Market Bounces on Oil Inventory Report and Financials Earnings

Traders are getting good news from early Earnings Season reports. If I throw out the Regional Banks then several other sectors and groups are giving the market decent reports. INTC and ALTR in chips, ABT in Healthcare/Biotechs, WFC in Banks, and even CSX in Railroads are all set to open higher today off their earnings reports. So far, we are seeing less than catastrophic earnings.

In addition, both Industrial Production and Capacity Utilization came in better than expected. The only report that really stunk for traders was the CPI report on inflation, which came in higher (or worse) than expected. The CPI report dropped pre-market futures, which were bullish before the open. Now the market is set to open down. I will use that as an opportunity to sell the DIA, SPY, and IWM puts, and probably some of the Energy puts.

7:35 am MT: I sold the four Energy puts into the initial gap down this morning. I want to be out ahead of the Oil Inventory report due out in an hour. Here are the totals: RDC was a .15 cent profit, or 5% gain, APA was an .80 cent profit, or 10% gain, ECA was a .50 cent profit, or 9% gain, and DVN was a 1.30 profit, or 16% gain.

7:50 am MT: I picked up some smaller call positions on MDT and WYE. I want some exposure to the Biotech/Healthcare sector again, but not too much. I also got rid of the mechanical error AAPL calls. I got tired of doing a lot of work to build many good trades in the past week and watch the software error trade keep blowing them up. I may do a little trick here later in the day with AAPL, but I'll write about that later.

7:55 am MT: since I don't need them anymore, I sold the put hedges on the DIA, SPY, and IWM. I lost .55 cents on the DIA, I lost .75 cents on the SPY, and I lost .57 cents on the IWM.

8:35 am MT: Banks and Brokers are up sharply this morning as the less than catastrophic earnings reports from Financials continue to roll in. WFC, SCHW, NTRS, and MI all beat expectations. At the very least, the shorts are probably covering (buying) some of their positions in the Financial sector.

8:40 am MT: I just bought a bunch of puts on Energy. I picked up APA, HAL, ECA, DVN, NE, and XTO. I sold the ECA already for a quick .30 cent profit, or 7% gain in a few minutes. I will sell a couple more and then keep the rest. I also culled out WYE for a .20 cent loss, and I may lock some profits on MDT soon.

I'm inserting this comment in here because I realized that I hadn't written about this: The drop in Energy stocks coincided with the Oil Inventory report showing a larger than expected build. That dropped the price of Oil to the low 130's and gave the market a boost intra-day. So the short covering in Financials broadened out to Retail and the Discretionary Spending sectors and bumped the market up pretty good intra-day.

11:15 am MT: Here is a recap of the past several hours. I sold the MDT calls for a .55 cent profit, or 24% gain intra-day. An hour or so later I bought them back cheaper. I also sold the APA puts for a (total trade) of .90 cents, or 12% gain. I sold the DVN puts for a (total trade) of .45 cents, or 6% gain. I sold the XTO puts for a .30 cent profit or 5% gain. I bought back the APA puts and a little bit of the DVN puts, and I'm still holding the HAL and NE puts. I also nibbled on some COST calls.

I'm targeting 55.00 to sell the MDT calls, but only if it gives it to me today. If I hold it overnight then I'll look for 55.50 - 56.00 tomorrow. I'm playing the Energy puts for another 1-2 day drop, but if we make strong new lows later today I will sell most of the positions just so I don't have to hold them overnight. For COST I was targeting 72.00 for today, and I was going to get out and play it again tomorrow if it moves across 72.50 (for a run to 74.50). COST is turning at 71.95, which means every other trader was targeting 72.00 as well. So I have a sell order in place for if the stock comes back into the 72.90 area.

11:45 am MT: I sold the COST calls when the stock was around 71.80 or so. I made .40 cents, or a 12.5% gain intra-day. I might re-visit the calls tomorrow. If COST pulls back .40 - .50 cents in the next hour, I will nibble a call position before the close.

1:10 pm MT: I nibbled back a call position on COST. I also sold the DVN puts for an .18 cent profit just to cull back on the Energy puts to four positions. More than anything I just don't want too much exposure in any one area. I also nibbled some ADBE calls to get a little more exposure to Tech. Also interesting in Tech: QQQQ (but it's countertrend), IBM, SOHU, and NIHD. I want IBM, but it has earnings tomorrow, so it's not worth the risk.

4:00 pm MT: Market Wrap: Ok.....here's the quick, easy to read version of what happened today. Remember that I warned yesterday that INTC and ALTR would drive Chips and Tech? And I warned over the weekend that if the Financials started reporting less than catastrophic earnings that the Shorts would light themselves on fire and run screaming into the ocean? And I warned yesterday of the Energy stocks rolling over as I was playing puts on them? Well.....we got the bounce in Tech from INTC, ALTR, and the Chips. We got the less than catastrophic earnings in Financials which set off huge short covering. We got the build in Weekly Oil Inventories which dropped Oil and Energy stocks and gave the market another big boost - through short covering and bargain buying in Retail, Consumer Discretionary/Leisure, Transportation, and other "high oil price" sensitive areas. And the Dow finally closed (slightly) above its 10dma (which the SPX still hasn't been able to do). The Naz had the biggest move, and all three major indexes confirmed a bounce. The Naz is headed towards 2,300, with a shot at the 2,320 area.

After the close: EBAY looks like it missed its earnings as the company is down about 7% in after hours trading. XLNX also looks like it missed expectations slightly (as opposed to ALTR) and is down around 2% after hours. Neither report will be as significant as the slew of Financial companies set to report earnings tomorrow morning, including JPM. Many other sectors will be impacted tomorrow morning as well, with NUE (and RS) probably driving Steel, UTX (and ITW) driving Cyclicals, NOK driving Wireless, F and HOG driving some Transportation/Leisure, KO driving Food & Beverage, and CAL driving Airlines. I said to expect peak volatility in the markets this week on Tuesday - Thursday, and that's exactly how it's playing out so far. If the earnings come in less than catastrophic, for the most part, then expect the market to continue the bounce. I will look for any kind of early gap down or drop (in the Energy sector not the market) to sell the Energy puts, just like this morning. And I will continue to work the calls I have, and maybe add some more tomorrow for a possible 1-2 days more in the bounce. I'm still not a super fan of holding things overnight this week unless I see really clear signals. So far so good, but I've got a quick trigger finger on all the directional plays.

The Iron Condors will benefit greatly from a continuation of the bounce tomorrow. It's very possible that I will be unwinding all the Bull Puts on the IWM, DIA, and SPY Iron Condors tomorrow, especially on another nice move up. I will probably use any continuation of this bounce tomorrow or Friday to load up my Iron Condors on the same three ETF's for August.