Trade of the Day: Xerox (XRX)

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The market’s action lately has been hard for many to stomach, as the major indices dropped down to bottom of their trading ranges. Stocks bounced back up a bit mid last week but ultimately ended lower on Thursday and continued their downward slide on Monday.

As bad as the hits were, no major technical damage was done. Judging by the chart of the S&P 500, it’s still locked in its ongoing trading range. I believe it will stay within that range this week, with support for the S&P 500 sitting at the 2,050 level.

Still, the severity of this week’s drop is a little bit concerning, and my indicators are bearish to neutral, a slight downgrade from last week’s neutral readings.

Along with my weakening indicators, we are facing warning signs for the market in the form of three exterior factors. The first is that China, via the Shanghai Composite Index, has officially moved into bear market territory after dropping more than 20% from its recent highs. The second, of course, is the Greek uncertainty. Coupled with the third factor, which is the Puerto Rican debt situation, it underscores that the worldwide sovereign debt picture is in trouble.

And, even on a more local level, debt remains a major issue. One factor to consider is that during the Great Depression, about 4,000 U.S. municipalities went bankrupt. The sovereign debt concerns are a possible warning sign that we might be setting up for a similar situation in the future, especially as we witness several states contending with financial trouble, with Illinois topping the list. The truth is that we don’t how bad the issues are at the state and local levels in the United States.

I also thought the unemployment figures released last week were very disappointing. Even though the unemployment rate supposedly dropped, I consider it to be a phony number. More telling is that we saw the labor force participation rate drop to 62.6%, its lowest level since 1977. While it’s true that some of the drop can be attributed to baby boomers entering retirement, I believe they are having a smaller impact on that figure than some people are claiming.

So, my feeling is that the employment figures were negative. We have an expanding population, yet our economy just cannot add much more than 200,000 new jobs every month, with many of those jobs being lower-paying and/or part-time positions.

There’s definitely a dark cloud hanging over this market, and my best suggestion is to buy puts on any rally and keep a good measure of insurance in your portfolio. I’m recommending one such position today.

Buy to open the Xerox Corp (XRX) Aug 11 Puts (XRX150821P00011000) at $0.70 or lower. After entry, take profits if the stock price hits $9.80 or the option price hits $1.30. Exit if the stock price closes above $11.00.

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