Yahoo, Intel, and Japan Fuel Market Sell-Off
Downside Pressure Opens Up 3 News Plays
Dear Bottarelli Research Member,
After an extremely strong start to 2006, the major market averages have entered into a short-term selling phase, fueled by sub-par earnings reports from the likes of Yahoo and Intel. Add into the equation that Japan’s Nikkei 225, undoubtedly the best-performing index of 2005, fell 464.77 points in overnight trading, and it’s easy to see why the today’s markets are spooked.
Of course, the point of Bottarelli Research is not to time the moves of the markets. After all, projecting how the markets will react to tech earnings is nothing shot of flipping a coin. Rather, the way to consistently make trading profits is to isolate those unique opportunities that put the odds for success squarely in your favor. And that’s what we have in today’s alert.
It’s always an extremely strong sign to see companies hitting new 52-week highs in the midst of a major market sell-off. On the flipside, it’s also a good idea to get positioned on those extremely weak companies that are getting dragged down even more by a weak market environment. Owning both an upside and a downside position like this gives you the ability to make money no matter what’s happening to the major market averages. That’s why today’s alert features two trades — one upside call and two downside puts.
The upside play comes in the form of Burlington Resources (BR – NYSE).
No surprise here, BR is a major crude oil, natural gas liquids, and natural gas company with operations primarily in North America and Canada. If we can take one unquestioned fact from 2005, it was that oil and energy companies were red hot. So far in 2006, this super-trend has continued, especially in BR. Look at the chart:
After breaking through that upper support line just above $80.00 a share, BR has continued its upward march to $90.00. By the looks of things, I’d expect BR to be a $100 stock by the end of March. So let’s play this one to the upside.
PLAY: Buy the BR February 90 Calls (BR BR) at or under $2.15, good for the day. The current bid/ask spread is $2.05 to $2.15. Place a protective stop loss at $1.00.
The first of your two new downside plays is a company called Biosite Incorporated (BSTE – NASDAQ).
Biosite developd protein-based diagnostics in the United States for drug screening, heart attack, congestive heart failure, acute coronary syndromes, evaluation of shortness of breath, and certain bacterial and parasitic infections.
By that description, it would appear that the aging U.S. demographic puts BSTE in a strong and growing market sector. But there are some major bumps in the road — and they come in the form of Roche Diagnostics.
As I write, Roche is alleging that Biosite is infringing on two patents that they own. This parent infringement has scared individual investors and insiders at BSTE alike. In fact, looking at the log of insider transactions, I didn’t see anything but automatic sales, option exercises, and direct planned sales dating back to February 3rd 2004. BSTE insiders haven’t logged a single stock buy in over two years!
The stock chart clearly shows this tremendous volatility. The recent breakdown under $50.00 could be the beginning of a full-on sell-off.
On February 9th, BSTE is slated to announce their 2005 fourth quarter results. Judging by the insider activity, I don’t have much confidence in a glowing report. In fact, we may experience even more selling pressure leading up to this date. So let’s get positioned in BSTE puts right now.
PLAY: Buy the BSTE February 50 Puts (BQS NJ) at or under $3.60, good for the day. Current bid/ask spread is $3.20 to $3.40. Place a protective stop loss at $2.00.
The final downside play comes in the form of Mills Corp. (MLS – NYSE).
Mills is a real estate investment trust (REIT) that manages 42 retail and entertainment super-regional shopping and entertainment centers in the United States, Canada, and Europe. What gets me is that this is the ideal environment for a real estate company to be making record earnings. But that’s certainly not the case with Mills.
On January 9th of this year, Mills announced that it would have to restate earnings after auditing their financial results from 2000 through 2004. These adjustments are expected to reduce net loss by 3 cents a share — although that’s just the early indication. Anything more than 3 cents and the stock could get rocked even lower. Not only that, but Mills just had to secured a $150 million term loan from J.P. Morgan just to keep their liquidity in balance. Quite frankly, things don’t look good. So let’s buy some puts.
PLAY: Buy the MLS February 40 puts (MLS NH) at or under $2.30, good for the day. The current bid/ask spread is $1.95 to $2.20. Place a protective stop loss at $1.00.
UPDATES
After setting a new 52-week high at $20.98, which of course triggered a Bottarelli Research “buy” alert, the stock has stabilized. Considering that the NASDAQ has been immersed in a sea of selling pressure lately, ECLG’s ability not to sell off has proven that it’s still engaged in an up-trend.
You entered the ECLG March 20 Calls (EGU CD) for $1.80, and they currently trade for $1.50. Hold.
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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