The Market Gets Hammered – The Dow Down 158 points and the S&P 500 19 Points on Monday

November 27, 2006 at 10:14 pm  ·  Category: Market Commentary, Options, Sentiment Analysis

Great!  Right after I tell everybody to go long the S&P 500 by buying call options the market has it’s worst day in 6 months.  The Jan07 SPY 137 calls that I recommended lost a third of their value today – from $5.20 to $3.50.  That means that if you put, say, $5,000 into this trade you’re down $1,677.  Everybody loves me!  Happy Holidays!

What say I?  DON’T PANIC.  Jim Cramer always likes to say: “Nobody ever made a dime by panicking”.  In fact, this is the time to have trust in your reasoned convictions and double down.  That’s right, you heard me: buy more Jan07 SPY 137 calls at $3.50. 

You have to learn to love this kind of market volatility.  When the market has big moves like this people’s emotions get the best of them and you have the opportunity to sell or short overheated stocks and buy those that were the victim of panic selling.

With the S&P finishing today at 1382 our breakeven point on the calls at the new price is 1405.  We need a measly 23 points, a 1.66% increase, to be solidly in the money. 

Because the important thing is that THE MARKET SOLD OFF ILLOGICALLY

The reason the market sold off today is because Walmart estimated a same store sales decrease of 0.1% for November on Saturday.  Because Walmart is so big people viewed this as a sign that the consumer is indeed weak and that perhaps consumer spending will not be strong for the holiday season.  Here’s a quote from a retail analyst in today’s WSJ market wrap up (subscription required):

“There’s more to Wal-Mart’s…sales data…for November than the cumulative effects of bad publicity, scandals, cluttered stores, checkout errors, merchandising missteps, and the other noise that comes along with their uniquely big turf,” Richard Hastings, senior retail analyst at Smyth Bernard Sands, said in a note. “Since Wal-Mart is the only retailer big enough to be an economic barometer, we should view this data point broadly and deeply.”

But, it turns out, this is probably the wrong interpretation of the number.  Instead of being a signal of a weak consumer Walmart’s same store sales decline is more likely attributable to a tough compare from last November.  Buried in a front page article on this weekend’s retail sales (subscription required) in today’s Wall Street Journal was a gem from Goldman Sach’s Adrianne Shapira on Walmart:

She added that Wal-Mart’s performance in December will be more telling. To achieve sales growth next month, Wal-Mart won’t face as high a hurdle as it did in November because its year-earlier sales for the month weren’t up as steeply. The retailer’s same-store sales gained 4.7% in November 2005, compared with an increase of just 2.7% last December.

In other words, Walmart probably had such a bad looking November this year because they had such a good November last year.

So this is why I wouldn’t read too much into the Walmart number.  I think we’ll probably see later this week when November retail same store sales come out that the consumer is doing okay.  When this happens, the market will bounce and today’s fiasco will be long forgotten.  Take the opportunity to pick up some quality stocks for the year end rally. 

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