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Weekly Newsletter, Sunday, 01/30/2005

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays
  6. Current Watch List

Leaps Trader Commentary

Four Weeks of Selling

2005 started of with a bang. Unfortunately the bang was our Q4 bull rally being shot in the head and turned into hamburger. After three months of positive gains from the October lows January 2005 has been a serious disappointment. The expected near record fund flows were stopped at the spigot and we are leaving January with outflows for the month. Since 1990 the average January inflows have been over $20 billion with recent years over $40 billion. To say we went from feast to famine with a switch to outflows would be an understatement.

We beefed up the portfolio the first week of January in anticipation of that cash and the liquidity wave it would produce. When the cash did not appear the market entered into four weeks of selling as funds scrambled to cover the liquidity crisis. Having the Iraq elections, inauguration, Fed meeting and several high profile stock disasters has completely soured investor sentiment for 2005. It is entirely possible we could see the market turn around after next weeks events have passed but I am beginning to doubt it.

We had three stops hit this week and I am dropping Marathon Oil after it failed to participate in last weeks rally. This brings us back down to our minimum play level while we wait out the coming week. The market is still very over sold but could easily become more oversold if Dow 10400 breaks convincingly. We appear to be in a holding pattern at current support levels but I hesitate to initiate any new longs.

On years where January is down substantially it is common to see the trend continue but with numerous head fakes to the upside as bargain hunters try to buy each successive dip. Instead of trying to pick a direction this week and adding new plays accordingly I believe it is time to stand aside and let the market confirm its next direction.

The LEAPS Trader strategy is to reduce risk as much as possible while in positions and in uncertain times refrain from entering new positions. This market is a crapshoot. Good stocks are being slaughtered on any negative news and buyers are not rushing to pick up the bargains. EBAY last week is a perfect example. EBAY has been bullet proof for over a year and the public crucified them for allocating more money for expansion. The -$20 dip to $85 was not bought and we were stopped at $80 again this week. No buyers appeared despite the potential bargain. On the flip side our DGX play rocketed +$7 higher when they announced a +21% increase in earnings and raised guidance for the year.

Until the market outlook clears I would rather keep our exposure to a minimum. Once a direction appears we will be more aggressive but for this week cash is a position too. Four weeks of selling has produced a lot of red ink but I don't think we are alone.
 


Changes in Portfolio

New Plays
None

 

 

Dropped Plays
HET$62.24Harrah's Entertainment
EBAY$81.10eBay, Inc
XMSR$31.80XM Satellite
MRO$38.36Marathon Oil

New Watch List Plays Triggered
None

 

 

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

New Plays

None

Play Updates

Existing Plays

Exisiting Plays

DGX - Quest Diagnostic $94.55 (Stop loss $89.00)

Quest announced a +21% increase in earnings on Thursday and soared from $89.50 to just over $96. It held most of its gains and was moving higher at the close on Friday.

DGX has support at the 100-day average at $90 and even stronger support at the 200-day average at $87.

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 @ $6.40

Insurance put
Feb-$85 Put DGX-NQ @ 50 cents.

Entry $91.00 (01/21)


 

QCOM - Qualcomm $36.25 ** No Stop Loss **

QCOM has made no effort to bounce from the post earnings depression but we are well protected. There is no stop loss on this position and we will be profitable regardless of the eventual direction.

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 failed at the 200-day average at $37.80 but still has plenty of support at $35.

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 @ $3.20

Insurance put
April $40.00 Put AAO-PH @ $3.00

Stop Loss on Put QCOM at $39.00
No stop on LEAP

Entry $38.00 (01/20)


 

HET $62.24 Harrah's Entertainment **Stopped at $62.00**

The winners over the last quarter are the ones hardest hit with the selling. Profit taking pushed HET to a two month low and stopped us out at $62.00 on Wednesday Jan-26th. The drop was not severe enough to cause much of an increase in the insurance put but the loss on the position was still less than $1.00.

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.

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 @ $6.20 exit $5.25
2007 $70 LEAP Call VKH-AN @ $7.00 exit $6.20

Insurance Put
Feb-2005 $60 Put HET-NL @ $0.85 exit $1.10

Entry (01/10) $64.00


 

ELN - Elan Pharma $25.91 **Stop loss $23.00**

ELN is still holding above its support at $25 and the 200-day average is $24.00. If we are stopped the insurance put should protect us.

Elan is a neuroscience-based biotechnology company that is focused on discovering, developing, manufacturing, selling and marketing advanced therapies in neurodegenerative diseases, autoimmune diseases and severe pain.

In neurology, Elan is focused on building upon its breakthrough research and extensive experience in the area of neuropathology-based disorders. In addition to Alzheimer's disease, Elan is also studying other neurodegenerative diseases, such as Parkinson's disease.

On December 28, 2004, the U.S. Food and Drug Administration approved Prialt for the management of severe chronic pain.

On November 23, 2004, the U.S. Food and Drug Administration approved TYSABRI, formerly referred to as Antegren, as treatment for relapsing forms of multiple sclerosis (MS) to reduce the frequency of clinical relapses.

2006 $30 LEAP Call WTB-AF @ $5.30

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

Stop Loss ELN $23.00

With the addition of the put I lowered the stop on the
LEAP Call to ELN @ $23.00. This is just under the 200
day average at 24.00.

Entry $28.50 (01/11)


 

IBM - IBM $92.97 ** No Stop **

IBM is holding at support at $92 and just over the 100-day average at $91.50. Friday saw a nice bounce despite the negative market.

If the market did decide to reverse IBM could find buyers as a safe big cap with increasing earnings. I think we are safe from any material loss and have plenty of upside potential if the market turns around.

IBM is moving strongly into even more areas of system and software services and maintains a huge backlog of orders.

IBM is the world's largest information technology company, with 80 years of leadership in helping businesses innovate. IBM Software offers a wide range of middleware and operating systems for all types of computing platforms, allowing customers to take full advantage of the on demand era

2006 $100 LEAP Calls WIB-AT @ $5.00

Insurance put
April $90 Put IBM-PR @ $1.40

Entry $94.00 (01/13)


 

IWM - $121.61 Russell Index Ishares ** NO STOP LOSS **

The Russell Ishares are holding the high ground relative to the rest of the market. The IWM dipped back to test support at $120 back on the 12th, again on the 24th and continues to hold over $121.50. The 100-day average is at $120 and this should continue to be strong support.

If the market does not rebound by next weekend I am dropping this position. We will be past the event risk and the majority of earnings. If the bull does not return we will exit.

The Feb puts are dropping in price as time decays. I would consider adding the $120 today at $1.15 but would rather see what next week brings. Instead of a stop loss let's institute a put stop. If the IWM trades at $120.50 buy the Feb-$120 put as insurance. This way we don't spend the money for the insurance unless we need it.

I am not using LEAPS for this play because I do not expect to keep it more than 4-6 weeks and LEAPS are very expensive. We will look to get into LEAPS on a dip later in the summer.

IWM MAY-$125 Call Option DIW-EU @ $5.20

Insurance put
Buy IWM FEB-$120 Put Option DIW-NP if the IWM trades at $120.50

NO STOP LOSS

Entry $123.05 (Jan-18th)


 

ADBE - Adobe Systems $55.41 ** No Stop **

ADBE is broke the 100-day average at $56 but remains in striking distance with a touch every day last week. Funds have to sell the winners to cover withdrawals and ADBE was definitely a winner. We are protected by the Feb-$55 put and with ADBE at $55 there is little additional risk.

Adobe is the king of the document and image business and continues to announce new products. The company announced earnings in December that rose +33% and beat estimates. Income for the year rose +69% on a +29% increase in revenue. Adobe affirmed guidance for 2005 and the stock has been beating the Nasdaq in percentage gains. In 2004 the stock rose +60%. Since they have already announced earnings we have very little event risk over the next month.

I recommended the February $55 put as insurance at 80 cents. That gave us six weeks for the Q1 earnings to cycle and for ADBE to pick a direction. If we are not profitable by Feb-18th expiration we will close and take our lumps.

Jan-06 $60 LEAP Call WAE-AL @ $7.50

Put Insurance
Feb-05 $55 Put AEQ-NK @ 80 cents

Entry $58.78 (01/09)


 

EBAY - eBay Inc $81.10 ** Stopped at $80.00 **

EBAY broke support at $85 and dropped -$5 to $80 and our stop. It is holding $80 but as yet no buyers have appeared. While would personally continue holding EBAY with the split only a few weeks away I cannot continue to re-institute the position without some confirmation of renewed buying interest.

Ebay did announce a 2:1 split as expected and this should help power the recovery. The split date is mid February for holders on Jan-31st.

Jan-06 $110 LEAP Call YRL-AB currently $5.70 exit $4.20

No insurance put

Stop loss $80.00

Entry 86.14 (01/23)


 

RIMM - Research in Motion $70.38 ** No Stop **

Finally a potential bottom! I am really glad we did not have a stop with the dip to $64 last Monday. Hopefully that was the final flush and the rebound will begin off the 200-day average at $69.00.

The $70 insurance put continues to protect us against a disaster and once buyers return we know from past experience RIMM can move quickly.

The court case will be back in court for a long time and RIMM is still selling and improving the Blackberry. They are escrowing a required portion of the sales to satisfy the judgment should the case eventually go against them.

RIMM is very profitable and should continue to be profitable. Hardly a week goes by that we don't see some new development in their product line.

This is not for those with a low risk profile.

Jan-06 $80 LEAP Call WLJ-AP @ $12.40

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

Entry $74.30 (01/09)


 

XMSR - XM Satellite $34.08 ** Stopped at $32.00 **

The rumors of a potential merger of XMSR and SIRI sent XMSR plunging and the 100-day average at $33 barely slowed it. This is another case of a news event producing fear and uncertainty among traders. XMSR has three times the subscribers as SIRI and SIRI's market cap is $2.5 billion more than XMSR. Why in the world would XMSR want to bail out SIRI?

Jan-06 $35 LEAP Call YLX-AG currently $6.20 exit $5.10

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

Stop loss $32

Entry $34.09 (01/09)


 

SYMC $22.68 Symantec - Veritas ** no stop **

SYMC rebounded on Wednesday prior to earnings and on news it was going to try and re-price the VRTS deal. VRTS beat the street as well. SYMC is holding above our $22.50 insurance and we have no risk from this level. We have a good position here with support at $22 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 was crushed in the anti-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 @ $6.30

Insurance Put
BUY APR-2005 $22.50 PUT SYQ-PX @ $1.15

Entry $25.37 (12/19)


 

XLE - S&P Energy SPDR $37.10 ** 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 this 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 @ $3.60
2007 $40 LEAP Call ORJ-AN @ $2.65
Drop insurance: March $34 Put XLE-OH @ $1.00

Entry $35.55 on 12/12


 

XLE Chart

MRO - $38.35 Marathon Oil ** dropped **

Marathon has simply not performed with the rest of the oil sector. The XLE is near a new high and COP our prior energy play did set a new high on Thursday. I am dropping the LEAP portion of this play but I would strongly suggest you retain the April $35 put insurance in anticipation of a spring drop in oil prices.

MRO is engaged in the worldwide exploration and production of crude oil and natural gas, the domestic refining, marketing, & transportation of petroleum products, and other energy related businesses. For the 9 months ended 9/30/04, revenues rose 18% to $35.6B.

Currently MRO is purchasing Ashland's 38% interest in the Marathon Ashland Petroleum refining venture. Marathon is trying to consolidate assets and acquire more. Banc of America just initiated coverage with a Buy.

Marathons chart shows strong support at the 200-day average, which has been tested three times over the past year.

2006 $40.00 LEAP Call WXM-AH @ $2.45 exit $3.00
2007 $40.00 LEAP Call VXM-AH @ $3.80 exit $4.50
Insurance Put: April $35 PUT MRO-PG @ $1.50 *** KEEP OPEN ***

Entry $36.67 (12/12)


 


Leaps Trader Watch List

Dropped Entries
DHI
$38.98
D R Horton Inc
Earnings forecast was inline with estimates

New Watch List Entries 
None
   

RYL - $62.69  Ryland Group ** Target $56.00 **

Buy 2006 $60 LEAP Call YRX-AL target $7.50

Insurance put
Buy Apr-$52.50 Put RYL-PX currently $0.85


 

TOL - Tol Brothers - $76.83 (Target $68.00)

Buy 2006 $75.50 LEAP Call YKW-AO

Insurance put
Buy March $65.00 Put TOL-OM

TOL Chart


 

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