The market staged a furious rally on top of the one it had going in the final hour of trading that lifted the Dow to its second-largest point gain ever. The Dow rose 890, or 11%, to finish at 9,065.12. The biggest point gain for the Dow was 936 back on October 13. In the final hour alone the Dow doubled its 450 point gain it had going for the day.

The market surge came on no real newsworthy event although the bulls are expecting an interest rate cut on Wednesday by the Federal Reserve. The bounce could be attributed to testing a bottom but the Dow hasn’t tested its October 10 low of 7,773 (yet). For now its looks as though 8,000 is providing support and the close above 9,000 was bullish. Very bullish.

The rally was also surprising given the weak consumer confidence report that came out earlier in the day. The index fell to a record low of 38 for the month, well below 51 which was what Wall Street had expected.

Of course, with today’s rally we saw some huge moves in quite a few of the Dow stocks. Alcoa (AA, $10.78, up $1.74), Exxon Mobil (XOM, $74.86, up $8.77) and Chevron (CVX, $70.02, up $8.31) all had oustanding days rising 13%-20%. Verizon Communications (VZ, $31.65, up $4.04) added another 15% on top of Monday’s 10% gain. The oil stocks zoomed higher despite another drop in the price of crude which is now at $62/ barrel.

If we can get through this week without a test of the October lows then we could be setting up for a decent rally. The bulls seem to be charging ahead as if the market has made a bottom. One thing I can say about the bears. They might not be spitting in the wind but they may tug on Superman’s cape (meaning the bulls) one more time before we are officially out of October.

Rick Rouse
Rick@OptionsMentoring.com

Some of you may have scaled into the copper plays on Friday at lower entry prices from Thursday’s close thanks to the nearly 200 point rally in the Dow. I profiled some October and January call options and here is where they closed:

BHP Billiton (BHP, $69.54, down $1.35)
October 70 calls (BHPJN, $3.80, down $0.70)
January 80 calls (BHPAP, $3.40, down $0.50)

Freeport-McMoRan (FCX, $90.60, down $3.06)
October 100 calls (FCXJT, $4.10, down $1.40)

Southern Copper (PCU, $25.37, down $0.93)
October 25 calls (PCUJE, $2.20, down $0.65)
October 30 calls (PCUJF, $0.60, down $0.20)
January 30 calls (PCUAF, $1.45, down $0.15)

The October calls have 50+ days before they expire so we should be in good shape. The January calls do not expire until January 16, 2009.

Rick Rouse
Rick@OptionsMentoring.com

Earnings will hit Wall Street starting this week and Dow component Alcoa (AA, $32.78, up $0.67) will officially start things off Tuesday after the market closes. The stock has taken a hit over the past month, dropping roughly 20%, from $40 to its current levels. No surprise there as the current bear market (it’s official) has taken a lot of stocks lower. A bear market occurs when the market has sold-off 20% from a high. Last October the Dow hit a high of 14,279. It closed at 11,288 Thursday.

Alcoa hasn’t participated in the commodity rally although the price of aluminum has gone up. The problem for Alcoa is that energy accounts for a huge percentage of the cost of making aluminum.

Wall Street is expecting earnings of $0.69 a share, down from $0.73 a share versus last quarter. However, analysts have been lowering those estimates as its likely the company will miss earnings due to a slowing economy and rising raw material prices, so they say. Maybe the recent drop has already been factored into the stock price but it could be tough for Alcoa to make a sharp rebound in these current market conditions.

Alcoa should do well over the next 6-12 months even if Wall Street doesn’t like the numbers. The company predicted strong growth in global demand for this year of nearly 9%, well above the average 6% growth rate for the previous 10-year period. Of course, China will lead the way but the demand for aluminum has actually been declining in the U.S. and Europe.

As far as an option trade it’s hard to tell if the glass is half full or half empty with Alcoa. Trading options around an earnings announcment is always risky but this one takes on a higher degree of risk because of the circumstances. In situations like these its best to stand on the sidelines and wait for better trades instead of forcing the issue.

Rick Rouse
Rick@OptionsMentoring.com