Blood in the Streets

Safety Takes Center Stage as Dow Drops 214 Pts.

Dear Bottarelli Research Member,

If you watch any financial program tonight, I’m certain that the mainstream media will tell you that “stocks plunged today on interest rate fears,” but there’s a lot more to it than that.

After all, the consumer price index — which spurred these inflation fears — rose 0.6% when analysts expected a rise of 0.5%. The core CPI (which is the number excluding food and energy prices) was expected to rise 0.2% and it actually rose 0.3%. This, my friends, is an ever-so slight increase. In no way should this number have had anywhere close to a 200-point sell-off on the Dow.

Just last week, in fact, the Dow came within 75 points of its all-time high at 11,722.98. Today, the Dow closed down 214 points to 11,205. This represents a one-month low. So in literally one week, the Dow went from closing in on a historic high to hitting a one-month low — peeling off a remarkable 517 points in the process. In fact, today’s 214 down-move marks the largest single-day drop since January 20^th’s 213 point decline. Amazing.

The NASDAQ looks even worse. With a closing price of 2,195, the tech-heavy index is now showing a loss for the 2006 calendar year, as it now sits 10 points under its beginning-year level of 2,205. It’s this weakness that makes me comfortable holding HHH June 55 Puts (HHH RK).We entered them for $3.60 this afternoon and they hit an intra-day high of $4.10. Like you saw from the chart I sent out earlier today, the next move will most likely be $48.00 for this collection of Internet companies.

With a down-move like this, I’m pretty convinced that the markets have definitely priced in one rate hike. In fact, the magnatide of today’s move has probably priced in two more Fed rate hikes. So at this point, it’s a virtual lock that the Fed will increase rates by another quarter percentage point on June 29^th. Hopefully in the 31 trading days leading up to this meeting, the markets will once again settle down and re-establish their trend-lines. To my eye, this latest down-move is simply the markets accounting for 2-more hikes — all lumped into five days of trading.

As I’ve been saying in earlier alerts, I’m on the lookout for strong companies that have experienced unwarranted sell-offs. But of course, risk management is of the utmost concern. After all, had I initiated a series of new plays yesterday, we’d be in a world of hurt today — no matter how strong the companies are. I say this because a lot of charter members are itching to get back to our quick “lock and load” trading style. Trust me, I’m itching as well. But it would be foolish to jump the gun and enter new plays without knowing, with a high degree of confidence, that the worst selling is over. Days like today just solidify that point. So rest assured, we’ll soon be back to our old style of quick hit gainers — we just need to be cautions right now until this rash of blood-red selling comes to an end.

Having said that, I always find it interesting to look at stocks that are actually posting strong days in the midst of terrible sell-offs. Identifying these super-strong stocks just confirms the continuation of their trends. Two that caught my eye today were Abercrombie & Fitch (ANF – NYSE) and Autodesk (ADSK – NASDAQ).

In a bold move, ADSK was upgraded today by Piper Jaffray just one day prior to their earnings announcement scheduled for tomorrow. ADSK is a company I discovered and recommended back in 2004 when I used some longer-dated options to make over 100% gains as the stock ran up and split 2 for 1. Their AutoCAD software is one of the best 3D design products on the market, and their media and entertainment segment makes the jaw-dropping special effects you see in personal computer games, animation, film, and television. Depending on how their earnings go tomorrow, we could have a potential upside play.

Also making noise today was Abercrombie & Fitch (ANF — NYSE ), as the teen-retailer reported first-quarter profit of $0.62 cents per share, up significantly from the $0.45 per share last year.

Had it not been for such an incredibly massive down-day, I bet ANF would have been up over $5.00 on this sort of earnings news. But as it stands, the stock only gained $1.29. This could represent a “catch-up” effect in the next few weeks. As always, I’ll keep you posted. Until then…

Lock and load,

Sincerely,