‘Penny Better’ Dancing Again On Wall Street

GE |
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‘s earnings came in a "penny better" and retail sales
were not a complete disaster, so the market is following through to the upside.
This is what we needed to see, a little bit of bad news overcome by market
strength. Even though the retail sales figures were only a bit worse than
consensus expectations (-1.2% vs. -1.0%, +0.1% vs. +0.2% ex-auto), the market
reacted well, demonstrating a possible change in psychology. One week ago those
numbers would have generated a selloff, but because most retailers have already
taken their (well-deserved) horse whipping, this news is old news, and the
market wants to rally.

Currently, DJI futures are 125.0 higher, S&P futures are 13.10 higher, and
the Nasdaq 100 futures are 18.00 better.  In Europe, the FTSE 100 is 120.40
points, or 3.19%, higher, the DAX is 127.05 points, or 4.65%, higher, the CAC 40
is 117.26 points, or 4.25%, higher. Even sad-sack Asia rallied last night, with
the Nikkei gaining 89.99 points, or 1.07%, and the Hang Seng picking up 107.04
points, or 1.21%.

Interest rate futures are only a tad lower at the
moment, and the dollar is only a tad higher — this makes me leery of the 09:00
CDT University of Michigan consumer sentiment number. Consensus expectations
call for a reading of 85.2. In order to become a true believer, I would like to
see a bad number followed by a pullback and a rally. Then I will believe. What
we don’t need to see is a raging rally into the number only to have the rug
pulled out.


We are probably going to be stopped out of a few positions today.
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penetrated our $58.25 stop-loss level intraday, but did not
take it out on a closing basis. Right now IBM looks to be trading $60.60 or so,
so we will likely be stopped out today. One has to use a fair amount of
discretion with "close only" stops and sometimes they work against you
and sometimes for you. If the market had opened sharply lower today, the "close
only" stop would have worked for us. Since we are opening sharply higher,
it appears to be working against us. If it becomes obvious that the stop will be
triggered, there is no reason to wait around until the close and give up even
more money. For example, if after the Michigan sentiment number the market
looked strong and the stock (BAC, IBM, MMM, or whatever) was sitting well above
the stop-out level, there is nothing wrong with beginning bail-out processes

Remember also that today is the beginning of a 3.5-day holiday for most of the
futures exchanges, closing at noon today and all day Monday (with the exception
of the stock exchanges, naturally), and the markets might get thin after noon


Yesterday the volatility indices put in some outstanding reversals,
indicating that a short-term bottom in the market may be likely. The VIX
temporarily took out the 50 level before reversing to close at 46.29, a loss of
3.19. The VXN actually rose a hair on the day, gaining .54 to 62.82, but also
reversed off its high. The QQV also put in a new high, and then reversed to
close at 53.03, a loss of 1.21.

Folks, if this IS an intermediate low, volatility has a long way to fall. Lace
up your butterfly, condor, and ratio spread shoes.

Update: (10/10/02)

IBM — As I mentioned above, our stop of $58.25 was hit on an intraday
basis, but not on a closing basis, so we held our spreads. We will probably be
stopped out today.

New Recommendations


Working Orders (Old Recommendations)

BAC — We are long the January 50/ 60 put spread at $2.50 (75%). We
sold half of the spread at $5.00 today. Use a $58.50 close only stop on the
balance of the position.

CCU — We are long the January 40 calls at $2.00 (50%). This stock, after
exhibiting good relative strength early in the selloff, has weakened. Use a
$28.80 close only stop on the entire position.

IBM — We are long the January 50/60 put spread at $2.00 (25%). We took partial
profits on half at $4.00, so we are playing with house money here. Sell the
balance at $6.00 and use a $58.25 close only stop on the remaining position.

MMM — We are long the October 90/100/110 put butterfly at $1.45 (25%). I am
going to use a time/price stop on this one. If MMM closes at or below 110 on
Friday, hold. If not, liquidate, and we’ll fight this battle again later.

Recap of open trades


Reverse Collars

CIEN — Long the January 2.5/5 reverse collar at
$.40 (25%).


HAL — Long the January 15 buy-write at $12.05 (100%).

Proxy buy-writes

DYN — Long the January 15 calls at $3.20 — left over from proxy buy-write
(50%). Left for dead.

Complex Strategies


Directional Positions

BAC — Long the January 50/60 put spread
at an average price of $2.50 (37.5%). Sold half at $5.00 on 10/09/02.

IBM — Long the January 50/60 put spread at $2.00 (25%). Sold
half at $4.00 on 10 /04/02.


Call Positions

CCU — Long the January 40 calls at $2.00 (50%).

Call Spread Positions


Put Positions


Spread Positions

MMM — Long the October 90/100/110 put butterfly at $1.45 (25%).


BAC — $58.50, close only.

IBM — $58.25, close only.

MMM butterfly — MMM < $110 on Friday 10
/11, hold, if not, exit.

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