S&P 500: What a Bounce!

After yesterdays disaster in the markets as the S&P 500 dropped 106 points, we recovered over half that amount on a bounce today of 58 points! Dangerous times to be in the market, but since we are lets look at we we are at specifically support and resistance.

First - We are definitely still bearish - S&P is well below the 200dma, made new 52 week low yesterday, and the 50dma is sloping down.

So look for Bear Calls folks!

Second - support and resistance - Support is easy - it is yesterdays low just above 1100; Resistance on the other hand is a little more gray. There is obvious strong resistance at 1300 and again at the 200dma of 1330. Now for weak resistance we are looking at 1200 as the continuation of a bear channel and 1250 as a double top from previous days this month. Both of these are weak and easily broken with the right amount of coaxing such as a spectacular deal from the Federal Government - HA HA HA! I crack myself up sometimes - spectacular deal and Federal Government in the same sentence…ROFL, but in any case it would be a perception of a deal that may break those resistance points, but do not expect the S&P or the rest of the market indices to break the 200dmas.

Just be happy that you are trading credit spreads and you can take advantage of these drops in the market and still make money, just stay above resistance and sell bear call spreads.

bear call spread, markets, resistance, S&P 500, support

Getting Defensive in an Offensive Market

In tough markets there are three types of investors; Bulls that remain in denial, those who sit in cash, and savvy investors who shift toward defensive stocks. Bulls are hard to find these days, sitting on the sidelines isn’t rocket science, so lets take a few minutes to talk about developing a good defense.

First things first, what is a defensive stock? These companies do not manufacture weapons or design body armor, they are stocks that provide a constant performance in bull and bear markets. A low P/E ratio, steady dividend, and low beta are the hallmarks of defensive opportunities.

A Quick Lesson on Beta
While stocks with low betas will, by definition, miss out on some upside when the markets rise, but they avoid the dips that hit most others. Beta is calculated by comparing percentage changes in a company compared to percentage changes in the market for a given period of time.

For example, a stock with a beta of 0.5 has experienced swings half as much as the market, on average. If the market climbs 10%, the stock only gained 5%, but it works coming down as well. When the market dropped 10%, shares only lost 5%. This is seen in non-cyclical stocks with steady performance.

Non-cyclical stocks often offer goods and services that are always in demand. If the economy is slowing down people are still eating dinner when they get hungry and, despite energy prices, probably haven’t switched to candle light just yet. As one can imagine food and utility companies weather economic storms better than most other industries.

Selecting Defensive Stocks
The logic makes sense, but selecting the individual investments is where most run into trouble, making stock screeners an invaluable tool. Below are a few companies in historically defensive industries, with low betas, low P/E ratios, and currently hold a Zacks Rank of #3 or better.

Four Defensive Stocks
AstraZeneca PLC (AZN) has a beta of .36 and a P/E just under 9x. The stock is up about 5% on the year compared to the markets, well we all know how that is going. AstraZeneca develops and sells pharmaceuticals and vaccines. Patients don’t stop taking medicine in tough times, in fact for prescriptions like Nexium, which treats gastrointestinal conditions, sales may even spike.

Elizabeth Arden, Inc. (RDEN) is a cosmetics company that is about flat for the year. Make up is another defensive industry as The stock has a P/E under 11x and a beta of .61. Earnings estimates have been climbing and the consensus is now a 50% year-over-year increase for the current quarter.

Universal Corp (UVV) is trading at under 10 times earnings, and has a beta of .6. The international tobacco processing company has the luxury of very consistent demand in all economic conditions.

Overhill Farms, Inc. (OFI) has more than doubled in value this year. The frozen food supplier for prominent chain restaurants, like Panda Express and Carl’s Jr, in addition to retail and food services. Overhill’s beta is just under 0.5 and the P/E is 7.2x.

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Bill Wilton is an Editor at Zacks Investment Research for more information please visit www.zacks.com.

bear markets, defensive stocks, stock screeners

Earnings Preview for Sep 22 – 26

The big bailout will be a key focus of the markets.

Congress is expected to meet over the weekend to discuss legislation proposed by Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson. The details of the proposal, and any additional measures designed to help homeowners struggling with mortgage payments, could impact market direction.
The temporary ban on short selling could also affect trading early in the week. Part of Friday’s rally was the result of quadruple witching. Traders are being forced to close short positions rather than roll them over into new contracts.

On the earnings front, we have confirmed reports from 33 companies. Included in this group are S&P 500 members Autozone (AZO), Bed Bath & Beyond (BBBY), Discover Financial (DFS), Jabil Circuit (JBL), KB Home (KBH), Lennar (LEN), McCormick (MKC), Nike (NKE) and Paychex (PAYX). I expect only limited reaction to the homebuilders (KBH and LEN), because of the proposal under discussion.

The economic calendar includes two reports on August home sales, but is otherwise light.

• Wednesday: August existing home sales, weekly crude inventories

• Thursday: August durable goods orders, August new home sales, weekly initial jobless claims

• Friday: Final September University of Michigan consumer confidence survey, final Q2 GDP
Bernanke has three scheduled appearances before Congress.

On Tuesday, he will discuss the financial markets before the Senate banking committee. The chairman will provide his economic outlook to the Joint Economic Committee on Wednesday. Finally, on Thursday, Bernanke will review the recent proposals and actions before the House financial services committee.

Companies That Could Issue Positive Earnings Surprises
AutoZone Inc. (AZO) has topped market expectations twice in the last three quarters. Ahead of the company’s fiscal fourth-quarter report, brokerage analysts have raised their forecasts. The consensus earnings estimate now calls for earnings of $3.90 per share, a penny higher than a week ago. The most accurate estimate is even more bullish at $3.92 per share. Autozone is scheduled to report on Monday, Sep 22, before the start of trading.

Companies That Could Issue Negative Earnings Surprises
H.B. Fuller (FUL) recently cut its profit forecast, citing high costs of raw materials. The chemical manufacturing company now expects third-quarter earnings of 35 cents per share, excluding a tax benefit. Brokerage analysts responded by lowering their forecasts to 35 cents per share from 48 cents per share. FUL has missed consensus earnings estimates in two consecutive quarters. H.B. Fuller will report on Tuesday, Sep 23, after the close of trading.

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Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit www.zacks.com.

bailout, earnings, markets, market direction

Credit Spread simple adjustment

Back in May I had a question from Matt…

Hi,
I have really enjoyed reading the insights in your blog. I have just started trading credit spreads, and really like the fact that the underlying can move against you a little and you still make money.

I have stumbled upon a “good” problem. In the case above - I am bullish AAPL. I also have a Bull Put Spread on AAPL. However it has moved so that I have only got a small amount left in the spread. I still see AAPL moving up.

What are the best adjustments to capture any further move? I have been considering:
a) buying back the initial spread for a small debit and selling a further credit spread.
b) buying a very OTM put as protection and selling another credit spread.
c) keeping the same spread.

Any hints/advice would be greatly appreciated.

Matt

I responded by stating…

Matt,

You can do any of those. It is more of what you are comfortable with. For my trading I have found it useful when doing adjustments to look at each trade as a new trade.

For example, I examine the stock and trade as a whole new trade. Is it still sound and logical and fit my trading parameters to make a new trade? Acting as if I did not have the old trade at all. IF I find that it is good to place a trade at a higher price point then I usually close the old trade and place a new spread. Taking the profits from the old and making an entirely new trade. I may on occasion just roll up my sold option leaving the bought option at the same strike lowering my commissions but taking on more capital risk. I only do this if I am fairly certain the stock will not break the new support/resistance level, such as in a large gain or drop in one day.

SO I guess what I am telling you is that if there is only a little left to go on the credit spread you are holding, why hold the risk of losing the capital for a mere few bucks more? Just close the trade and be happy with your profit. If the stock still warrants a credit spread make a new trade. For me it may be more in commissions but my peace of mind is worth it.

Dan

Well Mark Wolfinger seems to agree with me in a similar question he received from Dave (I have copied a few key points from his post here)…

There is no ‘best’ way to trade.

There is no ‘best’ way to handle iron condor positions.

I bid to close one side of an iron condor position at my ‘low’ price, regardless of circumstances.  That suits my comfort zone.  I don’t want to take the risk involved with trying to earn the last few nickels. I cover the cheap spread, then consider my alternatives.

I have more than one choice.  I could manage the remaining half of the iron condor as an individual call or put spread.  That means I would close the position if and when it violates my comfort zone.

To read more from Mark about risk management and locking in profits using a simple adjustment go to Options for Rookies-Coach Wolfinger

credit spreads, iron condors, risk adjustment

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