Option Investor
Newsletter

Daily Newsletter, Saturday, 1/9/2010

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

It Wasn't All Bad

by James Brown

Click here to email James Brown

Most of the major stock market indices rallied to new 52-week highs last week. This appears to be a flood of money from index funds and mutual funds all putting cash to work. While I am surprised by the strength of the rally I'm not surprised by the timing. It's common to see stocks rally in the beginning of a new year or quarter. Unfortunately this is a short-term effect and will eventually run out, which isn't necessarily a bad thing - more on that later.

The bigger surprise last week was the December jobs report. As of Thursday a Reuters survey had seen consensus estimates rise from -8,000 jobs to unchanged for job losses in December. There were plenty of individual estimates well above zero with a couple in the +80K to +100K. Imagine their surprise when the Labor Department said non-farm payrolls for December came in at minus 85,000 jobs.

Now it wasn't all bad. The two-year string of job losses was broken as November's -11,000 jobs was revised to +4,000. Unfortunately October's job losses were revised lower. I guess it's possible that if they're still revising October's numbers then November's could get revised lower again. Overall Friday's report illustrates that the job situation is going to be a tough one to change. What happens next month when the January jobs report counts all the seasonal holiday workers that were laid off after New Year's?

I've been suggesting that the stock market could see a correction in mid January starting Monday, January 11th and heading into the first real week of earnings about two weeks from now. That is still a possibility but I'm willing to admit last week's rally has certainly seemed to diminish it. It's entirely possible that the correction will not show up at all. However, another scenario could be stocks slowly drift higher into earnings, then see a spike as investors react to better than expected earnings news, only to form a top. Once the earnings news is out there is nothing left to drive stocks higher and then we see a correction.

While waiting for the correction might sound a bit scary it shouldn't be. Yes, we will have to monitor our stop losses on current trades but we WANT to see a correction to provide a better entry point into 2010 and beyond. Now everyone is entitled to their opinion and I still believe we face a very real threat of a double dip recession.

This past week I heard one analyst sharing his thoughts on the subject and he too felt that we will see a double dip. The last six months of 2009 were boosted by government stimulus. While we still have government stimulus to spend it won't be at the same elevated rate. I think politicians know this and that's why there has been talk of another stimulus package. Unfortunately (or fortunately depending on your outlook) getting another stimulus package through congress is going to be extremely tough.

Additional concerns that could lead to a double dip will be state and local governments cutting back on spending since tax revenues are down. Net exports will weaken. The consumer will turn more defensive and the consumer savings rate will stay elevated. This will have a very negative impact on the economy, which is 70% consumer spending. Businesses will be reluctant to hire workers. Jobs will remain tight with unemployment stubbornly high and foreclosures will continue to plague the housing market.

Sadly I can't tell you when this will all come together to produce the second dip. I have warned readers before that the first couple of quarters of 2010 should be positive for the economy. It's going to be tough to stick to the double-dip outlook as the media seizes on the positive headlines. There will be plenty of talking heads on TV forecasting good times.

Right now a good guess for trouble could be third quarter 2010 or it could be sometime in early 2011. Until then we need to play the market in front of us, which is bullish, but keep a wary eye on the horizon. It may be sunny now but it looks like a storm coming several months down the road.

Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:

Chart of the NASDAQ Composite:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Index funds are putting money to work in stocks and the result has been a big rally across the markets. Financials, materials, and energy are some of the best performers. Several of our trading candidates have seen some pretty significant rallies in the last five days. Readers may want to consider taking some money off the table.

Coal stocks look especially overbought and MTW is extremely short-term overbought. We've also updated several stop losses in our play updates tonight.

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 Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a dropped play this week.



Jim's portfolio and updates has been included in the normal play updates section.


New Plays

Take Your Pick

by James Brown

Click here to email James Brown


A Way to Trade U.S. Bonds


Editor's Note:

U.S. debt is exploding! If you thought 2009 was bad the Treasury plans to sell about $2.5 Trillion (with a T) in 2010. Many were surprised at how much appetite there was for U.S. debt in 2009 with the economy struggling and unemployment at 25-year highs. While it looks like the economy might bounce I fail to see how demand for bonds will remain strong enough to absorb this huge amount of issuance. Thus bonds seem destined to move lower and that's going to push bond yields higher. Every auction is going to be watched for a potential failure when demand finally fails to meet supply. A failure doesn't have to happen. If foreign investors finally decide they want more return for buying U.S. debt it will push yields higher.

There are two ways to play this. You can buy call LEAPS on the TBT, which is a short-bond ETF and will rise as bonds go down (bond yields rising). Or you can buy put LEAPS on the TLT, which will fall as bonds fall. I am listing both. Depending on your view of the U.S. debt situation you may want to consider the 2012 options instead of the 2011 options.


TBT $50.63 -0.01 -- UltraShort 20+ Year Treasury Bond ProShares

Why We Like It:
I explained in the Editor's Note above our outlook on the bond market. This ETF doesn't move super fast. I'm suggesting bullish positions now but you could choose to wait for a dip back toward $48.00 or a breakout over $52.00. This is a long-term trade (12 to 24 month time frame). Be sure to give yourself a wide stop loss. I'm starting our trade with a stop at $41.90.

Company Info:

This is an exchange traded fund (ETF) that tries to deliver twice the inverse performance of the Barclays Capital 20+ Year U.S. Treasury index.

Use the 2011 January calls (Entry point - now, at current levels)

BUY CALL JAN 2011 $55.00 strike (XRJ-AC) current ask $4.90
-or-
BUY CALL JAN 2012 $60.00 strike (YHT-AH) current ask $7.90

Chart of TBT


TLT $89.29 -0.04 -- iShares 20+Yr Bond ETF

Why We Like It:
I explained in my Editor's Note above why our outlook on bonds is bearish. I am suggesting positions now but there is no rush. This is a long-term 12 to 24-month trade. You could wait for another failed rally near $92.00 or wait for a new relative low under $87 before initiating positions. Our first target is $81.00. I'm suggesting a stop loss at $100.50. More conservative traders can use a stop closer to $96 or the 200-dma.

Company Info:

The TLT is an exchange traded fund that tries to mimic the performance of the Barclays Capital U.S. 20+Year Treasury Bond Index.

Use the 2011 January puts (Entry point - now, at current levels)

BUY PUT JAN 2011 $85.00 strike (VJL-MG) current ask $6.40
-or-
BUY PUT JAN 2012 $80.00 strike (YLI-MB) current ask $8.90

Chart of TLT



Play Updates

Big Rally Into 2010

by James Brown

Click here to email James Brown

Editor's Note:

It's been a very good week for some of our material/commodity-related plays. Some of the stocks on our list look so overbought that readers may want to take some money off the table right now. You could always jump back in on a correction.


Closed Plays


None. No closed plays this week.


Play Updates


ACI $26.82 +0.04 -- Arch Coal Inc.

It's been an extremely good week for ACI. The stock surged past resistance to close at new 52-week highs. The stock now looks short-term overbought and due for a correction. More conservative investors might want to raise their stops toward $22. I'm adjusting our exit strategy. We want to sell half at $29.75. We'll sell the final half at $34.75. I'd be tempted to buy long-term calls again if we see a bounce near $24.00.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $3.40/3.50
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $51.14 +0.75 - Alpha Natural Resources, Inc.

Target achieved. The coal stocks were in rally mode last week and ANR surged from under $45 to over $50. Our first target to take profits was at $49.80 and ANR hit this target on January 6th. I am raising our stop loss to $41.45. Our second and final target is $57.25. ANR is short-term overbought and due for a correction. I am not suggesting new bullish positions at this time.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $17.10/20.00
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

01/06/10 ANR hits 1st target at $49.80. Option @ $15.20 (+117.1%)

Chart of ANR:


BAC $16.78 -0.15 - Bank of America Corp.

Banking stocks enjoyed a substantial rally the first week of January. Shares of BAC vaulted from the $15 region toward $17. While BAC has broken some short-term resistance levels you'll notice that the rally stalled at one of its prior trendlines of support. I am raising our stop loss to $14.75. I am not suggesting new long-term LEAPS positions at this time.

Our long-term target is the $25-30 zone.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $7.20/7.30
-stop loss on BAC @ 14.75

10/31/09 Sell Half -- option at $6.00 (+152%)

Chart of BAC


BQI $1.20 +0.03 -- Oilsands Quest Inc.

Crude oil has seen a huge rebound in the last two weeks and yet BQI isn't moving very fast. The short-term trend is up but shares are struggling with technical resistance at the 50-dma and exponential 200-dma. My previous update suggested buying a breakout over the $1.20-1.25 level and shares did trade over $1.20 last week. Based on your own trading style you can wait for a dip toward $1.10-1.05 or wait for a breakout over $1.25-1.30 as your entry point. Our long-term goal is $2.90.

Nov 27th, 2009 - entry price on BQI @ 1.05, (buy the stock)
-stop loss on BQI @ 0.89

Chart of BQI:


CHK $28.91 +0.19 -- Chesapeake Energy Corp.

CHK is another energy stock enjoying the strength in the sector right now. The stock is trading at two-month highs and has yet to breakout past its 2009 resistance near $30.00. I'm concerned that the rally in the OIX oil index and OSX oil services index has stalled right at their 2009 highs and the sector could correct lower. We can expect CHK to follow its peers. Look for a dip toward $25.00, which should be new support. Our long-term target is $40.00.

Oct 30th, 2009 - entry price on CHK @ 24.00, option @ 4.70
symbol: VEC-AE, JAN 2011 $25 LEAP call - current bid/ask $6.45/6.50
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $56.21 +0.75 -- Consol Energy Inc.

CNX jumped from under $50 to $56.50 last week. The stock is hitting new one-year highs. I'm bullish but shares look short-term overbought. I am raising our stop loss to $44.95. CNX is very close to our second target at $58.50. More conservative traders may want to exit 100% at this level. We have a third, more aggressive target at $64.90. I am not suggesting new bullish positions at this time.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $18.00/19.70
-stop loss on CNX @ 44.95

1st Target hit 09/16/09 @ 48.50, option price $15.40 (+97%)

Chart of CNX


DE $57.63 +1.53 -- Deere & Co.

Shares of DE displayed relative strength on Friday with a bullish breakout from its recent consolidation. The stock looks ready to run higher. I'm upping our stop loss to $48.45. Our long-term target on DE is $69.50.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $11.50/11.75
-stop loss on DE @ 48.45

Chart of DE:


EMR $44.06 +0.25 -- Emerson Electric Co.

EMR also broke out to new highs. The stock is slowly marching higher and just crossed potential resistance near $44.00. Our plan is to sell half of our position at our original target of $47.50. We'll sell the rest at $54.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $6.30/6.50
-stop loss on EMR @ 35.90.

Chart of EMR:


FSLR $139.68 -0.80 -- First Solar

This is it! We're down to our last five days before January 2010 options expire. The calls on our covered call play are set to expire worthless and the stock is up over $10 from our entry point. Be careful here with your stock position. FSLR appears to be forming a bearish double top near $140.

I am not suggesting new positions at this time. Currently we are long the 2010 January $100 put and we have a covered call play that should be fine if FSLR stays above $90. At this point the $100 put, part of an old spread, is nearly worthless.

Covered Call position:

Long 100 shares of FSLR @ $128.00
Short 2010 $150 LEAPS Call LZL-AA @ $40.70
Profit if called is $40.70 in option premium + $22 in stock (+49%) if FSLR is above $150.00.

Put Spread position:

Long 2010 $100 LEAPS Put LQM-MT @ $32.90
Short 2010 $250 LEAPS Put LZL-MJ @ $135.70, net credit $103

- Update 08/15/09 -
Cover the 2010 $250 Put at $109.40. Keep the $100 put.

Currently the 2010 Jan. $100 put is worth (bid) $0.18.
If you're curious the 2010 Jan. $150 call is at $ 0.47.

Chart of FSLR


FST $25.83 +0.44 -- Forest Oil Corp.

Strength in the oil sector has sent shares of FST soaring. The stock closed at new 52-week highs. Shares are arguably short-term overbought and due for a dip. I am raising our stop loss to $19.49. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $8.10/8.40
-stop loss on FST @ 19.49

Chart of FST:


GHM $20.52 +0.13 -- Graham Corp.

Shares of GHM have spent the last three weeks moving sideways and digesting its previous gains. I am still suggesting readers consider an early exit and take some money off the table. I'm not suggesting new positions.

The spreads on the LEAPS remain horribly wide but they're getting better. As we get closer to June these spreads should narrow. When you choose to exit you may not want to use a market order.

Right now our target to exit is $24.00 but we may want to add a second, higher target.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $5.70/6.70
-stop loss on GHM @ 15.75

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 15.75

Chart of GHM:


GNK $25.68 +1.20 -- Genco Shipping

Investor appetite for risk has improved and the shipping stocks sailed higher last week. GNK rebounded from under a cloud of resistance near $23 to new four-week highs. I've discussed the problem with oversupply in the shipping industry before. Many analysts are concerned that new ships coming online in late 2010 and early 2011 will push shipping rates lower. I heard one opinion this past week that suggested many of the shipping companies would cancel orders to reduce that risk of oversupply. Looking out over the next few months, if the economy does improve, then I would still expect GNK to benefit.

In summary I would be tempted to buy LEAPS again on a new dip or bounce near $24.00. I am raising our stop loss to $20.95, just under the simple 200-dma. Our plan was to use small positions to keep our risk limited. Our long-term target is $39.00.

Nov 21st, 2009 - entry price on GNK @ 25.46, option @ 5.00
symbol: OKJ-AF, 2011 $30 LEAP call - current bid/ask $3.70/4.10
-stop loss on GNK @ 20.95

Chart of GNK:


HON $42.12 change: +0.91 - Honeywell Intl. Inc.

Industrial good stocks were big winners last week. Shares of HON rallied to new 52-week highs. I am almost tempted to buy LEAPS at this level but I'm still concerned about a potential market correction in January. Our first target to take profits is at $49.00. Our second target is at $54.00.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $2.75/2.90
-stop loss on HON @ 36.85

Chart of HON:


INTC $20.83 +0.23 -- Intel Corp.

Once again we are faced with the choice of taking profits early or buying some short-term put protection. Intel is due to report earnings after the market's close on January 14th. January options expire 24 hours later after the close on January 15th. You could choose to buy some cheap January puts before the closing bell on Thursday and if Intel disappoints and spikes down on Friday you've got some protection (just be sure to sell those puts before expiration). You could also choose to buy some out of the money February puts. Or you could just take profits now ahead of earnings.

The newsletter is going to let it ride. We're not taking profits and we're not buying puts although I would seriously consider it. Right now expectations are pretty bullish for INTC's earnings. They're so bullish that we're at risk for Intel to disappoint and the stock could overreact lower. Given our long-term time frame I suggest we hang on and endure any post-earnings volatility.

I am not suggesting new long-term positions at this time. Our long-term target is the $24-26 zone.

FYI: Shares of Intel don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $2.55/2.59
-stop loss on INTC @ 17.90.

Chart of INTC:


MTW $13.30 +0.77 -- Manitowoc Inc.

All I can say is "wow!" The +33% rally in MTW last week was totally unexpected. Investors were on a buying frenzy and MTW just exploded higher. I'm not complaining. Our LEAPS almost doubled. However, short-term the stock is clearly overbought and due for a correction. Nimble traders could sell now, and just buy the dip when it happens. The $11.50 zone might be a good spot to look for a bounce.

Please note that I'm raising the stop loss to $8.95. I am not suggesting new positions at this time. Our long-term target is $17.00.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $4.60/4.80
-stop loss on MWT @ 8.95

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 8.95

Chart of MTW:


ORCL $24.68 +0.30 -- Oracle Corp.

We've been expecting ORCL to roll over and fill the gap. It is slowly drifting lower but has yet to break down under the $24.00 level again. I'd prefer to launch new positions on a dip near $23.00. Our stop loss is at $21.75. Our long-term target is $29.75.

FYI: Shares of ORCL don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

Dec. 18th, 2009 - entry price on ORCL @ 24.05, option @ 2.55
symbol: VOC-AE, 2011 LEAP $25 call - current bid/ask $2.56/2.61
-stop loss on ORCL @ 21.75.

Chart of ORCL:


PBR $48.46 +0.26 - Petroleo Brasiliero

The performance in shares of PBR has been very disappointing. The oil sector has rocketed higher this past week and yet PBR is still struggling with resistance near its 50-dma and its broken trendline of support. We are down to our last five days before January options expire. Odds are very much against us here.

Our adjusted target to exit is $53.00 or higher.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $0.23/0.25
-stop loss on PBR at $44.40

Chart of PBR:


PEP $60.77 -0.20 -- PEPSICO Inc.

Once again I feel the need to warn investors about the trading action in shares of PEP. The stock's rally attempt past the 50-dma has quickly reversed lower. Traders bought the dip again at the 100-dma on Friday but overall PEP looks vulnerable. More conservative traders may want to exit early or raise their stops. At this time I would expect a pull back toward $58.00 or the 200-dma near $57.00. We still have 12 months to go but it could be rocky going forward.

I'm not suggesting new bullish positions at this time. Our exit target is the $69.90 mark.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $4.80/5.00
-stop loss on PEP at $54.95

Chart of PEP:


RAI $53.14 -0.25 -- Reynolds American Inc.

I was worried a week ago because RAI had broken down from its sideways consolidation. Fortunately there was no follow through lower. Shares remain under resistance near $54.00. More conservative traders will want to seriously consider a complete exit right here! Please note our new stop loss at $49.45. I'm not suggesting new positions at this time.

Our second and final target is $57.50.

July 24th, 2009 - entry price on RAI @ 42.50, option @ $4.50(estimate)
symbol: OWO-AH, 2011 JAN $40.00 LEAP call - current bid/ask $13.10/13.60
-stop loss on RAI at $49.45

Sold Half on 10/19 @ 49.50, option @ $8.90 (+97%)

Chart of RAI:


RGLD $49.65 +1.28 -- Royal Gold Inc.

Gold futures have bounced sharply higher this past week and the miners have followed. Shares of RGLD have managed to hold technical support at the rising 100-dma. I would be tempted to open new bullish positions on a breakout back above the $50.00 level. If you do initiate a new position consider buying the $50 or $55 strikes.

Our long-term target to exit is $64.50.

Nov. 7th, 2009 - entry price on RGLD @ 50.70, option @ 7.50
symbol: ZMO-AL, 2011 JAN $60 LEAP call - current bid/ask $5.00/5.20
-stop loss on RLGD @ 41.95

Chart of RGLD


TEX $22.76 +0.17 -- Terex Corp.

TEX has been another big winner with a strong rally past short-term resistance. The stock now looks short-term overbought and due for a dip. I would still hesitate to launch new positions in TEX right here. Our final target is $29.50.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $5.90/6.20
-stop loss on TEX @ 17.75

Sell half (10/24/09), option at $7.50 (+82.9%)

Chart of TEX:


UNH $32.70 -0.31 -- UnitedHealth Group Inc.

Wow! What a difference a week can make. The healthcare stocks rallied and UNH has set new one-year closing highs. I am inching up our stop loss to $27.99. More conservative traders may want to place their stops closer to $29.50ish. The $30.00 level should be significant support.

The plan was to use small positions to limit our risk. Our long-term target is $42.50.

Dec 16th, 2009 - entry price on UNH @ 31.55, option @ 3.80
symbol: VUH-AG, 2011 JAN $35 LEAP call - current bid/ask $3.45/3.55
-stop loss on UNH @ 27.99

Chart of UNH:


UYG $6.15 -0.05 - ProShares Ultra Financials (2x) ETF

Financials were some of the best performers last week. The UYG shot past resistance at $6.00 but has stalled at technical resistance with its exponential 200-dma and the old trendline of support now acting as resistance (see chart). The sector looks a bit overbought. I'm not suggesting new positions. JPM's earnings report late next week could be a pivotal moment for the industry. Please note our new stop loss at $5.30.

Our second and final target is $9.50.

FYI: The UYG trades off the DJUSFN index.

Our strategy called for buying the ETF instead of the options.

Current position in the UYG = $1.50 entry (stop loss: 5.30)

10/14/09 Exit - Sell Half @ 6.31 (gap open exit, +320%)

Chart of UYG:


VICR $ 9.92 +0.47 -- VICOR Corp.

As expected VICR has broken out higher from its sideways consolidation. This looks like a new bullish entry point. However, readers will want to keep positions small as I'm still concerned about a January correction in the stock market.

Our twelve-month target is the $13.50-14.00 zone (one reason I prefer the stock over the option). Remember, if the market dips in January VICR will probably dip with it.

Dec 26th, 2009 - entry price on VICR@ 9.30, option @ 1.40
symbol: VQV-GB, 2010 JUL $10 LEAP call - current bid/ask $1.35/1.60
-stop loss on VICR @ 7.45

- or -

Dec. 26th 2009 - entry price on VICR (the stock) @ 9.30
-stop loss on VICR @ 7.45

Chart of VICR:



Watch

Planting Seeds

by James Brown

Click here to email James Brown


New Watch List Entries

MOS - Mosaic Co.

POT - Potash Corp.


Active Watch List Candidates

DSX - Diana Shipping Inc.

Pharmaceutical Product Development Inc. (PPDI)


Dropped Watch List Entries

None.


New Watch List Candidates:

Editor's Note:

Last week's rally in the stock market was impressive. Several sectors saw huge gains. This widespread rally is mutual funds and index funds putting year-end and quarter end money to work. This rally is going to run out of steam. The question is when? While I'm still concerned that stocks could see a correction in January I'm willing to consider the possibility that the correction doesn't show up. One scenario is that stocks trade sideways or drift higher into earnings season. Then stocks see another spike higher on better than expected earnings and this forms a short-term top that then rolls over into a correction. Remember, we want to see a correction so we can use it as an entry point for our LEAPS positions.


MOS - Mosaic Co. $66.70 +0.94

MOS recently reported earnings. The company missed Wall Street's estimates but beat on the revenue number. The stock rallied higher on then news. Of course it didn't hurt that the stock market was in rally mode. The breakout past $55.00 and the $60 levels was significant. As the global economy rebounds this year the fertilizer stocks should see further strength.

I am suggesting that we buy call LEAPS on a dip back to $60.50. You could argue that $62 will be short-term support but this is a volatile group and MOS will probably over correct. I'm listing our stop loss at $49.00. Our long-term target is the $90-100 zone. (Readers might want to consider the 2012 LEAPS too).

Company Info:
The Mosaic Company is one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients. Mosaic is a single source provider of phosphates and potash fertilizers and feed ingredients for the global agriculture industry. (source: company press release or website)

NOTE: In 2009 MOS issued a special cash dividend of $1.30 per share payable back on December 3rd, 2009. The CBOE issued a new LEAPS symbol to account for the dividend. The old 2011 LEAPS have a root symbol of ZHX. The LEAPS we want to use are the ZXW root symbols. Buy-the-Dip trigger: $60.50

BUY the 2011 January $70 call (symbol: ZXW-AN)

Chart of MOS:


POT - Potash Corp. $124.43 -0.34

POT is another play in the fertilizer sector. The stock has also see a hefty run up this past week. The same argument for MOS applies to POT. As the global economy improves demand for fertilizer should improve as well. We want to use a dip to $111.00 as an entry point to buy LEAPS. If triggered we'll use a wide stop at $98.50. This can be a very volatile stock so keep your position size small. Our long-term target is $160 or higher.

FYI: The Point & Figure chart is bullish and points to a $168 target. POT is due to report earnings on January 28th and should report before the opening bell. More conservative traders may want to wait until after the earnings report before opening new bullish positions.

Company Info:
PotashCorp is an integrated producer of fertilizer, industrial and animal feed products. We are the world's largest fertilizer enterprise, producing the three primary plant nutrients: potash, phosphate and nitrogen. Among these, potash – the main focus of our business – delivers the highest quality earnings. With large low-cost operations, plans to expand capacity significantly and strategic global investments, we have an unmatched ability to meet the needs of North America and growing offshore potash markets. (source: company press release or website)

Buy-the-Dip trigger: $111.00

BUY the 2011 January $120 calls (symbol: VPT-AD)

Chart of POT:


Active Watch List Candidates:


DSX $16.09 +0.67 - Diana Shipping Inc.

On your mark. Get set. Go! Shipping stocks sliced higher last week and shares of DSX broke through a handful of short-term resistance levels. The high on Friday was $16.24. That was almost enough to hit our trigger to buy LEAPS. More aggressive traders may want to go ahead and launch positions. Actually if you're nimble enough consider buying LEAPS on a dip in the $15.50-15.00 zone. I'm suggesting the rest of us stick to the plan and wait for DSX to hit our entry point at $16.25. If triggered we'll use a stop loss at $14.25. Our long-term target is $24.00. We are changing our suggested strike from the 2011 January $20s to the $17.50s.

FYI: Investors should be aware that shipping stocks do face a headwind toward the end of 2010 and early 2011 as more ships come to market and put pressure on shipping rates. The problem is widely acknowledged but over the next six months I don't see it being a factor for us.

Buy-the-Breakout trigger: $16.25

BUY the 2011 January $17.50 LEAPS (symbol: XDJ-AW)

Chart of DSX:


PPDI $22.83 +0.15 -- Pharmaceutical Product Development Inc.

PPDI under performed last week thanks in part to an analyst downgrade. Traders did buy the dip at its rising 30-dma. We're still on the sidelines waiting for a breakout past resistance. We're going to stick to our plan with a trigger to buy LEAPS at $24.25. If triggered we'll use a stop loss at $21.90. Our first target is $29.25.

Breakout trigger: $24.25

BUY the 2010 July $25.00 calls (symbol: PJQ-GE)

Chart of PPDI: