More Volatility

Dow Drops 183 to Begin the Week

Dear Bottarelli Research Member,

The market volatility continues.

Last Thursday and Friday, the Dow gained a total of 164 points.

Today, the Dow is giving all of those gains back, closing the day down 183 points.

This choppy trading pattern is why I think it’s extremely important to remain both long and short. Over the longer-term, holding upside calls in companies like Genentech (DNA – NYSE), Caterpillar (CAT – NYSE), Alliant Techsystems (ATK – NYSE), Barrick Gold (ABX – NYSE) and Gen-Probe (GPRO – NASDAQ) is a great strategic move. In fact, look at DNA’s stock chart today:

Despite the Dow’s steep losses, DNA continues to represent a very strong “Aftermath” pick, as the stock is now pushing through its 50-day moving average. Hopefully, we’ll see this line convert from resistance to support, which would lead to continued upside gains. Hold your DNA December 80 Calls (DWN LP).

NOTE: If you’re a new Charter Member to Bottarelli Research — or if you have yet to buy any of the picks contained in my latest “Aftermath Report,” go to the Bottarelli Research home page (http://www.bottarelliresearch.com) and use your e-mail and password to log into the Members Area. Once you’ve logged in, you’ll find the Aftermath Report along the right-hand column of the “Special Reports” section. I’d pay special attention to the CAT November 75 Calls (CAT KO), which are trading at $5.00 today. If you do not own this position yet, buy them first thing tomorrow morning!)

In terms of the overall markets, May has historically been a bad month for equities — hence the phrase “Sell in May and Go Away!” Over the last four weeks, we’ve seen a dramatic stock pullback sparked by inflation and interest-rate worries, followed by a semi-bounce off these lows last week, and now another sharp sell-off today. How long will these huge moves last? Not much longer, if you ask me. Now that May is about to come to an end, we could finally see the markets stabilize in June and July leading up to second-quarter earnings season and the Fed’s next interest rate meeting. Nevertheless, we must remain positioned to the downside on the weakest stocks.

One stock I’m certainly bearish on is St. Joe (JOE — NYSE). As you can see by the chart, the stock is one again looking to set a new 52-week low, fueled in part by a Barron’s cover story titled “Second Home Glut” that doesn’t bode well for the Florida landowner.

In not-so-many-words, the article calls Florida “the epicenter of the looming glut,” pointing out that in most markets, Florida’s condo sales are down anywhere between 20% and 50% over last year. Specifically in Palm Beach County, the total inventories of unsold homes have more than tripled. This unsold inventory is a primary reason why Coldwell Banker has closed four offices in the Palm Beach region. If that’s not a sign of a slowing real estate economy, than I don’t know what is!

The Barron’s article designated some real estate areas as “Too Hot to Handle,” which they define as properties selling at far above their real value. Three out of the top five locations are in Florida. They also make a designation called “Flip City,” which they define as areas where a large portion of purchases are for investment rather than residences. Once again, three out of the top ten locations across the country are in Florida. As you can tell, this doesn’t paint a pretty picture for JOE, the owner of 838,000 acres of Florida real estate. Hold your JOE July 50 Puts (JOE SJ).

I’d also like to remain short Unitedhealth Group (UNH). The stock is somehow up $0.21 today even though the company is being looked at by the U.S. Securities and Exchange Commission and the Department of Justice about a serious options back-dating scandal. If any negative news leaks, UNH could be in for a big drop. Hold your UNH July 45 Puts (UHB SI).

The downside one play we’re now out ofis the Gannett (GCI – NYSE) July 55 Puts (GCI SK).In a semi-bogus move, the stock jumped this morning on the news that rival publisher Tribune Company announced plans to buy back a quarter of its outstanding shares for more than $2 billion. This announcement pushed Tribune’s stock up $2.13 — which represented the stock’s biggest single-day increase in more than six years! Speculative investors bid up GCI in the hopes that they would follow suit and buy back their own shares, but nothing that I can see supports this hypothesis. Either way, I set a tight stop on your GCI July 55 Puts which was triggered today at $1.90.

It’ll be interesting to see whether or not the markets bounce tomorrow. If not, we could be adding even more puts to our ledger. Until then…

Lock and load!

Sincerely,