EOT Position Update – March 16, 2011

| March 16, 2011

March 16, 2011

Market Snapshot

A one-two punch from rising oil prices and a horrific natural disaster in Japan has the markets on the ropes.  The S&P 500 has shed more than 6% since it peaked on February 18th.

But I’m confident the market is going to bounce back quickly.

Here’s why…

Right now we’re seeing the highly leveraged players scurrying out of the market.  And there are plenty of them getting shaken out.

Just a few weeks ago a Bloomberg article reported, “hedge funds increased their net leverage in January to the highest level since October 2007, as they took advantage of record-low borrowing costs to bet that the US equity rally will continue.”

Leverage is great when you’re on the right side of the trade.  But when the markets start moving against you, it can get ugly in a hurry.  It’s why everything from stocks to commodities like gold, corn, and oil are all falling.

…the good news is the markets will be in a great position to rally once the leverage is out of the system.

The markets will have worked through the severely overbought conditions and other technical indicators showing a correction was long overdue.  A 5% to 10% or for that matter a 15% correction after a 30% surge is actually healthy.

Don’t forget, the fundamentals of the US economy are still improving.  Leading indicators and economic data show economic growth is accelerating.  Conditions are ripe for businesses to expand profitability.

The bottom line is I think this is a healthy correction within a bull market.  As such, I’m treating this as a great buying opportunity.  But if my view of the situation changes, I’ll quickly move to buying put options to profit from the fall.

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.

  AKAM August 2011 $40 Calls
AKAM is the latest trade we sent out on Friday.  Right now AKAM is trading for over $35 per share.  I think the stock looks oversold and undervalued at this price.  I’m expecting AKAM to bounce off the support zone and move higher in the days and weeks ahead.  Go ahead and buy these call options under $2.90 if you haven’t already. Resistance is at $43.50 and $47.  Support is at $32 and $30.

  GM June 2011 $35 Calls
GM is holding steady.  Buyers are stepping in every time the stock dips below $31.50. All in all, GM is looking strong considering the amount of selling and deleveraging we’ve seen in the past few weeks.  The company may benefit from production stoppages at Japanese automakers.  Continue holding for now.  Resistance is at $37 and $40. Support is at $31 and $29.

  RIO July 2011 $80 Calls
RIO’s taken a big hit over the last week.  It’s now below both of our support levels.  All but the most aggressive traders should sell to conserve capital.

  MCD June 2011 $80 Calls
MCD is holding up well in the face of the market correction.  But it’s clear the situation in Japan is putting some selling pressure on the stock.  Keep an eye on your support and resistance levels but continue holding these call options for now.  Resistance is at $80 and 85.  Support is at $70 and $67.50.

  AUY April 2011 $12 Calls
AUY has had a hard time gaining any momentum.  But I wouldn’t be surprised if the increased uncertainty and increasing risk of inflation were to light a fire under gold prices soon.  That could be just what AUY needs to get moving.  Resistance is at $14 and $17.  Support is at $11 and $10.

Category: EOT Update

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