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Weekly Newsletter, Saturday, 11/22/2008

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Table of Contents

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

Leaps Trader Commentary

Long Term Buying Opportunity

I know you have heard before about strong support at XXX level and prices should rebound from here but I really believe we are near a bottom with oil at $50. Unfortunately I thought that at $70 and $60 and several other support points on the way down.

The volatility in the markets is extreme. The Dow traded in a 19% range over the last two weeks. The Banking index hit a 30% range. This is the worst trading environment in my lifetime. Making money in this market is nearly impossible if your time in the trade is more than a couple hours. Those playing puts are getting taken out on +500 point days while call players are getting killed on -500 point drops. Twice now those moves both happened on the same day.

The gap down last Thursday flushed the energy portfolio as crude fell from $55 to under $49 and the broader markets led by the Dow loss of more than 1000 points in three days crushed everything else. The soft bottom retest from last week was erased with lower lows on every index. The S&P hit an 11 year low at 741.

There are no safe havens but everything is pointing to a potential end of the bear market coming soon. Soon could be next week or next month but soon. Secular bear markets typically fall 45% to 50% and we are there now. They typically last 12-18 months and we are in the 13th month now. However, with the advent of the Internet age and online trading and news delivery that historical time frame in every market cycle has been shortened. Events happen faster and they are more volatile. The VIX has hit new decade highs in this cycle and Thursday saw a retest of resistance at 80. This could easily be a double top for the VIX.

VIX Chart
[Image 4]

We are undergoing some spectacular market moves on some unbelievable financial and economic events. I wrote in the Option Investor market wrap this weekend that ten companies with total assets of more than $5 trillion have failed or been taken over by the government in the last couple months. Citigroup could be next as soon as this weekend. This is truly a once in a lifetime event. All the normal rules of market behavior have changed.

The rapid arrival of a global recession only 4 months from a peak is unbelievable. Crude prices have fallen nearly $100 from the July high on fears of a global recession, demand destruction from all time high prices and the implosion of the hedge funds that made a market in commodities.

The price of oil will return to the highs but probably not in 2009. The current low price is doing irreversible harm to future production. Exploration and Development projects are being cancelled or postponed at a frantic pace. With each project cancelled we are losing momentum on the supply side. This is momentum that may not ever be regained.

Depletion never sleeps. It does not ebb and flow with the demand cycles. Depletion accelerates with the age of the fields and every field grows older every day. The wild card here is demand. Just as demand crashed with $4 gasoline and the arrival of a global recession it can rebound just as quickly. Every global government of any size is implementing economic stimulus to make sure the recession is short lived but the biggest economic stimulator is cheap energy. Oil is the fuel of economic expansion. With oil at $50 and even more unbelievable gasoline futures at $1 per gallon the seeds of the next economic boom have already been planted. We may not see a return in four months to the economic boom from last spring but we will see the rebound in 2009. Cheap gasoline knows no racial, geographic or economic boundary. It is the greatest stimulus package ever known and it requires no advertising and no checks in the mail. It is here now and we can expect to see the results very soon.

This is one reason I believe the markets are at or near a bottom. I believe the next few weeks are a buying opportunity but there may still be some major events to rock the markets. If your time horizon is calculated in years then this is the buying opportunity of the decade. If you are going to be in a position for less than a year or more then the road ahead may still be rocky. After getting blown out of our positions on last week's volatility I am not brave enough to charge back into battle with a full portfolio today. The developments at Citigroup, Goldman Sachs and AIG could still produce new lows for the equity markets if not handled correctly.

In the energy markets the Obama team have made it clear that negative changes are coming for coal fired electric generation and there will be big changes for electricity generation in general. The coal sector is crashing because of the coming changes. The new discoveries in shale gas and techniques for its retrieval has pushed gas prices back to $6 and it has the potential to go lower. This is weighing heavily on the nat gas sector. OPEC can't get its act together and the announced production cuts have not been enacted by many OPEC nations. Future announcements will have no impact until trackers report that production is actually slowing.

This may actually be the biggest plus for the overall markets. If OPEC nations continue to flood the markets with oil we will see prices plunge even farther. Cheaper oil equals cheaper gasoline and a faster economic recovery. As investors in the energy sector this could still mean lower prices ahead for energy stocks making this a long term buying opportunity rather than a short-term trade. We need to watch for signs of a cycle change rather than try to pick a bottom in the price of oil.

I wrote about the continuing hedge fund de-leveraging we are seeing now as well as the collapsing mutual fund sector. All of these liquidation events could continue to pressure the markets through year-end and into January. There are two different cycles here. There is one liquidation process that must generate cash before year-end and another one in the case of mutual funds that will force selling the instant the calendar year ends. We have seen the big drops in early January many times in recent years as funds dump positions once the tax year closes. I believe this will make the next six weeks very unpredictable and I am in no rush to jump back into a lot of positions.

Look for my update on the IEA World Energy report in a special email later this weekend.

Jim Brown

January Crude Futures Chart - Weekly
[Image 1]
December Natural Gas Futures Chart - Weekly
[Image 2]
December Gasoline Chart - Weekly
[Image 3]


Portfolio Listing & Top Picks


Current Portfolio


Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

Position Summary Table
Table lists CALLS/LEAPS only. Insurance puts, if applicable, are not shown.


[Image 1]


Top Picks


If you are looking to add another position these are my top picks for this week. The target prices listed would be the ideal entry points for these stocks today. There is no assurance any stock will ever return to these support levels and you will need to make your own decision about an entry point above these levels. I believe these stocks have the best potential this week. The list will change from week to week based on technicals, fundamentals, crude prices and market action. The list is not sorted in any particular order.

Short list this week. Until the market finds a bottom I am going to be cautious.

Top Picks List
[Image 2]


New Plays

Five Year Lows and High Volatility


New Energy Plays


None - See Watch List


New Non-Energy Plays


VIX 72.67 - Volatility Index

The CBOE Volatility Index is showing an almost perfect double top at 80 as of last Thursday. I am betting that it is not going higher even if we do experience some additional market volatility through year-end. I am suggesting we buy some January puts just in case the markets find some traction here at five-year lows.

Buy JAN $50 PUT VIX-MJ currently $3.90 Chart of the VIX
[Image 4]


New Watch List Plays Triggered


TS $17.75 - Tenaris

Nice spike higher to almost $24 before the market crashed the sector. Solid resistance at $24. Breakdown trigger of $20 hit on Thursday's dump.

Company Info:

Tenaris S.A. (Tenaris) is a global manufacturer and supplier of steel pipe products and related services for the energy industry, as well as for other industrial applications. Its customers include oil and gas companies, as well as engineering companies engaged in constructing oil and gas gathering, transportation, and processing facilities. Its principal products include casing, tubing, line pipe, and mechanical and structural pipes. It operates an integrated worldwide network of steel pipe manufacturing, research, finishing and service facilities with industrial operations in North and South America, Europe, Asia and Africa, and a direct presence in major oil and gas markets. Tenaris is organized in three major business segments: Tubes, Projects and Other. In May 2007, the Company acquired Hydril Corporation (Hydril), a manufacturer of premium connections for steel pipe products. On April 1, 2008, it sold Hydril’s pressure control business to General Electric Company.

Breakdown trigger: $20

Position: JUNE $25 Call TS-FE, 4.80 11/19

Chart of TS
[Image 1]


SMG $26.29 - Scotts Miracle Gro

Even a miracle plant food could not keep the market from knocking nearly 20% off SMG from the weekly high. Our entry point at $25 was triggered on Friday.

Company Info:

The Scotts Miracle-Gro Company (Scotts Miracle-Gro) is a marketer of lawn fertilizer, grass seed and growing media products within the United States. During the fiscal year ended September 30, 2006 (fiscal 2006), the Company divided its business into North America; Scotts LawnService; International, and Corporate & Other business segments. Its major customers include home improvement centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, food and drug stores, commercial nurseries and greenhouses, and specialty crop growers

Breakdown trigger: $25, hit 11/21

Position: 2010 $30 LEAP Call WOF-AF, $5.20

Chart of SMG
[Image 2]


RIMM - Research In Motion

RIMM said last week that even though they were not immune to the economic slowdown they expected new products to maintain their momentum. I doubt many business people are rushing out to cancel their Blackberry contracts in exchange for a dumb phone. The news showed people standing in line to buy the new BlackBerry Storm with an iPhone type touch screen. Strong support at $40

Company Info:

Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information including email, phone, short message service (SMS) messaging, Internet and intranet-based applications. RIM technology also enables an array of third party developers and manufacturers to enhance their products and services with wireless connectivity to data. RIM’s portfolio of products, services and embedded technologies are used by organizations worldwide and include the BlackBerry wireless solution, software development tools, and other software and hardware. RIM operates offices in North America, Europe and Asia Pacific.

Breakout trigger: $46, hit 11/18

Position: 2010 $60 LEAP Call YKD-AW, $11.20

RIMM Chart
[Image 3]


Play Updates

Stops and 1000 Point Swings

Wipe Out! The 1000 point market drop coupled with the 900 point swing the prior week cleaned out the portfolio but gave us entries in three new positions.


Dropped Plays


NE - Noble Corp *** Stopped ***

BUCY - Bucyrus *** Stopped ***

CMP - Compass Minerals *** Stopped ***

DIG - Proshares Ultra ETF *** Stopped ***

ENER - Energy Conversion Devices *** Stopped ***

HES - Hess Corp *** Stopped ***

HK - Petrohawk *** Stopped ***

HLX - Helix *** Stopped ***

NOV - National Oilwell *** Stopped ***

PBR - Petrobras *** Stopped ***

PDE - Pride *** Stopped ***

RIG - Transocean *** Stopped ***

XCO - Exco Resources *** Stopped ***

JPM - JP Morgan *** Stopped ***

ATI - Allegheny Tech *** Stopped ***

MOS - Mosaic *** Stopped ***

STLD - Steel Dynamics *** Stopped ***

UWM - Ultra Russell 2000 ETF *** Stopped ***


Energy Play Updates


HLX - $5.31 -3.19 Helix Energy Solutions *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Breakdown trigger: $8.50, hit 11/12

Position 2010 $10 LEAP Call WAI-AB @ $3.10, exit $1.95, 11/20


ENER $21.00 -6.97 - Energy Conversion *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Breakdown trigger: $35, hit 11/11

Position: 2010 $50 LEAP Call KYU-AJ @ $7.90, exit $6.50, 11/20


HES $44.87 -$10.63 - Hess Corp *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock. Refiners have gone from one extreme to the other with gasoline so cheap today there is no crack spread.

Breakout trigger: $62.50, hit 11/10

Position: 2010 $80 LEAP Call WHS-AP, $9.70, exit $4.80, 11/20


HK $16.50 -2.53 - Petrohawk Energy *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock. I believe they are poised for a recover in gas prices but we need to see it first.

Breakdown trigger: $16, hit 11/6

Position: MARCH $20 Call HK-CD, $2.85, exit $2.00, 11/21
(no leaps)


XCO $5.09 -1.96 - EXCO Resources *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Breakdown trigger: $7, hit 11/6

Position: JUN $12.50 Call XCO-FV, $1.25, exit .50 11/19


MOS $24.94 -7.53 - Mosaic *** Stopped ***

No specific news as Mosaic traded with the market. The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions.

Breakdown trigger: $35, hit 11/6

Position: 2010 $50 LEAP Call LXW-AJ, $7.10, exit $5.40, 11/20


DWSN $16.92 -3.38 - Dawson Geophysical

DWSN had no specific news and traded with the market. Support broke at $19 and it was a quick drop. There was no stop on DWSN because of the cheap option.

Breakdown trigger: $22.50, 11/06

Position: MAR $30 Call DVQ-CF, $2.05


BUCY $25.18 +2.43 - Bucyrus International *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock. Comments about carbon caps in an Obama administration crushed the coal sector.

Breakout trigger: $28.50, 11/4

Position: 2010 $40 LEAP Call YHB-AH, $5.40, exit $3.40, 11/20


DIG $26.30 -$3.12 Proshares Ultra Oil & Gas *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock. It was simply the drop to $48 that killed it.

Position: March $50 Call DPB-CX @ $5.00, exit $1.95, 11/20


NE $22.72 -4.17 - Noble *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Earnings Oct 22nd, $1.43 per share up from $1.18 and est of $1.33

Breakdown Trigger: $35, hit 10.6

Position: 2010 $40 LEAP Call YVJ-AJ @ $5.20, exit $2.00, 11/20


NOV $21.52 -4.29 - National Oilwell *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. On the positive side NOV and SLB formed a joint venture to develop intelligent pipe where drillers can always know instantly about conditions at the bottom of the hole.

Earnings: Oct-23rd $1.44, +28% compared to analyst est of $1.31

Breakdown trigger: $28.50, hit 10/8

Position: May 2009 $40 Call NOV-EH @ $6.00, exit $1.50, 11/20


PBR $17.40 -$4.05 - Petrobras *** Stopped ***

Petrobras was crushed with the rest of the market despite another find of 3-4 billion barrels of oil. There is no justice.

11/12 $1.40 per share record.

Breakdown trigger: $28.50, hit 10/6

Position: 2010 $40 LEAP Call YMO-AH @ $7.00, exit $1.75, 11/19


PDE $13.35 -$2.33 - Pride *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Earnings: Oct 30th, $1.09 vs .67 Q3-07 and est of $1.03

Breakdown trigger: $20, hit 10/6

Position: 2010 $25 LEAP Call YAD-AE @ $5.00, exit $2.00 11/20


RIG $57.08 -$13.81 - Transocean *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Earnings schedule: Nov-5th

Breakdown trigger: $80, hit 10/6

Position: 2010 $100 LEAP Call YDR-AZ @ 13.40, exit $6.50, 11/20


Non-Energy Positions


CMP $47.02 -$5.03 Compass Minerals *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Breakout trigger: $60.50, hit 11/10

Position: MARCH $70 Call CMP-CN @ $4.50, exit $3.10, 11/20


UWM $14.13 -3.93 - Russell 2000 Proshares Ultra ETF *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that stopped us out of all our positions. I still have faith in the UWM but faith does not make the market move.

ETF Info:

Ultra Russell2000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 2000 Index.

Recommended 10/23 at $19.94 on the UWM
Stopped at $18 on 10/28 ($2.90, -$1.10)
Reentered at $20.50 11/29 open ($4.40)
Stopped at $17 on 11/13 ($2.90, -$1.50)
Reentered at $17.72 11/13 email ($3.10)

Position: UWM $25 April Call Option ULX-DY, exit $2.10 11/19


ATI $16.94 -$4.26 - Allegheny Technologies *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Earnings: 10/22 -26%, $1.45 vs $1.88 year ago, $1.44 est

Breakout trigger: $26, hit 10/13

Position: 2010 $40 LEAP Call YFQ-AW @ $3.60, exit $1.65, 11/19


STLD $6.10 -2.02 Steel Dynamics *** Stopped ***

The Dow traded in a 19% range of more than 1700 point over the last two weeks and that coupled with a drop in oil to $48.50 stopped us out of all our positions. There was nothing specific in the news about this stock.

Recommended 11/2 @ $11.92

Position: 2010 $15 LEAP Call WAF-AC @ $3.40, exit $1.45, 11/20


JPM $22.72 -$11.75 - JP Morgan *** Stopped ***

The Dow traded in a 19% range of more than 1700 points over the last two weeks. The banking index fell -26%. No long position is safe under those conditions.

Earnings: Oct 15th @ 11 cents

Breakdown trigger: $40. Hit 10/6

Position: 2010 $50 LEAP Call WJP-AJ @ $6.00, exit 3.06, 11/18


Leaps Trader Watch List


New Watch List Entries


HPQ - Hewlett Packard

UWM - Russell 2000 ProShares

DIG - ProShares Ultra Oil & Gas


Current Watch List


HPQ - Hewlett Packard

Company Info:

Hewlett-Packard Company (HP), is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including in the public and education sectors. HP’s offerings span personal computing and other access devices; imaging and printing-related products and services; enterprise information technology infrastructure, including enterprise storage and server technology and software that optimizes business technology investments, and multi-vendor customer services, including technology support and maintenance, consulting and integration and outsourcing services. During the fiscal year ended October 31, 2007 (fiscal 2007), its operations were organized into seven business segments: Enterprise Storage and Servers (ESS), HP Services (HPS), HP Software, the Personal Systems Group (PSG), the Imaging and Printing Group (IPG), HP Financial Services (HPFS) and Corporate Investments.

Breakdown trigger: $33

Buy 2010 $40 LEAP Call WPW-AH


UWM - ProShares Ultra Russell 2000 ETF

Eventually there will be a rebound.

Company Info:

Ultra Russell2000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 2000 Index

Breakdown trigger: $13

BUY April $17 Call ULX-DQ


DIG - Proshares Ultra Oil & Gas

Company Info:

Ultra Oil & Gas ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones U.S. Oil & Gas Index.

Breakdown trigger: $24

BUY MAR $30 Call DPB-CD


Dropped Watch List Entries


None

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