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Weekly Newsletter, Sunday, 01/23/2005

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Table of Contents

  1. General Commentary
  2. Changes in portfolio (new, drops, stops etc)
  3. Portfolio Listing (table)
  4. Full write up of each new play with charts
  5. Updates of existing plays with charts
  6. Watch list of potential future plays with charts

Leaps Trader Commentary

Commentary

The EBAY leap play did not have an insurance put because I did not expect any scenario where EBAY would lose -$20 on an earnings miss of a penny. That is a painful lesson that I will refer back to many times in the future.

The markets have completed their roll over and the outlook is very cloudy from my perspective. The Dow has broken below critical support at 10425 and the S&P broke support at 1175. There is no specific news impacting the markets but it appears the bulls have picked up a new form of chronic wasting disease called Mad Bull.

Analysts are at a loss to explain the complete lack of fund flows and a $40 billion shortfall in retirement contributions. Many reasons have been suggested for the shortfall but the only one that has not already been proved wrong are the Iraq elections. I seriously doubt Ma and Pa investor are putting their investment dollars under a mattress because the elections might go badly.

That leaves the obvious reasons that markets go down. Earnings are slowing, the economy is slowing and the Fed is making noises that they could escalate their rate hikes. This uncertainty casts a cloud on the market outlook and suggests we lighten the load once again to protect against a potential market event.

Fortunately the majority of our plays are protected by insurance so we don't have a high risk on anything left in the portfolio. I am going to tighten the stops on some and if stopped we will exit only the LONG LEAP Calls. We will keep the insurance puts.

Considering this has been the worst January for the markets since 1977 the portfolio is in pretty decent shape.


Changes in Portfolio

New Plays
EBAY
$86.12
eBay Inc
Dropped Plays
None
New Watch List Plays Triggered
DGX
$89.95
Quest Diagnostic
QCOM
$37.80
Qualcomm

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Portfolio Listing & Top Picks


New Plays

Most Recent Plays

Quest held last weeks bounce like it was defending the Alamo but the market weakness on Thr/Fri was just too much to bear. Quest dipped to our entry target of $91 on Friday. DGX came to rest on the 100-day average at $90 at Friday's close and has even stronger support at the 200 day average at $87. We have an $85 insurance put and I am placing the stop loss at $85, -$2 under the 200 day. This average has held on both dips over the last year. If stopped close only the LEAP Call. Keep the insurance put.

Quest Diagnostics Incorporated is the nation's leading provider of diagnostic testing, information and services, providing insights that enable healthcare professionals to make decisions that improve health. The company offers the broadest access to diagnostic testing services through its national network of laboratories and patient service centers, and provides interpretive consultation through its extensive medical and scientific staff.

Quest Diagnostics is also the leading provider of esoteric testing, including gene-based medical testing, and provides advanced information technology solutions to improve patient care. (Source DGX)

2006 $95 LEAP Call YFK-AS 50 cents.

Entry $91.00 (01/21)

DGX Chart

 

PLAY: QCOM - Qualcomm $37.80 ** No Stop Loss **

Our target on QCOM was $41 and we came very close on Wednesday but never touched during market hours. The gap down on Thursday provided everyone with a great entry point with one exception. The insurance put I chose for this play was the April $40 at $1.50. The gap open below $40 sent that put into orbit with a jump to $3.00. The good news is that it has retained its value and is still over that level. It was offset by the drop in the LEAP to $3.20 from the $4.40 we saw last Sunday.

In our current position with the Put in the money we are very well protected with a total cost of entry only slightly above the $5.90 we were looking at last Sunday. I think this is about as good as it gets with our April put and plenty of time to run. I am going to set a stop on the put at $40 to prevent a complete giveback if QCOM suddenly finds traction. Since our LEAP will also escalate we should not lose much if the put is stopped.

QCOM closed Friday at $37.80, which is exactly the 200 day average and it should be strong support.

Qualcomm is a leading technology provider for wireless communications and pioneered the CDMA standard used in many phones today.

There was a symbol error last week on the Leap.
This is the correct symbol.

2006 $42.50 LEAP Call WLU-AV $3.00

Stop Loss on Put QCOM at $40.00
No stop on LEAP

Entry $38.00 (01/20)

QCOM Chart

 

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Play Updates

Existing Plays

Harrah's has been on a roll since August and has recently set a new high at just over $67. We saw a pullback last week to $64.50 but it is still well above support at the 50 day average at $63.

HET operates hotel casinos in Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada and Atlantic City, New Jersey. The company also operates riverboat, dockside and Indian reservation casinos. Harrah's Entertainment, owns or manages 28 casinos in the United States, primarily under the Harrah's and Horseshoe brand names.
http://www.harrahs.com

Caesars Entertainment, (CZR) is an international gaming company which owns, operates or manages 27 casino properties in the United States, Australia, Uruguay, Canada, South Africa and at sea.

HET has agreed to pay $9.4 billion for Caesars and will be the largest casino company in the world when complete.

2006 $65 LEAP Call WBI-AM $7.00

Insurance Put
Feb-2005 $60 Put HET-NL $5.30

Insurance Put - added Jan-23rd
Feb $25 Put ELN-NE currently 90 cents.

Stop Loss ELN $23.00

With the addition of the put I lowered the stop on the LEAP Call to ELN $5.00

Insurance put
April $90 Put IBM-PR $7.50

Put Insurance
Feb-05 $55 Put AEQ-NK $12.40

Insurance put
Buy Feb-$70 Put RUP-NN currently $3.50.

Entry $74.30 (01/09)

RIMM Chart

 

PLAY: XMSR - XM Satellite $34.08 ** Stop $32.00 **

XMSR is holding its ground at $34 and resisting the selling. I am very happy with the way XMSR is performing. We had a great entry and we are holding at that entry. The 100 day average is $33.50.

As the radio wars progress it is SIRI that is announcing some new effort almost daily and spending itself into a hole. XMSR has three times the subscribers as SIRI and SIRI's market cap is $2.5 billion more than XMSR.

There are a lot of differing views on this battle but I am sticking on the biggest of the two. I believe SIRI is overbought and XMSR is oversold. As long as XMSR continues to put the subscribers in the seats
it will win in the end. XMSR is the only one with a satellite portable iPod like device. At $349 it offers the capability of all the channels plus a recording capability of five hours of streaming content when
you can't listen live.

Jan-06 $35 LEAP Call YLX-AG currently $6.20

Insurance Put
Buy Feb-$32.50 Put QSY-NZ currently $1.75

Stop loss $32

Entry $34.09 (01/09)

XMSR Chart

 

PLAY: SYMC $23.38 Symantec - Veritas ** no stop **

SYMC had rebounded to $25.25 by Wednesday but caved in on the weak markets on Thr/Fri to lose about a buck for the week. We have a good position here with support at $23 and an April $22.50 insurance put. Very little risk and plenty of potential.

I believe that the SYMC/VRTS merger is a match made in heaven and analysts will come to that view as more plans are announced. The companies have no overlapping products but all their products are perfect fits for the others. With one company having anti-virus, data security, backup, recovery and storage management it puts the other stand alone companies in a very difficult position. EMC and QLGC both fell in the storage sector and Mcafee got crushed in the ant-virus sector.

There is no stop on this position. With the 2007 LEAP Call any minor dips will not result in a material drop in the leap. The April $22.50 insurance put will protect us from any potential disaster. For me this is a buy and forget play.

2007 $25 LEAP Call OBL-AE $1.15

Entry $25.37 (12/19)

SYMC Chart

 

PLAY: XLE - S&P Energy SPDR $36.41 ** No Stop **

The XLE continues to outperform the market and is holding near the $37 resistance. We have very little risk here and strong rising support. I do expect oil prices to come down after the Iraq elections so snug up your stop next week to a decent level and we will take profits if oil drops.

I do not want to exit before the elections because anything is possible. There could be a disaster that impacts oil for a long time.

This is a long-term play and we could see some volatility but we have an insurance put to protect us.

The XLE SPDR is composed of 27 energy stocks and represents about 8% of the SPX. This is the 8% that helped push the SPX to the current levels with the rise in oil over the last year. In fact the XLE has far exceeded the SPX in performance over the past year.

I am not putting a stop loss on this play. I am suggesting an insurance put to offset against any material drop. Because I believe oil is in a long term up trend I do not want to get jerked out of this position. If we see that oil is not moving higher by March I will reevaluate the position.

2006 $35 LEAP Call WHA-AI $2.65
Drop insurance: March $34 Put XLE-OH $2.45
2007 $40.00 LEAP Call VXM-AH $1.50

Entry $36.67 (12/12)

MRO Chart

 


Leaps Trader Watch List

Normally a period of market instability would be the time to add positions to the leap portfolio. This is not the case for me today. I am concerned we could see additional weakness and a break below our current levels could easily send us plunging significantly lower.

Our last two watch list entries from last week were triggered on the market drop and about the only stocks I would risk adding would be home builders and only if they drop substantially from their lofty levels.

I am adding TOL, DHI and RYL as potential entries but I hope we are not triggered. That would mean the rest of the portfolio was severely trashed. However, if funds need to take profits to raise cash they have huge amounts of stored value in the builders. Maybe we will get lucky.

Dropped Entries  
 
None
 
New Watch List Entries 
RYL
$60.39
Ryland Group Inc
Target $55.00
TOL
$73.44
Toll Brothers Inc
Target $67.00
DHI
$38.80
D R Horton Inc
Target $37.00

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Current Watch list 

PLAY: RYL - $60.39 Ryland Group ** Target $55.00 **

Buy 2006 $60 LEAP Call YRX-AL currently $9.00, target $7.00

Insurance put
Buy Apr-$52.50 Put RYL-PX currently $1.50

RYL Chart

PLAY: TOL - Tol Brothers $73.44 (Target $67.00)

Buy 2006 $75.50 LEAP Call YKW-AO currently $9.80

Insurance put
Buy March $65.00 Put TOL-OM currently $1.55

TOL Chart

PLAY: DHI $38.80 Target $37.00

Buy 2006 $40.00 LEAP Call YRI-AH currently $5.60

Insurance put
Buy Feb $35.00 Put DHI-NG currently $0.55

DHI Chart

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