A Crushing Blow for Microsoft

Plus, Setting the Tone for Next Week

Dear Bottarelli Research Member,

Let’s quickly recap the trading day — and then set the table for next week.

Without question, the news of the day is Microsoft (MSFT – NASDAQ) In fact, if it weren’t for Microsoft today, the markets would all be moving higher. So what happened?

This morning, shares of MSTF got slammed, falling 11% when the company failed to forecast earnings in line with Wall Street’s expectations. Microsoft stock, down $2.83 to $24.42, reported net income rose to $2.98 billion, or $0.29 cents a share, from $2.56 billion, or $0.23 cents, a year earlier. Thomson First Call was expecting a profit of $0.33. I guess you can add MSFT to the list of other struggling tech stocks like Intel and Dell. I really can’t sugar-coat this, so just take a look at this crushing, bludgeoned, and devastating chart:

With a move like that, I’m really surprised the major market averages have been able to keep their heads above water. In fact, a good reason why I was so comfortable holding onto our protective SPY June 129 Puts (SPY RK) was the historical market facts surrounding Fed rate cycles. You see, during the last nine interest rate cycles, stocks have fell an average of 7% between the time of the last Fed tightening and its first easing.

Now, we all know that Mr. Bernanke isn’t finished (as per his comments yesterday), but it’s clear that he will definitely slow things down. From a trading perspective, there will soon come a time when the Fed cycle officially comes to an end, and if history is any gauge, that will be the time where stocks become weak.

In terms of this week, I’m really surprised that the markets have remained relatively strong. After all, gas prices and mortgage rates are rising — and house prices are slipping. The American automobile industry has its foot halfway in the grave, and the paycheck of the average American worker has not even kept up with inflation. All this further strengthened my reason to hold the protective SPY puts.

What I found rather interesting today was that oil prices rose for the first time in 5 days. This price increase looks to have established a floor after setting a 2-week low. As you’ll see below, this triggered a number of oil stocks that I’m watching — which could lead to bullish plays next week.

Also, we have more disturbing news out of Iran. Today, Iran’s president said that his country would pay no attention to international calls to halt its nuclear work. According to an IRNA news agency, Mahmoud Ahmadinejad told a rally in northwest “Those who want to prevent Iranians from obtaining their right, should know that we do not give a damn to such resolutions.”

In response, Meir Itzchaki, who is the deputy director for arms control in the Foreign Ministry, said “It is disappointing that Iran, once again, is choosing to take advantage of the UN to promote their anti-Semitic agenda and their culture of hatred and terror while acting in total defiance of their international obligations and demands set out by the UN Security Council."

This is truly scary stuff. And it’s a strong reason why gold futures rose past $655 an ounce today — a level not seen since late 1980. On the heels of this gold move, silver prices rose 9%, which is why two silver stocks also triggered on my watch list today (company names profiled below). According to some gold analysts, the geopolitical tensions will continue to push metals higher — which could help gold break the $700 level.

This news also supports the case to get back into some defense plays — as we’ve had success playing stocks like ceramic product maker Ceradyne (CRDN – NASDAQ) and defense electronic product maker DRS Technologies (DRS – NYSE).

Now, a lot of you are always asking what I’m looking at. So today, I’d like to give you a look at the “short list” of stocks that I’m currently doing my due diligence on for a possible trade next week.

Kirby (KEX – NYSE): At $73.20, it looks like the stock wants to move up and establish a new high above $75.00. The company offers diesel engine services in the United States, with a fleet comprised 897 inland tank barges, 239 inland towboats, 4 offshore dry-cargo barges, 4 offshore tugboats, and 1 shifting tugboat. They also assist the United States Coast Guard, the U.S. Navy, offshore barge operators, oil service companies, and petrochemical companies with marine transportation services.

Air Methods (AIRM – NASDAQ): This is a cool little company that looks like a great trading position if you can withstand some movement. AIRM is an air medical transportation company that operates here in the United States. They design, manufacture, and install medical aircraft interiors and other aerospace products — which could make them an indirect defense play. If you look at a chart, it appears like AIRM has called $26.00 strong support, positioning itself for a move up to its recent high of $32.00.

Transocean (RIG – NYSE): I really like these guys. RIG has 89 mobile offshore and barge drilling units for oil and gas wells — with a focus on deepwater and harsh drilling environments. After the last four days of selling pressure, it looks like the stock has found support right around $80.00, which could signal a move up to the last high at $87.60.

Schlumberger (SLB – NYSE): Sticking with the oil theme, we’re all familiar with SLB, a major oilfield services company in the United States. As I mentioned above, oil prices this week set a 2-week low, but that did little to effect the share price of SLB. This one looks like a very strong candidate for upside calls.

Apex Silver Mines (SIL – NYSE): Playing off the rise in metals due to geopolitical concerns, SIL engages in silver and mineral mining in Central America and South America. The company has rights to 700,000 acres in Bolivia, Peru, Argentina, and Mexico. One project, called San Cristobal, has proven and probable reserves of approximately 231 million tonnes of ore. After touching a near-term low of $20.00, the stock looks poised to run back up to $26.00.

Pan American Silver (PAAS – NASDAQ): Another silver play popped up, as PAAS operates silver mines in Mexico, Peru, Argentina, and Bolivia. Yesterday, the stock dipped all the day down to just over $22.00, but in a strong display of strength, it quickly recovered and is today trading for $24.59. A move up past its recent $27.00 high could be in the making.

Devon Energy (DVN – NYSE): Another oil and gas play, DVN engages in the exploration, development, production of oil and gas in the United States and Canada. At just under $60.00 a share, the chart isn’t as strong as others on this list, but that could possibly change next week.

Southern Copper (PCU – NYSE): Here’s one we’re all familiar with, as we had success playing them before. PCU has mines that produce the full gamut of precious metals, including copper, molybdenum, zinc, silver, gold, and lead. You simply cannot find a more comprehensive metals play, and their strong $5.00 up-move today could signal another run up and over the $100.00 mark next week.

Dover Corporation (DOV – NYSE): The stock hit a new 52-wek high on the news that they more than doubled first-quarter profits — exhibiting strength across all its operating segments, which range from ink-jet printers to refrigeration equipment.

In terms of our protective holdings, : I noticed that our protective SPY June 129 Puts touched our $0.95 stop-out price for mere seconds today before bouncing back and trading the rest of the day between $1.10 and $1.25 and closing at $1.15. As I mentioned, I wanted you to underweight this play since it was solely a protective measure. And to be honest, I think a lot of you are probably still holding these puts, which I think is a good idea. For the purposes of the track record, I’ll call it stopped — but I’d like to continue monitoring the play since it’s probably still in most of your trading ledgers.

As you can tell, there’s a lot of action that could trigger next week. So rest up — because it looks like an exciting week is coming!

Oh, and one final thing. If you’ve been a Bottarelli Research member since February, then you probably remember my super-speculative play on Intuitive Surgical (ISRG – NASDAQ), the company that makes the remarkable da Vinci robotic surgery consoles.I recommended picking up calls when the stock was getting absolutely murdered in early February. Talk about a wild ride!

Today, the stock is up a whopping $24.00 on the news of a 59% rise in profits. If you’re looking for a day-trading position in its purest form, this is definitely it. Heck, maybe we’ll roll the dice and play this one too!

Until next week,

Lock and load!

Sincerely,