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Weekly Newsletter, Sunday, 02/20/2005

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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

Markets Expire With Options

The Dow and S&P failed to reach new highs and tech stocks can't find a bid. The post earnings depression has appeared and investors are trying to decide if they should sit out the next couple of weeks before the Q1 guidance updates begin to appear.

If you read my market wrap this weekend I suggested that there might be a chance for a rebound next week based on the Nasdaq resting on strong support on the 100-day average. Volume has been weak on down days and stronger on up days. Internals have not been that bad overall. There is a good chance this week's slump was option related profit taking ahead of expiration and a long three-day weekend.

I am not prepared to take that bet with real money. Late February has never been a particularly strong period for rallies to start. We are in that twilight zone between Q4/Q1 earnings and without a major catalyst to get us out the current rut. I believe the economy is doing fine but fine is not very inspiring. Conditions are ripe for a range bound market and we have been seeing exactly that on the Nasdaq. If the Dow and S&P follow the Nasdaq lead then we are destined to have a boring couple of weeks. If we do hold over the Nasdaq support levels there is no guarantee that we will move higher until that catalyst appears. It could come in the form of the Intel mid quarter update on March 10th. Until then we could wander aimlessly in a range.

The only sector that really appeals to me besides energy is the homebuilders. I was hoping the Greenspan testimony would rile the bond market a little more than it did and give us an entry on Toll Brothers at $79. Instead it appears to have built a base over the last couple of weeks and readying for another blast off. am going to bite the bullet ahead of the spring selling season and take the entry at the current level.

I can't get a break on energy stocks and they just keep powering ahead despite a seasonal demand lull ahead. I am beginning to wonder if the lull will just give producers a chance to catch up and not really impact prices. I remember when we were stopped out on COP back in December after a really great run and very strong gains. Since Jan-5th COP has run from $83 to $106 and has only shown one really down day for the entire year. Regardless of how bad you want to go long you just can't justify buying a stock that is up +23 in the last 45 days. Eventually it has to fade and we know from experience that profit taking after that kind of gain can be very sharp. At least I keep reminding myself of that fact at least once a day. Until it happens we will continue to root for our lone energy position the XLE and its new highs every day.

Until a trend develops the markets are playing havoc with the portfolio. I am sure hoping for a Nasdaq bounce off that 100-day average or we will be a lot lighter next week. 


Changes in Portfolio

New Plays
TOL$84.41 Toll Brothers

Dropped Plays
None  

New Watch List Plays Triggered
None  

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

TOL $84.41 Toll Brothers ** No Stop **

Toll Brothers has been vertical since early December and the last week has been one of the rare consolidation periods. We saw TOL pullback to just over $81 and hold there for an entire week despite interest rate worries and repeated stories on the bursting of the housing bubble. I would have liked to see a sharper pullback but homebuilders have been like energy stocks. Any pullback is a gift and they don't last long.

This is going to be a high-risk entry because TOL has earnings on the 23rd. I checked back several quarters and they have moved higher on earnings instead of lower. They continually raise the earnings bar and exceed expectations. Eventually this trend will fail. We need to make sure to take out the insurance put on this play. I considered waiting for the earnings to pass but that could cost us another missed entry if they gap up another $10 and announce a split. If you feel this is too risky then pass on this trade.

Toll Brothers is unique in that it does not just build homes. This gives them a broader revenue base than many other builders and should insulate them from any softness ahead.

Toll Brothers overview: Source - company press release.

Toll Brothers, Inc. is the nation's leading builder of luxury homes. The Company began business in 1967 and became a public company in 1986. The Company serves move-up, empty-nester, active-adult and second-home home buyers and operates in 21 states.

Toll Brothers builds luxury single-family detached and attached home communities, master planned luxury residential resort-style golf communities and urban low-, mid- and high-rise communities, principally on land it develops and improves. The Company operates its own architectural, engineering, mortgage, title, land development and land sale, golf course development and management, home security, landscape, cable T.V. and broadband Internet delivery subsidiaries. The Company also operates its own lumber distribution, and house component assembly and manufacturing operations.

Buy 2006 $85.00 LEAP Call YKW-AQ currently $11.90

Insurance put
Buy March $80.00 Put TOL-OP currently $1.95

If we have a negative earnings surprise we should be protected and we can make a hold or exit decision next week.

Entry $84.10 (02/20)

TOL Chart

Play Updates

Existing Plays

RYL - $67.30 Ryland Group ** No stop **

RYL - $67.30 Ryland Group ** No stop **

Like Toll Brothers, Ryland consolidated last week and then began to move higher as the week progressed. Our entry point at $65 was retested and now resistance at $68 is the next obstacle. The Toll earnings coming up on Wednesday should make or break this trade. Builders as a group will live or die by what TOL has to say.

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)

RYL Chart


 

PCAR - Paccar Inc $71.32 ** Stop loss $68.50 **

After a week of consolidation at the $72-$73 level Thursday saw an opening drop of a buck to $71 and PCAR held that level on Friday. I believe there is still some profit taking underway from the big Q4 gains and as long as the consolidation holds at these levels we will be fine.

I am adding a March $70 insurance put but not on Monday (Tuesday). I would like to see some premium decay from the option expiration and roll over into March as the current month. Buy the put on Wednesday IF PCAR touches or is below $71.

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 $68.50 This will be below the January dip.

Buy insurance put if PCAR touches $71 on
below on Wednesday 2/23 or later.

March $70 Put PAQ-ON currently $1.40

Entry point $71.80 (02/07)

PCAR Chart


 

ADSK - Autodesk Inc $28.91 ** Stop loss $27.50 **

Autodesk followed the lackluster Nasdaq for the week and held very close to the $29 level with very little volatility. I was hoping for a continuation of the early February rebound but the Nasdaq depression is becoming a black hole that is sucking in everything around it. If we do not get a Nasdaq rebound on Tuesday we could be stopped before the end of the week.

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 @ $4.40
July $32.50 Call ADQ-GZ @ $3.20

No insurance put

Stop loss $27.50

Entry point $31.33 (02/07)

ADSK Chart


 

DGX - Quest Diagnostic $98.62 ** Stop loss $96.00 **

Quest support at $98 is still holding with a couple forays over $100 but the long term uptrend resistance at $100 is also holding. I hesitate to close the play for lack of movement because a breakout here could really generate some short covering. With the markets negative for the week DGX performed well and I am willing to stick with it.

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 expired worthless.

Entry $91.00 (01/21)

DGX Chart


 

ELN - Elan Pharma $27.66 **Stop loss $25.50**

ELN is trying to rally after four weeks of volatility. The longer term pattern is one of consolidation followed by sprints higher. Hopefully this consolidation is about over. We need to move over $29 to generate any short covering needed to push us higher. We have a solid pattern of lower highs and higher lows so something will break soon.

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 - expired worthless.

Stop Loss ELN $25.50

Entry $28.50 (01/11)

ELN Chart


 

IBM - IBM $93.30 ** No Stop **

IBM continues to follow the Nasdaq lead although it did try to rally once again with an assault on resistance at $95. With the Nasdaq drop on Thursday that assault failed and we are right back in the middle of the range. The uptrend support is still intact at $93 but we need some tech help soon.

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)

IBM Chart


 

ADBE - Adobe Systems $62.83 ** Stop $60.00 **

Adobe has stalled at its recent highs while waiting for the Nasdaq to recover. Current support is $62 and resistance $65. Our February put insurance expired worthless and I hate to add another position to protect profits but I believe it is necessary. I am adding the March $60 put for 75 cents. We are up +1.30 on the LEAP and in the money so I hate to close for little more than a breakeven. If the Nasdaq would turn positive I believe ADBE would break resistance and move higher. We had a stop at $61.50. I am changing it to $60 with the addition of the new insurance put.

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 - expired worthless

Add new insurance on Feb-22nd
Mar-05 $60 Put AEQ-OL currently $90 cents, target 75 cents.

Stop loss $60.00

Entry $58.78 (01/09)

ADBE Chart


 

RIMM - Research in Motion $73.83 ** Stop loss $72.00 **

I fear RIMM has failed us and we are just waiting for the sound of the guillotine to come crashing down on our neck. The Feb insurance put expired worthless. Unfortunately RIMM hit a new high for the year on Tuesday at $79.35 but rolled over with the Nasdaq and is threatening to break $74 support at the close on Friday. I studied on whether to put on another put but for $1.80 I deemed it not worthwhile. The stop is $72 and that $1.80 is probably more than the LEAP would lose in that $2 drop. I am going to leave the stop at $72 and leave us naked. If the Nasdaq does not rebound on Tuesday morning we will probably be out of this trade. Amazing when you can go from new high for the month to nearly a new low for the month in four days.

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 expired worthless.

Entry $74.30 (01/09)

RIMM Chart


 

SYMC $22.08 Symantec - Veritas ** no stop **

SYMC rebounded from last weeks Microsoft induced drop but then weakened again with the Nasdaq late in the week. I am still not worried despite the confirmed downtrend because of our in the money April $22.50 put. Put this one on the back burner and forget it.

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)

SYMC Chart


 

XLE - S&P Energy SPDR $42.06 ** Stop loss $40.00 **

Unbelievable! The XLE continue to make new highs almost daily and we are nearly $10 away from our insurance put at $34. I would consider that a lost cause but well worth it. If profit taking ever appears it could be VERY sharp. With oil rising I am going to give it another week before really tightening the stop in front of the expected March weakness.

I instituted a stop because the March insurance put at $34 is so far away from the current price. We are up +$4 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

XLE Chart


 


Leaps Trader Watch List

Dropped Entries
None
   

New Watch List Entries 
None   

EBAY - $42.47

Entry target $40 on breakdown
Entry target $45 on breakout

EBAY rose into the split on Thursday and then eased off slightly. With it currently at $42.47 and resistance at $44 I would love to see a normal post split depression phase where the new shares get moved around. Some traders/investors will sell their new shares and keep the same number in the position as they had previously. Since split shares tend to return to the same level over a 12 month period I question that logic but that is what some people do.

I am going to set a $40 target on the downside for a long entry. However, should the Nasdaq suddenly catch fire next week EBAY could be a favorite at this reduced price level. Therefore I am also going to put an insurance buy stop at $45. If we break resistance at $44 then I want to be along for the ride. If we dip to $40 then we will be in an even better position.

Buy 2006 $45 LEAP Call YRL-AI currently $5.00
Buy 2007 $45 LEAP Call OYI-AI currently $8.40

Insurance put:
Buy April $37.50 Put XBA-PU if entry is at $40.00
Buy April $42.50 Put XBA-PV if entry is at $45.00

EBAY Chart


 

AAPL - $86.73 Leap Puts

Apple is taking no prisoners and rallied over $90 on Thursday. Friday saw some depression setting in as the record date for the split passed. The split date is March 1st and while I was planning on an entry next week I am concerned that there could still be some short covering ahead. Shorts have been beaten badly but they still keep coming back for more. The +10 bounce this week is proof.

I believe a break of $86 could start the ball rolling down hill but I am also expecting a potential Nasdaq rebound on Tuesday. I am going to wait another week before taking the plunge. As always readers know what I am looking for and can jump in early if you want.

AAPL Chart


 


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