Things Are Getting Dangerous

Dow Closes in on 200-Point Loss

By Bryan Bottarelli
Wednesday, May 17, 2006 12:07 PM EST
Wed, 17 May 2006 17:07:00 GMT

PLAY: Buy the HHH June 55 Puts (HHH RK) at or under $4.00, good for the day. Current bid/ask spread is $3.40 to $3.60. Place a protective stop loss at $2.00.

Dear Bottarelli Research Member,

As I write, the Dow is down 180 points. That means we’ve closing in on a 400-point Dow loss in less than five trading days. In short, everyone who is long is getting wiped out. And it doesn’t even matter if we’re talking metals, tech or oil — it’s all getting hammered today.

Like I’ve been saying all along, this sets the table nicely to pick up some of the market’s best companies for attractive entry prices. LMT is one of the companies I’ll definitely want to re-enter since our June 70 Calls (LMT FN) got stopped on today’s downside action. But we must be extremely cautious before taking any upside plays — as the selling pressure is really taking a stronghold of the markets.

Today, the sell-off is being credited to a stronger-than-expected rise in consumer prices in April. The CPI rose 0.6%, which proved to be slightly higher than the 0.5% that economist had predicted expected. Of course, this number gives yet another signal that the Fed is less likely to pause its cycle of interest-rate hikes in June — especially since core inflation is now at the top end of the Fed’s comfort zone. What you’re probably seeing today is the market reacting to the inevitable Fed rate-hike in June. This next rate hike is now priced into the markets.

The interesting thing is, not even inflation safe-havens like gold stocks can shrug off the weakness. Nearly every gold and metals play I watch is squarely in the red today. And that brings me directly to the one play that I feel comfortable issuing: Put options on the Internet HOLDRS (HHH – AMEX).

HHH

Like I’ve been saying all along, I’m bearish on technology. So in a market like this, why not own a short position in a basket of the top internet and tech stocks? As you can see by the chart, the HHH just set a new 52-week low. And just like our past plays in Intel, Dell, and eBay, the weakness is not over. If the HHH drops below $50.00, the next support level will not come until $40.00! Odds are the HHH will re-test its 200-day moving average at $48.00, but even that move will give you a winning trade.

By entering HHH puts, you’ll own a short position in companies like Amazon, Ameritrade, CMGI, EarthLink, eBay, McAfee, Priceline.Com, RealNetworks, Time Warner, and Yahoo (you’ll notice Google isn’t on this list, which is probably a good thing since it has been the only consistent upside gainer in the tech arena). Based on the tech bearishness, let’s enter the some HHH puts into June.

PLAY: Buy the HHH June 55 Puts (HHH RK) at or under $4.00, good for the day. Current bid/ask spread is $3.40 to $3.60. Place a protective stop loss at $2.00.

A quick jump to $4.50 would give you a 25% gainer, so that’s my most conservative price target. If you plan to be away from your computer over the next few days, it may be a wise move to enter a sell order at these levels now. If the markets break down even more, your gains could be even greater.

Lock and load,

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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