Don’t Read Too Much Into It

Expect Muted Trading Until Labor Day

By Bryan Bottarelli
Monday, August 28, 2006 1:23 PM EST
Mon, 28 Aug 2006 18:23:00 GMT

Dear Bottarelli Research Member,

I wouldn’t read too much into today’s rally, as the so-called “hurricane premium” is being pulled out of oil and natural gas companies.

Now that tropical storm Ernesto is projected to bypass the Gulf of Mexico, there is no need to price a premium into these shares — which is why oil is down 2% and natural gas is down 10%. This price break is being applauded on Wall Street today, which is why the major market indices are all posting gains.

Although the markets are in the green, the upside action is coming on exceptionally light trading volume ahead of the long Labor Day weekend. In fact, last week witnessed the lowest trading volumes of the year! Barron’s appropriately called it “the market’s week at the beach.” This decrease in trading volume has caused option prices to fall across the board, which is why I purposely chose to keep the ledger light. As of today, we’re holding only one cheap call on AIRM and one cheap put on WFC — and to be honest — I’d expect to implement this same mind-set this week as well.

I’m still surprised that Wells Fargo (WFC – NYSE) hasn’t traded lower, especially on the recent news from tax preparer H&R Block (HRB – NYSE). In case you missed it, HRB reported last week that they would take a $61 million charge to earnings to reflect an increase in the number of sub prime mortgage customers falling behind on their loan payments. Just look at how HRB’s stock price reacted to the news — a crushing drop!

HRB

Since this trend could easily spread to other sub prime lenders like WFC (especially when said lenders have publicly said they plan to get even more aggressive when approving risky loans), I’d like to maintain a short side bias in WFC. Hold your WFC October 35 Puts (WFC VG).

Looking at Air Methods (AIRM – NASDAQ), the stock looks to have sound support a the crossing of the 50 and 200-day moving averages, as I suspected. If the stock can mount some upside momentum, we could be in for a nice upside push, as AIRM tends to move quickly in one direction. Hold your AIRM September 25 Calls (UDU IE).

AIRM

Like I mentioned last week, I have a few other trade candidates that came up on my screen — but before initiating them — I want to be certain the decreased trading volumes will not derail their profitability. Therefore, I will continue to be cautious this week. If I were to wager a guess, I’d expect our true “lock and load” trading to resume after the long Labor Day weekend. Of course, I’ll still be in touch all week should any trading opportunities come up, but until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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