EOT Position Update – May 4, 2011

| May 4, 2011

May 4, 2011

Market Snapshot

Slowing economic growth and inflation risk are on the rise… sounds to me like a recipe for a market correction.

Let me explain…

Right now, we’re seeing negative readings in key economic indicators like jobs, oil inventories, and the ISM Non-Manufacturing index.  The data show business activity is running a bit slower than expected.  And at the same time, numerous measures of inflation (outside of the nonsensical core inflation the Fed tracks) are running hot.

Slower growth and rising inflation is not an environment for stocks.

What’s more, the markets are in the midst of a major sector rotation.  Investors are pulling money out of economically sensitive cyclical sectors and pouring it into defensive sectors.

The shift is being driven by the business cycle and a seasonal sector rotation.  It’s a clear indication investor sentiment is becoming less bullish, if not outright bearish.

Remember, a spike in energy prices like we’ve seen over the last few months is often the first step in a business cycle top and an economic slowdown.  Plus, we’re entering into the markets slow summer season.  There’s a reason why many Wall Street pros say… “sell in May and go away”!

And to top it off, the Fed’s ‘grand experiment’, called QE2, is coming to an end in June.

If you put it all together, there’s only one conclusion.  The markets are heading for a rough patch.

I’m dialing up a new trade to profit from the sector rotation and market weakness.  So keep an eye out for a new trade later this week.

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.

  WMT June 2011 $55 Puts
WMT is getting a boost from the massive sector rotation taking place right now. Investors are selling cyclical stocks and buying defensive stocks.  WMT is traditionally a defensive play as a consumer staples retailer.  But WMT has lost its way over the last few years.  They forgot what made them such a great investment in the first place… low prices.  Now they’re business model looks like it’s more vulnerable to cyclical swings in the economy.  I see warnings signs that WMT’s quarterly earnings are going to come up short of investors’ expectation.  Hold tight for the earnings announcement in a few weeks.  Resistance is at $57 and $58.  Support is at $52 and $50.

  WPRT October 2011 $30 Calls
WPRT is hanging out between $23 and $26.  The stock is consolidating after a big move higher on speculation the Nat Gas Act could be enacted this year.  This is a speculative trade with huge upside.  But until the legislation is passed, we just have to sit tight.  Resistance is at $30 and $35.  Support is at $20 and $17.50.

  HP June 2011 $70 Calls
HP came up short of analysts’ earnings expectations.  And the price of crude oil is down 4% in the last week.  These two factors have taken the wind out of HP’s sails. Here’s the bottom line… I think HP is a great company.  They’re on track to dominate the US onshore contract drilling market with their FlexRigs.  But right now HP stock is selling off, and I don’t think it will come back before our options expire next month. Conservative traders already pocketed 110% gains on this trade a month ago, but  aggressive traders still holding these options may want to sell now to conserve capital.

  AKAM August 2011 $40 Calls
AKAM’s guidance was a punch in the gut.  They surprised everyone by indicating their content delivery business is slowing and pricing power is deteriorating.  AKAM’s still growing but competition from Level 3 (LVLT) and others is taking a toll on profitability. I think it’s time to cut AKAM loose.  All but the most aggressive traders should go ahead and sell their AKAM call options now.

  MCD June 2011 $80 Calls
MCD broke through resistance near $77.  The sector rotation into defensive stocks is driving shares of this consumer staple higher in a hurry.  Keep an eye on MCD as it approaches our resistance levels at $80 and $85.  Support is at $70 and $67.50.

Category: EOT Update

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