EOT Position Update – June 8, 2011

| June 8, 2011

June 8, 2011

Market Snapshot

The Dow, S&P 500, and NASDAQ hit their bull market highs on May 2nd.  Since then, they’ve been trending steadily downward.

But that’s nothing compared to June.  So far this month, the S&P 500 has logged six consecutive down trading days.  The large cap index is now down more than 5% for the month.

As you know, I’ve been expecting some stock market weakness.  But this is getting ridiculous…

The rapid selloff has pushed the markets into oversold territory.  I’m expecting the markets to bounce.  But the bounce may not come until the S&P 500 reaches 1,250.

The technical support zone at 1,250 is the line in the sand.  It marks the March low and the 200-day moving average.  If the bulls can’t hold this level, it could get ugly in a hurry.

So far, the evidence supports stocks getting a bounce in the short term.

Remember, the economy isn’t plunging into recession.  Economic growth is merely slowing.  And there’s a big difference between the two scenarios.

When growth slows, we often see stock prices stagnate.  In other words, stocks tend to trade in choppy sideways action.  I think that’s what we’re going to see now.


Because neither the bulls nor the bears have enough conviction to push the market either way.  They’re waiting to see if growth will re-accelerate or if the economy will dip into recession.

Here’s the bottom line…

Right now the economic data’s bearish.  But if we get a few more months of weak economic data, the Fed is probably going to start printing money again.

And we all know what happens when the Fed turns on the money spigot.  Risky assets like stocks and commodities tend to go straight up.

In short, the weakness we’ve seen lately is overdone.  But with so much uncertainty, I don’t see the markets making a big move one way or the other anytime soon.

Let’s move onto the updates…

Position Updates

Just a quick note:  Remember, we won’t update every open position every week.  I try to focus on the positions that have some significant news or price movement.

  SBUX January 2012 $38 Calls
SBUX was upgraded to outperform by an analyst at BMO.  The analyst thinks SBUX can beat management’s projected revenue and earnings growth.  Cheers to that… Obviously, I share their sentiment.  It may take a while, but once the markets shake their bearish tone, SBUX should soar.  Continue holding for big gains ahead.  Resistance is at $40 and $45.  Support is at $32.50 and $30.

  POT September 2011 $60 Calls
POT is caught up in the overall market weakness.  The good news is it’s holding above the upward trending 200-day moving average.  The key technical level of support should put a floor underneath the stock price.  I’m expecting the agriculture industry’s strong fundamentals to propel POT higher regardless of what the broad market does. Continue holding for bigger gains ahead.  Resistance is at $62.50 and $70.  Support is at $50 and $48.

  WMT June 2011 $55 Puts
WMT tested support of the 200-day moving average last week.  Congratulations to everyone who locked in their 48% gains on Friday.  Our options are in the money with expiration day rapidly approaching.  With the markets showing weakness, aggressive traders may want to hold on for WMT’s next leg down.  Resistance is at $57 and $58. Support is at $52 and $50.

  WPRT October 2011 $30 Calls
WPRT announced the purchase of Emer S.p.A. today.  They’re buying the Italian company for $40 million.  Not surprisingly, the stock is down on the news.  The deal is dilutive to existing shares.  However, the merger of the two companies should enhance WPRT’s position as a leader in natural gas fuel systems.  What’s more, it doesn’t change our investment thesis.  If the NAT GAS Act passes Congress, WPRT will skyrocket.  Continue holding as we await the news on the fate of the NAT GAS Act.  Resistance is at $30 and $35.  Support is at $20 and $17.50.

Category: EOT Update

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