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Weekly Newsletter, Sunday, 02/06/2005

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Table of Contents

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

Leaps Trader Commentary

What a Difference a Week Makes

In only a week the market has turned our lemons into lemonade and it is a very refreshing drink after four weeks of selling. We have no drops this week and several of our current long positions are either at new highs or very close. Even the laggard Symantec has finally started to attract some buying interest.

Unfortunately after four weeks of selling our watch list was very sparse while we waited for the market to confirm a direction from last weeks support. The two watch list entries were homebuilders RYL and TOL and the combination of the "measured pace" language from the Fed and the tame but steady jobs numbers knocked interest rates to two month lows. This propelled homebuilders to new highs and left us in the dust just wishing we had an entry. Each week I hesitate to bite the bullet and go long at a new builder high and the next week I kick myself for missing out on another $5 gain. Still, patience is the key to profit and we will continue to practice that virtue.

For next week we are going to face some new resistance if the markets continue higher. The Dow could test the 2004 high at 10850 and the S&P at 1220. Given the gains for this week we could see a bit of profit taking before an actual breakout. We have some nice gains again in our current portfolio and I want to be cautious about loading up on new positions after a very strong rally. Option premiums for LEAP calls will be very high despite a multiyear low for the VIX at 10.90.

The best plan here is to find a stock that has been beaten up and limit our risk in hopes of it finding favor once again. Buying winners today has a slim chance of success. I considered EBAY again with a split in two weeks but there are still no buyers even at support at $75. It lost $1.34 on Friday despite the positive market. AMZN and GOOG were also weak with GOOG down -6. I considered a two-week put play on GOOG in advance of the massive 187 million share lockup release on Feb-16th but a two-three week play is not really a scenario we should be playing in this newsletter. I like it for a short-term play and mention it here for those who are interested.

I still like oil stocks but despite falling oil prices the oil stocks continue to move higher. I expect a dip in March and we will get long when that appears.

I found two stocks that fit my low risk profile this weekend and that will bring us back to eleven in the portfolio. Once the initial bounce is over fund managers will begin looking for those stocks missed in the first wave. Hopefully these will fill the bill. I would like to keep us in the 8-12 position range in anticipation of the April decline. If the current rally has legs past the 2004 resistance highs then we will watch our profits grow on the current plays and add to them selectively in anticipation of an end of quarter exit. Sell in May and go away my actually work this year but we will let the market make that decision for us.


Changes in Portfolio

New Plays
PCAR
$71.80Paccar Inc
ADSK $31.33 Autodesk Inc

Dropped Plays
None

 

 

New Watch List Plays Triggered
None  
   

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

PCAR - Paccar Inc $71.80 ** Stop loss $68.50 **

Paccar is the number two maker of heavy-duty trucks with two of their major brands being Peterbilt and Kenworth. Paccar produced a company record of 124,000 trucks in 2004 as healthy freight volume pushed demand. Earnings were announced on Feb-1st and revenue increased +44% and earnings +52%. The company said sales continue to be strong with an expected 15% jump in total truck sales in the U.S. in 2005 and a +5% jump in Europe. Market share in North America increased to +24% on heavy duty trucks and 9.4% on medium duty vehicles.

Paccar had risen from $52 last January to $81 at the close of 2004. Like all the other winners they were hit hard by profit taking and knocked back to $68.50 on Jan-28th. After two weeks of sideways consolidation they have started to move higher once again. This is a stable company with very strong earnings and growth and should be a target of fund managers once the techs move into overbought territory. $70 appears to be holding as support and hopefully a launching point.

With PCAR at $71.80 the 2006 $75 LEAP Calls are $6.30. The $70 LEAP Calls are only $8.80. They are already $1.80 in the money and I believe represent a better value. I am going to list them both and you pick your favorite. I am not putting an insurance put on this play given the already drastic drop and earnings are behind us. I would rather go with a tight stop.

2006 $70.00 LEAP Call YYQ-AN currently $8.80
2006 $75.00 LEAP Call YYQ-AO currently $6.30

Stop loss $68.00 This will be below the January dip.

No insurance put

Entry point $71.80 (02/07)


 

ADSK - Autodesk Inc $31.33 ** Stop loss $27.50 **

Autodesk is the worlds biggest software design maker and the stock has made quite a few investors a lot of money. In 2004 the stock rose from $12 to $39 for a +209% gain. Needless to say the company was hammered once the calendar expired and it dropped to a low of $26 on profit taking. On January 24th, the low for the current market and after a 33% January drop the company was downgraded on valuation my Banc of America. BAC was late to the party but ADSK saw another -12% drop on the news. Smith Barney retaliated that the concerns over share price had already been factored in with the January selling and suggested there was upside potential.

In November ADSK raised guidance for 2006 above analysts estimates and nothing has change from the company. A string of positive press releases continue to paint a picture of business is booming. Earnings are Feb-22nd so we do have event risk but I would like to think the risk is to the upside. The 100-day average has proved to be support in January as is did last August.

Autodesk does not have leaps. Since the normal time in a leap trade is only about two-three months I decided to enter the play with the July $32.50 call instead at $3.20. It is cheaper than a leap and plenty of time to play. The July $30 call is only $4.40 and it is already $1.33 in the money.

I am not going to recommend an insurance put because of the cheap calls. The closest strike at $30 makes the March put $1.60. I can see paying $1.60 to insure a $3.20 position.

July $30.00 Call ADQ-GF currently $4.40
July $32.50 Call ADQ-GZ currently $3.20

No insurance put

Stop loss $27.50

Entry point $31.33 (02/07)


 

Play Updates

Existing Plays

DGX - Quest Diagnostic $99.21 ** Stop loss $95.00 **

Quest announced a +21% increase in earnings in January and soared from $89.50 to just over $96 in a week. Instead of consolidating those gains it just keeps moving higher. We entered DGX on Jan-21st as it was moving lower and touched support at the 100-day average at $90. Three days later the rocket ride began from $89. The trick now is to stay far enough away from the price to keep from getting stopped but not give back all of our gains.

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 $36.89 ** No Stop Loss **

QCOM has made no effort to bounce from the post earnings depression but we are still 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 $5.90. 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 $39 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.

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)


 

ELN - Elan Pharma $28.08 **Stop loss $25.50**

ELN finally caught fire and has moved nearly +$3 off last leeks lows. $29 is resistance and our next test.

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 $25.50

Entry $28.50 (01/11)


 

IBM - IBM $94.52 ** No Stop **

IBM finally began rising with the market and $92 proved to be the bottom last week. We got a really good entry on IBM and bought it when nobody else wanted it at the end of the month long decline.

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 - $126.96 Russell Index Ishares ** STOP LOSS $123.00 **

The Russell Ishares are holding the high ground relative to the rest of the market. The IWM dipped back to test support at $124 on Thursday but then surged to a new high for the month. The 100-day average is at $121.50 and this should continue to be strong support.

The Feb puts are dropping in price as time decays. Instead of a stop loss let's institute a put stop. If the IWM trades at $124.00 buy the Feb-$123 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-$123 Put Option DIW-NS if the IWM trades at $124.00

NO STOP LOSS

Entry $123.05 (Jan-18th)


 

ADBE - Adobe Systems $63.98 Unbelievable!! ** Stop $60 **

ADBE gained over $8 for the week and it threatening to breakout to a new high at $65.50. Earning were very strong and by having put insurance we were able to hold over the event with no risk.

I am adding a stop loss at $60 because our put is so far out of the money.

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

Stop loss $60.00

Entry $58.78 (01/09)


 

RIMM - Research in Motion $77.38 ** No Stop **

Finally a new uptrend emerges. RIMM has rocketed off the $65 bottom and at $77 is right at January resistance. A breakout here and we could easily retest the old highs at $95.

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
Feb-$70 Put RUP-NN currently $3.50.

Entry $74.30 (01/09)


 

SYMC $23.42 Symantec - Veritas ** no stop **

SYMC is beginning to see some buyers return but until the VRTS deal is concluded we may not see any monster gains. 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
APR-2005 $22.50 PUT SYQ-PX @ $1.15

Entry $25.37 (12/19)


 

XLE - S&P Energy SPDR $39.10 ** No Stop **

The XLE continues to outperform the market and made a new all time high on Friday. We have very little risk here and strong rising support. I do expect oil prices to come down in March so we need to monitor this one closely.

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


Leaps Trader Watch List

Dropped Entries
None
   

New Watch List Entries 
None
   

RYL - $68.56 Ryland Group ** Target $65.00 **

Buy 2006 $70 LEAP Call YRX-AN target $8.80

Insurance put
Buy Mar-$60.50 Put RYL-OL currently $0.65


 

TOL - Tol Brothers $82.03 (Target $79.00)

Buy 2006 $85.00 LEAP Call YKW-AQ currently $10.50

Insurance put
Buy March $75.00 Put TOL-OO currently $1.75


 

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