A Little Too Much

“If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia.”

- Commodity Expert Jim Rogers, who formed the Quantum Fund with George Soros in 1970

PLAY: Buy the UPS October 50 Puts (UPS VJ) at market, good for the day. Place a protective stop limit at $2.10 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the RTH October 75 Puts (RTH VO) at market, good for the day. Place a protective stop limit at $3.30 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

PLAY: Buy the MDR January 2010 15 Calls (YAE AZ) at market, good for the day. Place a protective stop limit at $1.90 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

Dear Bottarelli Research Member,

Believe it or not, we just witnessed the strongest 4-week rally on the S&P 500 since 1933. Wow.

During this up-swing, I’ve told my daily Bottarelli Research Options readers that this was nothing more than a classic bear market rally. I still feel that way.

Therefore, today’s LEAPS alert will capitalize on the market’s latest upside move by getting you positioned in two plays that have become tremendously over-bought. Over the next 2-3 months, as Wall Street realizes that the global economy is nowhere near “fixed,” both positions are set to pull back. When this occurs, we’ll be in position to profit.

At the same time, we’ll combine these two puts with an upside call on a company that’s quietly becoming one of the first beneficiaries of the new government spending programs. As you’ll see, this company just received a billion-dollar contract in February, and the shares have been quietly inching higher without any notoriety. This is setting up for a powerful upside move, and we’ll take full advantage by getting positioned in longer-dated calls today. So on that note, let’s begin!

First and foremost, I’d like to highlight DryShips (DRYS – NASDAQ), which is one of the most volatile stocks you’ll ever encounter. They own and operate dry bulk carriers, which includes a 40-ship fleet that transports 3.3 million tons of commodities such as coal, iron ore, grains, bauxite, phosphate, fertilizers, and steel products.

As you probably can guess, the global recession has absolutely clobbered shares of DRYS, taking the stock from $120.00 down to current levels under $5.00. That’s right, we’re talking a 92% decline! As you read this, ship owners are anchoring the largest number of vessels since the 1970s. And no wonder — they have absolutely no cargo! According to a Bloomberg interview with GAC Solutions (a service provider for the shipping industry), commodity-based cargo ships might be harbored for months — or even years.

When I look at this situation, it reminds me of the quote from Jim Rogers (above). You see, you won’t find a single economist today that argues against countries like Russia, Brazil, China, and India leading the global economic expansion over the next 20 to 30 years. Therefore, despite the recent global economic downturn, a company like DRYS (based in Athens, Greece) is still in one of the best strategic positions of any other company in the world.

There will be a time in the future when dry bulk shipping loads pick up. That’s when you’ll see shares of DRYS begin to move aggressively higher. When they do, we’ll take full advantage by adding LEAPS calls to our ledger. But right now, the timing is not right, so keep this trading idea in the back of your mind going forward.

Now, in contrast to DRYS, I do feel like the timing is right to play put options on United Parcel Service (UPS – NYSE).You see, unlike DRYS, United Parcel Service does not enjoy a powerful strategic position. UPS operates 107,000 cars/vans and 570 aircrafts that operate the following business segments:

• U.S. Domestic Package: Includes time-definite delivery of letters, documents, and packages in the United States.
• International Package: Provides air and ground delivery of small packages and letters to approximately 200 countries and territories
• Supply Chain & Freight: Offers forwarding and logistics services, freight distribution, customs brokerage, mail, and consulting services to customers in North America.

When I look at the stock chart of UPS, I see a company that has just had a very impressive rally. In fact, the entire Dow Jones Transportation Index has now rebounded 40% from its March low, which has out-performed other benchmark indices (such as the Dow and S&P 500). See for yourself below:

One explanation of this performance is the idea that the transportation sector is a strong barometer of the global economy — which many feel has now recovered. As a result, a powerful recovery in the transportation sector is often the first sign that economic conditions are improving. After all, as consumer demand improves, you see companies shipping more goods from one place to another. But as I look at the UPS chart, I see nothing more than an over-sold market rally. As you can see, shares of UPS are hitting their head on the 200-day moving average, which is a very strong level of resistance. See for yourself below:

Not only that, but on a weekly basis, UPS is also approaching another resistance level at the 50-day moving average. The combination of both technical indicators should lead to selling pressure on UPS very soon.

Plus, despite the recent up-move, it’s clear that the shipping numbers we’re now seeing on a global scale are depressionary. For example, the CEO of Tsakos (a major shipper) says that there is “no hope” for a recovery in the container and transportation business until sometime in 2010. As a result, I feel like the recent up-swing will soon move right back down.

Plus, UPS will also get hurt as oil prices continue to move above $50.00 per barrel. Despite all the commercials you see for UPS, I really don’t think that a guy with a mullet and a dry-erase whiteboard will help correct the company’s problems. So, as the first order of business, we’ll get positioned to profit off a fall in UPS by adding longer-dated puts. Here’s the play…

PLAY: Buy the UPS October 50 Puts (UPS VJ) at market, good for the day. Place a protective stop limit at $2.10 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

For our next play, we’ll apply the same trading strategy to the Retail HOLDRs (RTH – AMEX).As you probably know, the RTH groups together a basket of the market’s top 20 retail stocks and trades this entire group as one liquid basket. The RTH’s top ten holdings, which accounts for 85% of the basket, is made up of:

Just like the UPS chart, you can see that the RTH has also engaged in an impressive rally, moving from $60.00 up to $77.50 over the last month and a half. I attribute this rally to the bear-market bounce combined with slightly positive economic data.

For example, factory orders improved in February for the first time in seven months. At the same time, auto sales also increased for the first time in months. These two figures gave investors the sense that the worst is now behind us. As a result, we’ve just experienced a major upside move in the top retail stocks. In my view, this is another illusion.

After all, you won’t hear this in the mainstream media, but the government reports that our “official” unemployment rate now stands at 8.5%. But get this: If you factor into the equation unemployed people who haven’t looked for a job in 30 days, or those who are working part-time because they can’t find a full-time job, you’ll see that the “true” unemployment rate is really closer to 19.1%. As a basis of comparison, unemployment hit 24% during the Great Depression. Therefore, I think we’re in a situation that’s a lot worse than many people realize.

Right now, 5.73 million people are collecting benefits — and this figure will remain miserable for quite some time. That’s why I feel that the retail sector, despite its recent up-move, will soon move lower.

From a chart perspective, the RTH has also put in a powerful rally, taking it right up to a strong resistance level at the 200-day moving average. This should trigger a downside move on any forthcoming market weakness.

Furthermore, the weekly RTH chart also supports this bearish view. From a technical perspective, the RTH faces a coming resistance level right at the 50-day moving average.

If that’s not enough, Wal-Mart just reported worse-than-forecasted same-stores sales growth. At the same time, Costco Wholesale also reported that their March sales at stores open at least one year fell 5%, which lead to a 3% drop in their net sales. If Wal-Mart and Costco can’t grow right now, then no retailer can. Therefore, let’s profit off the down-move using RTH puts.

PLAY: Buy the RTH October 75 Puts (RTH VO) at market, good for the day. Place a protective stop limit at $3.30 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

In terms of a new upside call, I feel like we have a tremendous opportunity to hit a powerful winner with McDermott International (MDR – NYSE).McDermott is an engineering and construction company that focuses on energy infrastructure. Their customers include utilities, major oil companies, and the U.S. government — all of whom happen to be spending money right now.

On February 5^th, McDermottannounced that their subsidiary Babcock & Wilcox received $1 billion to manufacture nuclear components that support U.S. defense programs. If fully executed, this contract will be worth over $2.66 billion in revenue over a 10-year time span. As a result of this increased workload, MDR looks to be one of the few companies positioned to prosper throughout these harsh economic times.

From both a daily and a weekly chart perspective, MDR looks poised to keep moving higher. The daily chart shows a very sustainable upside move.

And the weekly chart (shown below) indicates that a move from $20.00 up to $30.00 could occur before the first major resistance level. Therefore, let’s add MDR calls to our LEAPS ledger now!

PLAY: Buy the MDR January 2010 15 Calls (YAE AZ) at market, good for the day. Place a protective stop limit at $1.90 and implement our scaled-selling technique as your position achieves gains of 50% (and greater).

UPDATES

CERN September 42.50 Calls (CQN IV): Our play on electronic medical records hit a high of $6.70 this week, good for a 28% gain off last week’s entry price. I would expect to see CERN break through the $46.00 level soon. Hold.

UDN September 25 Calls (UDN IE): As of mid-March, the Fed’s balance sheet was over $2 trillion — and this doesn’t even include their latest spending program, which could push this figure up to $3 trillion! This will certainly increase inflation fears, and subsequently drop the value of the U.S. dollar. That’s bullish for our UDN calls. Furthermore, a recent news report revealed that a growing number of cash-strapped communities have begun printing their own money. Can you imagine? This is reminiscent of the Great Depression! Here’s how it works: Businesses and individuals form a network to print currency. Shoppers then buy this currency at a discount ($0.90 cents for every $1.00, for example), and then they spend the full value at stores that accept the currency. I don’t know about you, but U.S. communalities that are getting organized enough to print their own currency certainly does not make a strong case for the U.S. dollar. Hold.

FXI January 30 Calls (YOF AD): The FXI continues to push higher, which has now handed us a solid 61% gain on this position. If the FXI can break through resistance at the 200-day moving average, we could be in for a powerful upside move. Having said that, this will be a very difficult level to penetrate. Therefore, I expect to see a temporary pullback. Based on this technical pattern, I’d like to officially lock in the remainder of our profits — with the plan to re-enter these calls when the FXI dips lower.Congrats on a nice winner! Sell.

PLAY: Sell the remaining half of your FXI January 30 Calls (YOF AD) at market, good for the day. I plan to re-enter these calls on any price dips.

UNG October 15 Calls (UNE JO): UNG is showing signs of forming a bottom, and I want to remain positioned to play a forthcoming bounce. Hold.

IBKR September 15 Calls (QBO IC): Data continues to support our investment thesis for IBKR, which is that more individuals are taking control of their finances than ever before. This should help IBKR maintain its upside move. Hold.

SU September 25 Calls (SU IE): After a momentary dip, SU is moving back up. As oil prices continue to push above $50.00 per barrel, SU will benefit. Hold.

IAG September 7.5 Calls (IAG IU), SLW September 5 Calls (SLW IA), AUY January 7.5 Calls (WNZ AU), & GDX September 35 Calls (GBJ II): As I’ve mentioned before, the demand for gold is now global. Case in point, the Chinese, Indians, and Arabs are all becoming big buyers. At the same time, the multi-trillion dollar stimulus spending here in the U.S. will undoubtedly spark another move into gold as a pure inflation hedge. In fact, if you look at year-over-year gold demand, the idea will become crystal clear. According to the World Gold Council, Americans bought 77.8 tons of gold in 2008 for investment purposes. In 2007, Americans bought only 16.6 tons in 2007. That’s a 368% increase, which completely supports the idea of holding upside calls on the top gold and silver producers. Hold.

M&T Bank July 30 Puts (MTB SU): When it comes to the financial sector, something doesn’t smell right. On Thursday, for example, Wells Fargo reported record-breaking profits, completely taking the markets by surprise. At the same time, an article from Reuters quoted an anonymous source familiar with the government-induced “stress test” on banks. According to this source, the U.S. Treasury Department is planning to delay the release of the completed bank stress test results until after the first-quarter earnings season. The reason for this delay is that they don’t want to disturb the markets.

In other words, the Treasury wants to let a company like WFC report blowout earnings, which shoots the banking stocks higher. Then, after all of these blowout earnings reports from the banks have been reported, they’ll come out and report (what looks to be) troubling conclusions from the stress test.

As you know, the purpose of this stress test process is to assess how the 19 largest U.S. banks would fare under more adverse economic conditions. These tests are expected to be completed by the end of April, but the Treasury has recently reported that they’ll be done before the end of the month. As I look at this situation, combined with WFC’s news, something just doesn’t smell right.

The fact that the Treasury is all of a sudden so concerned about how to release the stress-test results indicates that they’re not good. After all, if all the banks had passed the stress test, they’d simply report the results and let the financial sector soar. But according to the insider source, the Treasury is now concerned about avoiding further stock market complications. The bottom line is, there are still some very unsettling questions surrounding the financial sector, and nobody seems to have a solid answer. We can only believe what the Treasury, Fed, and individual bank companies are telling us — and right now, I don’t believe any of it. Unfortunately, there are some investors who do buy into their slanted news, and this has sparked a rally in shares of MTB. I refuse to play in this manipulated game. Therefore, we have no choice but to close out this position now. Sell.

NYSE Euronext January 2010 15 Calls (YVX AC): The push over the 50-day moving average has now given us a 30% gain on this position. Hold for more upside! Hold.

USO January 2010 30 Calls (KWW AD): As I’ve mentioned before, I feel like we pegged the bottom on these calls perfectly. Thursday’s bounce off the 50-day moving average indicated more upside ahead. We’re currently up 39%. Hold for more gains. Hold.

GERN January 2010 7.5 Calls (WNM AU): After setting a support level at the 200-day moving average, GERN is setting up for another move above the 50-day moving average. Hold.

VIX May 60 Calls (VIX EN): Talk of reinstating the up-tick rule has acted as a negative catalyst for the VIX. In short, reinstating the up-tick rule means that floor traders cannot aggressively push stocks lower in the midst of a sell-off. This reduces the level of investor panic and fear during a sell-off, which subsequently decreases the value of the VIX. Because of these new developments, we have no choice but to close our VIX call position. Sell.

TEVA January 2010 45 Calls (WTX AI): We could be seeing the beginning of an upside breakout in TEVA. Hold for a move up to new highs! Hold.

PCU January 2011 15 Calls (XBW AC): PCU is making a very strong move above its 200-day moving average, which could also qualify as an upside breakout signal. We’re up 43% on this position, so be sure to lock in half of your profits at the 50% level. Sell half at 50%.

YRCW January 2011 2.5 Calls (VYX AZ): Our decision to lock in half of our profits was dead on the money as YRCW has since pulled back. Since this is a January 2011 play, we have plenty of time. Therefore, hold for more gains. Hold.

Sincerely,