LEAPS Trader Update Wednesday May 17th
Don't Worry Be Happy
I know that is easy to say and hard to do but we have to remember that once the pain of any market drop fades away it turns into a buying opportunity. It appears that opportunity is upon us. The Dow has dropped nearly -450 points since the FOMC meeting last week. The Nasdaq has given up -151.
More importantly to us is the drop in crude prices to $68.50 at Wednesday's close. That represents a -5.50 drop from last week's high. I wrote last weekend that I felt the majority of last weeks drop was related to funds exiting option positions as they normally do in the week before expiration. Monday and Tuesday were neutral days with Monday's drop in oil still more profit taking and a reaction to some EIA comments. Today's drop was the sell the news event on oil inventories. Crude fell -100,000 bbls, gasoline rose +1.3 mb and distillates fell -100,000 bbls. This was a completely neutral report. Unfortunately everyone who was holding expiring June crude positions and hoping for a bullish draw in crude was disappointed. They flushed their expiring contracts and returned us to the support low set back on May-8th. The broader equities market also underwent a flush of remaining option positions after the Consumer Price Index showed core inflation rose +0.3% again as is did in March. Fears of the Fed returned and those bulls waiting until the last minute to dump May equity options ran for the exits.
June crude oil futures terminate trading on Friday and that expiration event has produced some severe volatility in the recent past. That was an added factor in today's energy sector dump.
The Good News
The good news is that I think we are nearing a bottom in both the broader market and the energy sector. The $68 level is decent support on the June contract, $69 on the July contract, which is about to become the current month. Without some bad news this level should produce a rebound. We just have to get by Thursday and any sellers exiting the June positions.
I would take this opportunity to enter new positions on the following plays profiled in the LEAPS newsletter. Not all of our stocks have withstood the blast and several melted. I would not add to or enter a position not on this list until we see how they rebound with the sector.
BTU - $62.00 - Peabody Energy
CCJ - $39.40 - Cameco
CSX - $68.12 - C S X Corp
GG - $32.00 - GoldCorp
HAL - $73.76 - Halliburton
PTR - $112.35 - Petrochina
Wait for the market to begin a rebound before entering any new positions. The trend is still down but I am hoping Wednesday's free fall was a capitulation day. If that is true then we could see a final dip at Thursday's open followed by a rebound. IF THE REBOUND IS REAL it will be on heavy volume and be moving quickly. If we just get a few points of uptick and sideways motion I would be cautious and wait.
MDR - $66.05 - McDermott
J. Ray McDermott is a leading provider of engineering, procurement, construction, and installation services for offshore oil and gas field developments worldwide. McDermott International, Inc. is a leading worldwide energy services company. McDermott's subsidiaries provide engineering, construction, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy and power industries, including the U.S. Department of Energy.
I hate to recommend a Jan-2007 LEAP because the time is short but the Jan-2008 LEAPS are very expensive for some investors. I am going to list both for reference.
2007 $70 LEAP Call OYZ-AN currently $8.50
2008 $75 LEAP Call YAE-AO currently $12.50
TRN - $64.88 - Trinity Industries
Trinity Industries, Inc. is a diversified industrial company that provides a variety of products and services for the transportation, industrial, construction and energy sectors. The Company is engaged in the manufacturing and marketing of railcars, inland barges, concrete and aggregates, highway products, beams and girders used in highway construction, weld pipe fittings, tank containers and structural wind towers. In addition, it leases railcars to customers through a captive leasing business, Trinity Industries Leasing Company. Trinity has five business groups: Rail Group, Railcar Leasing and Management Services Group, Construction Products Group, Inland Barge Group and the Energy Equipment Group.
Buy October $70 Call TRN-JN currently $4.00