Shove Back

Then Pounce on Inefficiencies

Dear Bottarelli Research Member,

In the last three days, the blue chips have given up nearly 400 points. Without question, this is a brutally devastating wipeout, fueled by the escalating conflict and uncertainty in the Middle East.

For the second day, Israel has blasted Lebanon — dropping bombs on critical access roads, power stations, communications infrastructure, and the Beirut airport. This news has created a downward snowball effect that’s affected everything — from International markets to oil prices to inflation fears. There’s no question in my mind that without the Middle East conflict, the recent downtrend would not have happened at such an accelerated level, but that’s now irrelevant. Tactically speaking, we need to absorb the recent market environment and strategically decipher a plan that allows us to profit within the madness. So here’s the plan:

It may sound cliché, but the first step is not to panic. When I look at our longer-term upside positions, I think we have a well-diversified mix of companies with strong upside potential.

Barrick Gold offers us “safe haven” exposure to the gold sector via the ABX October 30 Calls (ABX JF).This can be seen today, as ABX is one of the only stocks on my ticker in the green.

Alliant Techsystems offers us exposure to the best mid-cap defense company via the ATK November 80 Calls (ATK KP), which is a smart position to have in times of missile scares and international conflict.

Caterpillar offers us exposure to the strongest blue chip you can buy via the November 75 Calls (CAT KO). With strong earnings, a loaded backlog, and exploding demand for international infrastructure (brought about by non-stop population growth), CAT looks poised to run for years to come.

Celgene offers us exposure to the resurgent biotech sector via the October 50 Calls (LQH JJ). Assuming the role of the most promising biotech company on the market, CELG should be a company you accumulate on any significant dips (just like we did with DNA). This additional accumulation may come as early as Monday.

Over on the put side, we’re holding the Medtronic August 50 Puts (MDT TJ) which have used today’s down-stroke to trade back in the black. A slew of earnings reports and forecasts from competitors, coupled with slowing growth for medical devices and FDA recalls, has cast a shadow on MDT that seems like it could last a while.

We also used today’s continuous downside on FedEx to exit the FDX July 100 Puts (FDXST) at our $0.15 sell price. While it doesn’t seem like much, this sell trigger could have gotten you to break-even (or even profitable) on our FDX earnings strangle.

As I mentioned yesterday, it may also be a good idea to enter into some additional puts on companies like WebMD Health (WBMD – NASDAQ), which carry sky-high price multiples within a NASDAQ index that’s approaching new 52-week lows. If you look at WBMD today, you can see the stock has a lot of room to move down. We could establish a put position as early as Monday.

But the most important rule in times like this is to simply shove back from the table. There’s no need trying to make rational trading decisions within an otherwise irrational market environment. Let’s simply watch the weekend developments while lining up a list of potential trading candidates that have gone down too much — like 3M (MMM — NYSE).

Then, once all the dust has settled, we’ll be ready to pounce on all the inefficiencies brought about by the last three days of extreme downside. Until then…

Lock and load

Sincerely,