Tuesday, June 2, 2009

What's next for June Expiration??

What’s next for June Expiration?? May is over and the market has gone straight up since March 6th. The DOW has closed above 8500 and now there is little resistance between 8500 and 9,000 to 9150. It could take only a few weeks to reach these levels however there are some very worrisome clouds on the horizon. Gas prices have jumped and will see $3 per gallon by July 4th and maybe $4 by Labor Day if the current flow of money continues to push prices higher. The funny thing is oil inventory is high and demand remains low. China just released that it has plenty of oil although it did raise state prices a bit. Doesn’t this sound like a broken record from last summer? This time however the commodity price increases are less than last summer but will cause more harm than last summers surge. Why? Expect a cap and trade or some sort of tax on fuel to occur by the end of the summer.

Yesterday the market shot up over 200 points while the vix was up. This divergence usually signals some sort of short term top. So many stocks have gone up 200-300% in just 3 months. The financials have issued huge secondaries. Stocks like Dow Chemical couldn’t raise money at $5 in March but did so 2 months later at $15.

The SPX is up 11 out of the last 13 weeks while the COMP is up 12 of 13 weeks. Some sort of sharp selloff is due. June expiration is 5 weeks in length. Most 5 week expirations have a key reversal during the final week or so especially when there was a strong trend the previous 4 weeks. This is due to option traders selling out of the money options thinking the market can’t reverse. In the current case a continuation of the rally into late next week or expiration week followed by a sharp 3-5 day reversal putting the out of the money options into the money. Kind of a vacuum reversal where traders sell out the money puts thinking the market never can go down and then getting caught the final week.

On the fundamental side seems the government has created a false sense of security in the financial markets. Does anyone think that GM will pay back all of the 50 billion? In GM’s best years they made only a few billion. That was with funny accounting. What happens if foreign countries slow their purchases of our bonds? Who is going to bail out California? Or other states that are in trouble? What about legacy payments?

This bear market rally could last a bit longer but the easy money has already been made. It’s amazing how everyone had been putting the blame on short sellers for the market’s decline. Now that we are 2100 points higher where is all the noise? Short selling has dropped sharply the past few months to 2 year lows. The lack of increased shorts the past 2 months is a big negative.

Below are some ideas-


Tin short 14-16 stop 18.75 target 7-9

LNC short 20-22 stop 26 target 8-10

IP Short 15-17 stop 19 target 7-9

BWA Short 36-38 stop 41 target 22-24

STT Short 46-51 stop 56 target 25-27

AAPL short 143-145 stop 151 target 120-122

GS Short 149-151 stop 157 target 110-115

DOW short 18-20 stop 22 target 11-13

MAS short 11-13 stop 16 target 8-9

TM Short 83-85 stop 93 target 70-72

DAI short 45-47 stop 51 target 30-32


UNG buy 13-15 stop 11 target 23-27

LUV buy 6.50- 7 stop 5.5 target 10-12

LCC buy 2.50 – 3 stop 1.95 target 4.5-5

Bottom line is keep raising your stops. Seems that all the recommendations in March have hit their sell zones and quickly.