Monday, August 13, 2007

The Market Wakes Up New Everyday

The chart above is of the S&P 500(click to enlarge). In the top pane the red dashed lines mark extension levels based on the opening range from the beginning of the calender year. The market came down and tested the top of this opening range and then bounced up 2 levels to the 1500.43 level. The battle of these levels continues as the futures are currently up 12 and it looks like there is going to be a new challenge to get to the 1476.76 level.

The bottom pane of the chart shows a basket of large-cap stocks that have businesses exposed to the global economy. This group outperformed significantly from the lows in March. These large-cap companies still might hold the key to the market's success. While the S&P 500 has be bouncing off of its 200day moving average and trying to regain its 50day moving average, this multinational basket has held above its 50day moving average. Below is a spreadsheet with the components of this custom basket, along with the values of each stocks moving averages.

With the wild market swings lately, it has not been easy to just buy a stock and sit back. The comfort of everything acting tamely and going up in an orderly fashion is over for now. It is pays to be very selective in picking stocks, and it also helps to use options as insurance.

Below is a chart of Altria Group Inc. This chart shows the 200day moving average as a blue dashed line. The channel is based of a linear regression with 2 standard deviations making up the upper and lower channels.(click to enlarge)

A couple months ago buying this stock at this level involved a lot less stress. Today it is another story. There are a few potential ways to limit this stress. If purchasing the stock at this level, we could also purchase a put option at the 65 strike to act as insurance in case of further market weakness.

Another idea that would not tie up as much capital would be to buy just the 65 call option, this would limit our potential loss to just what we paid for the option. If the stock broke down through its 200day, we would just lose what we paid for the call option.

A trickier strategy is to buy both the call and put option. This would be basically betting that Altria would not stay were it is,but would either rally or breakdown. If we bought both the September 65 call and the September 65 put options, it would cost around 5.90 for both positions. This is roughly 9% of the stocks price. The stock would have to move to 70.90 or break to 59.10 for this position to break even. This strategy is betting that things will move and the price will not stay in the area it is in. This is stock is used as example, it is best to scan for stocks for this strategy were the percentage move to break even is less. This is harder to do when market volatility is moving higher, like the current condition. There are also some other factors, like delta, to use in the calculation. These will be covered in a later post.

Another strategy could be to buy Altria or another stock and then short or buy a put on the index it is a member of. Below is a list of the Dow 30. Buying some of the stronger stocks in this index and then buying puts on the Dow Diamonds (DIA), could take some of the risk and stress out of a volatile market.

Looking at suppliers to the aerospace sector lead to finding some companies that deal in carbon fiber composites. Below are a few, and they seem to be performing stronger that the overall market.


Cytec Industries

3M Company

Hexcel Corp.

Another stock to watch for a buy on any weakness

Chart Industries Inc.


ZOLT - Zoltek Companies, Inc., through its wholly owned subsidiaries, engages in the development, manufacture, and marketing of carbon fibers for various applications. Its carbon fibers are used as the primary building material in commercial products. The company also manufactures and sells filament winding and pultrusion equipment used in the production of composite parts. In addition, the company produces oxidized acrylic fiber for flame and heat resistant applications; and technical fibers, which are used to manufacture aircraft brake pads and other friction applications. It has operations primarily in the United States and Europe and sells its carbon fibers worldwide. The company was founded in 1975 and is headquartered St. Louis, Missouri.

CYT - Cytec Industries, Inc., a specialty chemicals and materials company, engages in the development, manufacture, and sale of chemical products. It operates in four segments: Cytec Performance Chemicals, Cytec Surface Specialties, Cytec Engineered Materials, and Building Block Chemicals. The Cytec Performance Chemicals segment offers various products, including mining chemicals, phosphines, polymer additives, specialty additives, specialty urethanes, and adhesives. The Cytec Surface Specialties segment's product line includes radiation-cured resins, powder coating resins, and liquid coating resins, including water-borne resins, amino resins, and solvent based resins. The Cytec Engineered Materials segment offers composites and structural film adhesives. The Building Block Chemicals segment offers acrylonitrile, hydrocyanic acid, sulfuric acid, and melamine. The company serves various markets, including aerospace, adhesives, automotive and industrial coatings, chemical intermediates, inks, mining, and plastics. It offers its services in North America, Europe, Asia-Pacific, and Latin America. The company was founded in 1993 and is headquartered in West Paterson, New Jersey.

MMM - 3M Company operates as a diversified technology company. It operates in six segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security, and Protection Services; and Electro and Communications. Industrial and Transportation segment offers tapes, coated and nonwoven abrasives, adhesives, specialty materials, supply chain execution software solutions, closures for disposable diapers, and components and products that are used in the manufacture, repair, and maintenance of automotive, marine, aircraft, and specialty vehicles. Health Care segment provides medical and surgical supplies, skin health and infection prevention products, drug delivery systems, dental and orthodontic products, health information systems, and microbiology products. Display and Graphics segment offers optical film and lens solutions for electronic displays; touch screens and touch monitors; computer screen filters; reflective sheeting for transportation safety; and commercial graphics systems. Consumer and Office segment provides office supply products; stationery products; construction and home improvement products; home care products; protective material products, including consumer health care products, such as bandages; and visual systems products. Safety, Security, and Protection segment offers personal protection products, safety and security products, energy control products, cleaning and protection products for commercial establishments, and roofing granules for asphalt shingles. Electro and Communications segment offers electronic and interconnect solutions, micro interconnect systems, high-performance fluids, high-temperature and display tapes, telecommunications products, and electrical products. 3M, formerly known as Minnesota Mining and Manufacturing Company, was founded in 1902. The company is based in St. Paul, Minnesota.

HXL - Hexcel Corporation, together with its subsidiaries, engages in the development, manufacture, and marketing of advanced structural materials in the United States, Europe, and internationally. It operates in three segments: Composites, Reinforcements, and Structures. The Composites segment offers carbon fibers; prepregs; structural adhesives; honeycomb, parts, and composite panels; fiber reinforced thermoplastics; molding compounds; and polyurethane systems, gel coats, and laminates. The Reinforcements segment manufactures and markets industrial fabrics and other specialty reinforcement products. The Structures segment produces composite structures, such as aerodynamic fairings, wing panels, and other aircraft components. Its products are applied in commercial and military aircraft, space launch vehicles and satellites, body armor, wind turbine blades, printed wiring boards, high-speed trains and ferries, cars and trucks, window blinds, bikes, skis, and various other recreational equipments. Hexcel Corporation serves commercial aerospace, industrial, space and defense, and electronics industries. The company was founded in 1946 and is based in Stamford, Connecticut.

GTLS - Chart Industries, Inc. manufactures and supplies engineered equipment used in the production, storage, and end-use of hydrocarbon and industrial gases. It operates in three segments: Energy & Chemicals (E&C), Distribution and Storage (D&S), and BioMedical. The E&C segment offers vacuum-insulated containment vessels, aluminum and air cooled heat exchangers, cold boxes, and other cryogenic components, which are used in the liquid gas supply chain for the purification, liquefaction, distribution, storage, and end-use of hydrocarbon and industrial gases. The D&S segment supplies cryogenic equipment to the bulk and packaged industrial gas markets. This segment's products include cryogenic bulk storage systems; cryogenic packaged gas systems; cryogenic components, including VIP, engineered bulk gas installations, and liquid nitrogen end-use equipment; liquid natural gas and liquid/compressed natural gas refueling systems for fleets operated by metropolitan transportation authorities, refuse haulers, and heavy-duty truck fleets; and beverage liquid carbon dioxide systems that primarily consist of bulk liquid carbon dioxide containers used for beverage carbonation in restaurants, convenience stores, and cinemas, as well as bulk fountain syrup containers. This segment also offers installation, service, and maintenance for cryogenic products comprising storage tanks, liquid cylinders, cryogenic trailers, cryogenic pumps, and VIP. The BioMedical segment manufactures medical respiratory products, including liquid oxygen systems and ambulatory oxygen systems; biological storage systems comprising vacuum-insulated containment vessels for the storage of biological materials; and MRI components that are used to transfer power and/or cryogenic fluids. It has operations in the United States, Australia, the People's Republic of China, the Czech Republic, Germany, and the United Kingdom. The company is headquartered in Garfield Heights, Ohio.

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