,000-point range, hitting a low of 7,882 and a high of 8,901.
The last hour of trading was a toe-to-toe battle between the bulls and the bears that left both sides bloody. It was awesome. By the final bell the market had mixed results as the Dow fell 128 points to 8,451, while the S&P 500 slipped 11 points to 899. The Nasdaq held its own and managed to finish in the green, up 4 points to 1,649.
The final score for the week was a clear victory for the bears, however, as they hit the Dow and S&P 500 for 18%, while the Nasdaq slid 15%.
As a result, a lot of companies went on sale, at least in my mind. More on that in a minute. While it is extremely hard to predict a market bottom, there are signs that at least we are getting close. I still don’t trust October but as bad as the month has been historically, it is often the best time to buy when looking at long-term stocks or options if there has been a correction.
Yeap, it’s gonna be hard to go long right now, but with a game plan you can advantage of everyone’s elses fear. Take a look at how some of these big names traded on Friday.
Microsoft (MSFT, $21.50, down $0.80) hit a low of $20.65. Are you kidding me? Back in April when Microsoft was trading at $30 did you ever think you would have the chance to buy it at $20?
Back in May, Google (GOOG, $332.00, up $3.02) was at $600. Yesterday it traded as low as $310. At half-price, is it a Blue-light special?
How stupid does Yahoo (YHOO, $12.29, down $0.36) look now for not taking Microsoft’s $30+ a share offer? Yahoo may not be worth $30 but it does look cheap at $12.
Johnson & Johnson (JNJ, $55.85, down $1.73) was at a 52-week high less than a month ago and hit a 52-week low of $52. Crazy. Just crazy, man.
General Motors (GM, $4.89, up $0.13) got chopped in half after after Standard & Poor’s Ratings Services said the company’s credit could drop further.
Energy companies have taken a whippin’ as oil prices fell 10% to a 13-month low of $78 a barrel. That’s the lowest its been in a year. Gas is going for $2.99 a gallon here on the east coast. Remember our Energy Watch list from June?
Arch Coal (ACI, $22.04, up $0.49) was at $70.
Massey Energy (MEE, $20.73, down $1.15) was at $84.
Patriot Coal (PCX, $14.60, down $0.23) was at $154. There was a 2-for-1 stock-split in August at $100. Still, the shares have fallen from $154 to $28 ($14 split-adjusted)? Incredible.
Peabody Energy (BTU, $28.65, down $0.93) was $77.
Joy Global (JOYG, $28.88, down $2.09) was at $85.
I profiled quite a few of them on June 4 and two weeks later they had returns of 100%-300% as the call options exploded when the stocks were hitting new 52-week highs. Click here to view these blogs.
The VIX (^VIX, 69.95, up 6.03) blasted through the 60′s and nearly hit 77. On Tuesday, the VIX was at 52 when I said that the 60′s look like a good bet.
The point I’m trying to make is that some stocks ran too high too fast and now some of them have gone too far to the downside. Somewhere in the middle is where they may be fairly valued but we are more worried about the options on these stocks, not the funadamentals. I still don’t trust the financial stocks but there will be some winners out there once the dust settles.
The credit crunch, President Bush, the press and the talking heads have scared the be-Jesus out of everybody and nothing seems to be working to restore faith in the market. Remember what I have said about not following the herd. Yes, the market is tanking and there’s more downside risk. But everybody needs to quit beating the horse. It’s already dead. Now is the time to start buying for 6-12 months down the road.
I’m working on a “Lottery Portfolio” this weekend and I will be picking some stocks and sectors that may be worth a gamble. The market is open for business on Columbus Day although banks will be closed. Right now Wall Street can’t see the forest for the trees and hopefully by doing a Lottery Portfolio, I will be able to show you the bigger picture.
Rick Rouse
Rick@OptionsMentoring.com
Market Explodes for 900 Points
Monday, October 13th, 2008
The relief rally was on today as the Dow zoomed 936 points as bulls rushed in to buy stocks that have been beaten down 50%-80% in just over a month. If you read the blog that I posted over the weekend, then you could tell how excited I was to go long the market. There were a ton of positions that could have been bought at the open this morning and it felt like I was going Christmas shopping on the Friday after Thanksgiving. That day is the biggest shopping day of the year as consumers rush to the malls at 4am to get the best deals. That is exactly what was happening at the opening bell this morning.
The Dow was up a quick 400 points right off the bat and its 11% gain was ithe biggest since the Great Depression. For the record, the Dow officially closed at 9,387. The “dead cat bounce”, “relief rally”, “oversold rally” or whatever you want to call it also pushed the S&P 500 and Nasdaq higher by 104 and 195 points, respectively. The S&P 500 closed at 1,003 while the Naz closed at 1,844.
But can the rally be trusted? The key point I made over the weekend was that you should only be looking out 6-12 months and it is hard to say if this rally will hold. However, today was our shopping day and here is what I had on my Christmas list from the weekend for my Lottery Play Portfolio.
Microsoft (MSFT, $25.50, up $4.00). If you’ve been reading the blog then you know how much I’ve mentioned this stock. This company has over $20 billion in cash and no sub-prime exposure. Share buybacks, dividend distributions, and acquisitions have eaten away at the company’s coffers – two years ago they had nearly $60 billion but the company’s products still generate about $1 billion a month. The stock fell to a low of $20.65 Friday. This morning, the April 25 calls (MSQDE, $3.30, up $1.30) opened at $2.35 and closed 65% higher for the day. Even at $2.35, you still got a 40% gain if you bought at the open. The April calls are over 6-months out and expire on April 17, 2009. If these calls get back to this level, don’t hesitate to jump on the. If you got in today with a half or full position then you could set 25% stops in case the stock retreats.
Google (GOOG, $381.02, up $49.02) turned out to be a “Blue-Light” special as it rallied 15%. This stock was on sale at half-off from its 52-week high of nearly $750 and the March 500 calls ($19.40, up $6.20) opened at $11.50 and briefly traded over $20. Google still has earnings so if you got in early, set stops at $15 or so.
Yahoo (YHOO, $13.49, up $1.20) fell below $12 last Friday and although it didn’t get the big pop Microsoft and Google did, it still managed a 10% gain. I didn’t go too far out on Yahoo call options because I still think the company is a mess (not taking the $33 a share from Microsoft still haunts shareholders). Remember though, we are not trading on fundamentals for some of these plays, just on what appears to be cheap. The January 17.50 calls (YHQAW, $1.33, up $0.06) were the most active but I don’t expect much from this one. In fact, set stops 20% below your entry price instead of the usual 50%.
Johnson & Johnson (JNJ, $62.68, up $6.83) was a no-brainer and a really safe play. The stock was up over 12% and I had mentioned the big drop after hitting a 52-week high a month ago. The November 60 calls (JNJKL, $4.70, up $1.70) opened at $3.30 as volume came in at 4x open interest. I love this stock for the short and long-term which is why the April 70 calls (JNJDN, $2.00, up $0.50) looked like a down-right steal at $1.50 this morning. If you missed today’s jump you could start building half-positions even at these levels.
I didn’t like General Motors (GM, $6.51, up $1.62) and still don’t although the 33% rally today was very impressive. We rode Ford and GM all the way down to these levels a few months ago and while there may or may not be bankruptcy in their future, I just think there are better trades out there. If you are a die-hard bull, the GM 2010 January 5 calls (WGMAA, $3.65, up $0.50) saw a lot of action as nearly 5,000 contracts traded. The 7.50′s (WGMAR, $3.15, up $0.65) weren’t nearly as popular, trading only 200 contracts.
Arch Coal (ACI, $27.32, up $5.28). The November 25 calls (ACIKE, $5.20, up $1.60) opened at $4.50.
Massey Energy (MEE, $26.47, up $5.74). The November 25 calls (MEEJE, $1.85, up $0.75) opened at $1.00.
Patriot Coal (PCX, $19.50, up $4.90) also made a nice comeback. The November 20 calls (PCXKD, $3.60, up $1.40) opened at $2.40.
There were a couple of other energy stocks I mentioned but I didn’t want to go too heavy on the sector.
Morgan Stanley ($18.10, up $8.42) was a huge story today after the company nearly went bankrupt last week. The investment bank went through a zany week of trading as many on Wall Street pondered its future. Mitsubishi Financial Group of Japan was the knight in shining armor for Morgan as they made a $9 billion investment in the company. The October 15 calls (MSJC, $3.80, up $2.61) were up 220% today.
Goldman Sachs (GS, $111.00, up $22.20) has made up 40 points since hiting a low of $74 last Friday. What a steal it was below $100 or even $80 for that matter. Remember, Buffett is in at $5 billion with another $5 billion waiting in the wings. The October 100 calls (GSJT, $15.50, up $10.00) opened at $6.95. An easy double as the day went on. If you bought at the open, set stops at $11.00. The January 125 calls (GSAE, $11.60, up $4.35) didn’t have the banner day as the October calls did but still were up 60% for the day.
There were a slew of other good trades, too many more for me to list but you got the idea. Keep an eye on some of the calls I have mentioned. They may get cheaper and they may not. It’s too early to call this a rebound and there is no way of predicting where we are headed over the next few days. Remember, earnings are on tap and they will certainly sway the market.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Add new tag, Coal stocks, Goldman Sachs. Microsoft, Google, Johnson & Johnson, Morgan Stanley, Yahoo
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