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Weekly Newsletter, Sunday, 02/13/2005

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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

Volatility Reigns

The Nasdaq failed at resistance at 2090 after two days of trying to move higher and retreated to support at 2040. That support was rescued from an imminent break by the Kim Jong-il rumor on Friday morning. The rebound failed to break 2080 and it appears the Nasdaq is stepping down resistance in 10-point increments. In January it was 2010 then 2100. I February we have seen 2090 and now 2080 serve as resistance. I am beginning to become more worried that we are not moving higher.

The Dow is on the verge of retesting its 52-week and multiyear highs at 10850 and the S&P is just below its 1215 highs from last December. Neither are going to make much progress unless the Nasdaq finds some buyers. Tech funds just completed their 12th straight week of cash outflows. This is not encouraging. Were it not for the rebound in the SOX I would be much more bearish. Instead I am only cautiously pessimistic.

I say pessimistic because several of the high profile stocks which have been leading the February rebound are starting to slow if not fail entirely. This is troubling but not entirely unexpected. I want to maintain a positive bias but the facts are not supporting that position. You would think that with the Dow and S&P just a few points away from new highs that the broad market was doing great. That is not the case.

Homebuilders and energy are the only two sectors breaking out to new highs. The homebuilders were hit with downgrades on Friday but the dip was short lived. It was just deep enough to trigger our entry on Ryland Homes on the watch list. Toll Brothers was the one I wanted but it had already jumped several dollars early in the week.

I considered closing some of the non-performers this week but all are sufficiently covered by put insurance with the exception of RIMM. RIMM insurance expires next Friday and is well out of the money. The IBM rebound has stalled as well as Adobe. The Russell has fallen off its upward trajectory and that puts our IWM play in jeopardy. All in all I am not very positive this week. As we have seen for the last two weeks the picture can change drastically from day to day. There is still no trend and it may be time to start cutting the dead wood and tightening our stops. Hanging on one more week on the marginal trades could see them switch to solid green or turn a deeper shade of red. Personally I am allergic to red and I am going to take some lumps this week instead of waiting. If the markets move up from here we will still participate but if they move down we will have cut our risk.


Changes in Portfolio

New Plays
None    

Dropped Plays
QCOM $36.15 Qualcomm
IWM $126.43 Russell Index Ishares

New Watch List Plays Triggered
RYL $66.76 Ryland Group

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

RYL - $66.76 Ryland Group ** No stop **

Thank you Smith Barney. RYL hit a high of $70.77 on Wednesday morning and traded as low as $64.51 on Friday after the downgrade by Smith Barney. Our entry target was $65. While a -$6 drop is significant it is not material in the homebuilders. The $65 level was first level support from last week and I believe we got a good entry. The key will be how many traders buy the dip. If other brokers gain confidence after the Smith Barney downgrade then we could see some piling on but with homebuilders and oil the only real sectors with gains I am betting against it. The insurance put is only March so we will want to see some upward movement pretty quickly or we will abandon the play. Every dip in the past six months has been quickly bought.

Ryland is one of the countries largest homebuilders and was recently added to the S&P-500. Ryland currently builds in 27 markets across the country and also acts as a mortgage lender. Net income has increased +400% over the last four years and estimates are continuing to increase but RYL trades at a PE of only 10. Ryland sold 16,880 homes in 2004, which was an increase of 1,683 over the prior year.

They recently announced 13 new planned communities around Las Vegas, currently the fastest growing market in the U.S.

Ryland will be presenting at the Wachovia Securities Consumer Growth Conference on Feb-17th in Florida.

2006 $70 LEAP Call YRX-AN @ $7.90

Insurance put
Mar-$60.00 Put RYL-OL @ $0.80

Entry $65.00 (02/11)


Play Updates

Existing Plays

PCAR - Paccar Inc $72.92 ** Stop loss $68.50 **

After a bounce on Monday PCAR traded flat all week. It did not succumb to the Nasdaq weakness on Wed/Thr but neither did it rally on Friday. It appears to be consolidating from the recent volatility.

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.

2006 $70.00 LEAP Call YYQ-AN @ $8.80
2006 $75.00 LEAP Call YYQ-AO @ $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 $29.48 ** Stop loss $27.50 **

Autodesk traded in lock step with the Nasdaq moving to new highs for the month through Tuesday and then selling off to support by Thursday. The Friday rebound was not strong and we are back in the middle of the trading range. No excitement here and we are trapped my the weak Nasdaq.

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't 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)


 

DGX - Quest Diagnostic $100.01 ** Stop loss $96.00 **

Quest is still moving higher and one of the few stocks not in the energy sector to do so. $100 is long term resistance and I would expect some profit taking here. I hate to more the stop too close but I also hate to give back our $5 in gains. After the January dip we need to pocket some gains. I am going to raise the stop to $96 in hopes DGX continues higher.

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 $36.15 ** Dropped **

Despite our very strong put insurance with the April $40 put I am dropping QCOM today as a non-performer while we still have a breakeven on the options. It did not rebound with the SOX this week while most other chip stocks did. The SOX closed at a new high for the year and QCOM near a new low. Exit safely now.

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 exit $2.05 -1.15

Insurance put
April $40.00 Put AAO-PH @ $3.00 exit $4.20 +1.20

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

Entry $38.00 (01/20)


 

ELN - Elan Pharma $27.28 **Stop loss $25.50**

ELN has a Jekyll and Hyde mentality lately bouncing from strongly bullish to strongly bearish on alternating weeks. There was a serious sell off from the new two-week highs on Tuesday at $28.50 to dip as low as $26.00 on Thursday. Friday saw a recovery to $27.50 and right in the middle of the range. The 100 day average is still acting as support and a break of that average will hit our stop.

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 $93.30 ** No Stop **

IBM acted like a Nasdaq stock last week and traded up Mon/Tue and down with the Nasdaq on Wed/Thr. Unfortunately the Friday rebound left a lot to be desired. I struggled with the open/close decision this weekend because we are right in the middle of the rebound range. We are down slightly on both the put and the leap with plenty of time remaining before the April put expires. I want to be optimistic but IBM lost some of its excitement with the dip. I am going to let it ride one more week. We really only need it to pick a direction. We could be profitable with plenty of time on both directions.

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 - $126.60 Russell Index Ishares ** Dropped **

The Russell traded along with the Nasdaq and just weak enough to get us into trouble. The IWM traded back down to $124 and triggered the February $123 insurance put entry at 60 cents. Considering our current profit in the long calls is only 50 cents we are effectively at a breakeven after three weeks in the position. The Russell finally moved off the lows last week but stalled and the outlook does not look good. I have some growing concern that the Nasdaq is going to fail.

I am exiting this play for a breakeven given the failure to follow through on the rebound from the January lows.

IWM MAY-$125 Call Option DIW-EU @ $5.20 exit $5.60 +0.40

Insurance put
IWM FEB-$123 Put DIW-NS @ $0.60 exit $0.25 -0.35

Entry $123.05 (Jan-18th)


 

ADBE - Adobe Systems $63.77 ** Stop $61.50 **

ADBE has stalled at $64 after a monster post earnings run. I raised the stop to just below Thursday's low just in case more Nasdaq weakness appears.

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 $61.50

Entry $58.78 (01/09)


 

RIMM - Research in Motion $76.00 ** Stop loss $72.00 **

I was encouraged that RIMM did not sell off as strongly as some Nasdaq stocks. Support at $74 has held and RIMM is ready to move higher if the Nasdaq decides to continue its rebound. The insurance put will expire next Friday so a decision will need to be made on keeping RIMM next week. I am instituting a stop at $72 because of the expiring put.

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 @ $3.50.

Entry $74.30 (01/09)


 

SYMC $21.62 Symantec - Veritas ** no stop **

SYMC was knocked for a substantial loss on Tuesday when Microsoft bought their third virus company in the past two years. The new Microsoft product will be a virus checker for email. SYMC was at a two week high at Monday's close and lost nearly -$3 on the news and the Nasdaq sell off. We still have little risk and with the insurance put we are only down about -$1 on the play.

We have a good position here with strong support at $20 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 $40.42 ** Stop loss $38.00 **

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 for signs of weakness.

I instituted a stop because the March insurance put at $34 is so far away from the current price. We are up +$3 on the 2006 LEAP and I don't want to give it back. The $34 put is now worthless but I am not writing it off. Should the March weakness show up as I expect we could still recover some of our PUT investment.

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

Components of the XLE


 


Leaps Trader Watch List

The builder downgrade triggered our watch list entry on Ryland but we did not get close on Toll Brothers. I am leaving it in the list with the $79 target just in case we get another dip.

I am adding EBAY to the list and kicking myself for not adding it as a play last week ahead of its analyst meeting. When I look back at last Friday's chart it was still in decline and Monday showed no buying. Once it started on Tuesday it was steady the rest of the week. I would add it to the regular plays this week but it has a 2:1 split coming next Friday.

I keep looking for the oil stocks to turn down in anticipation of weakness in March but every day is a new high. Nothing but frustration there.

With the Nasdaq the weakest link there is not much to speculate on for leaps. Until we move out of this trading range and pick a direction we are better off not adding any new plays.

I plan on adding Apple next week as a LEAP Put given their massive gains and no significant future news.

Dropped Entries  
None
     

New Watch List Entries 
EBAY
$82.07 Ebay  
AAPL
$81.25 Apple  

TOL - Tol Brothers $82.98 (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


 

EBAY - $82.07

No targets yet. 2:1 split next Friday and we will pick an entry once the split passes. Leaps will be cheaper once the split passes.


 

AAPL - $81.25

Apple announced a 2:1 split on Friday with a record date of Feb-18th. We will be looking to add some LEAP puts on AAPL once the record date passes.


 

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