Shift Out of Oil & Into Tech

It’s Happening & It’s Time to Play

Dear Bottarelli Research Member,

There’s an important near-term positioning shift that’s happening right now — and I think it’s in our best interests to play alongside it. With oil prices about to dip below $60 a barrel, I’ve noted in past alerts that every major oil company has gotten pummeled — as evidenced by the $20 drop in Marathon Oil (MRO – NYSE).

Last week, I noted that I was looking for a near-term support point to call the bottom. Now, I’m not sure we’ll see that support point anytime soon. As you can see from the chart above, MRO tried to call the 200-day moving average a support point, but that level was vehemently rejected. At this point, it’s time to say “look out below!” If oil prices break into the mid-$50’s, we could see even more weakness in this group, so let’s get positioned to play this continued downside.

PLAY: Buy the MRO October 70 Puts (MRO VN) at or under $1.80, good for the day. Place a protective stop loss at $1.00.

In the meantime, the recent weakness in everything oil-related has created a market positioning shift that has money flowing OUT of oil and INTO tech. Although I didn’t quite realize it at the time, I made note of this shift in your September 14^th alert when I wrote:

“Also catching my eye is the quiet upside moves in both Oracle (ORCL – NASDAQ) and Cisco Systems (CSCO – NASDAQ). Left for dead for the last three years (at least), ORCL and CISCO have each snuck up and registered new 52-week highs. With ORCL trading for $16.48 and CSCO trading for $22.72, each stock offers us a relatively cheap way to enter into some longer-dated calls. When the time is right to enter into a play, I’ll let you know. For now, hold off until further upside confirmation.”

Well this morning, this “upside confirmation” was officially triggered thanks to blockbuster news out of Oracle. As I write, ORCL is up 11% to a new high of $18.32. That’s a price ORCL hasn’t been seen since August of 2001!

The surge is due to the company’s quarterly profit rising 29% and revenue jumping 30%, which is a direct result of Larry Ellison’s $20 billion acquisition spree. Most investors thought Ellison was nuts spending so much money on acquisitions (which was an attempt to extract business away from Germany’s SAP) but now Ellison’s getting the last laugh because his plan is working. Today’s results prove it.

Now here’s the thing. I’m afraid we already missed the big jump in Oracle. Today’s chart clearly shows a huge up-move which may give way to profit-taking with any Oracle shareholder waiting for a move like this since 2001. On the other hand, I do think we can piggyback Oracle’s upside move by making an upside call play on Cisco (CSCO – NASDAQ).

Similar to Oracle, Cisco has been quietly moving up as money flows out of oil and into tech. And if you look closely, you’ll notice that CSCO’s 50-day moving average just crossed over its 200-day moving average. This tells you that near-term momentum could soon be pushing the stock even higher. Therefore, I think it’s time to enter into some mid-rage calls on CSCO.

PLAY: Buy the CSCO November 20 Calls (CYQ KD) at or under $3.50, good for the day. Current bid/ask spread is $3.30 to $3.40. Place a protective stop loss at $2.00.

Looking at our other positions, it’s clear my thesis was right — but I was just a little too early on Arch Coal (ACI – NYSE). If you recall, we played October 27.5 Puts (ACI VT) to capitalize on the weakness in commodities — and especially coal. Although one brief and unfortunate up-tick stopped us out, ACI has indeed continued to move lower — just as expected. In fact, today’s down-move set a new 52-week low and pushed the October 27.5 puts up to $2.00 per contract.

The reason for the weakness is that spot coal prices (which are defined as the price a customer might pay for coal in a one-time transaction for immediate delivery) have plummeted over the last 12 months. A ton of Central Appalachian coal on the spot market finished last week at $49.90, down more than 12.5% from one year ago and down 20% from January ‘05. As it stands now, the coal market is oversupplied by about 20 million tons, and the only hope of recovery is a cold winter or a pickup in economic strength. Unfortunately, I don’t think either of these situations will happen. If you’re still holding the ACI October 27.5 Puts (ACI VT), take your profits on today’s ACI weakness.

Finally, let’s address St. Joe (JOE – NYSE), as all signs continue to signal coming weakness in the stock. First off, unless you think the swampy part of Florida will soon turn into red-hot real estate, JOE’s wetland landholdings are virtually worthless.

The latest bit of good news from the company is that they stuck a land development deal Beazer Homes (BZH — NYSE), but if you read the fine print, you’ll learn that Beazer has 120 days to back out of the deal. Given the plummeting building permits, there’s a very good chance that BZH could pull the plug. And if they do, JOE will get crushed.

As of today, St. Joe has declined any comments on the deal, which doesn’t appear promising. No wonder The Wall Street Journal just ran an article titled “St. Joe’s Real-Estate Strategy May Test Patience of Investors.”

Throw in a downgrade on September 14^th from both Morgan Stanley and Wachovia, and the buzz on the floor is that JOE’s recent up-swing was induced entirely by short sellers covering their positions (and not by takeover speculation). Although the stock is moving a little higher today alongside the broader market upswing, I’m still bearish. Hold your JOE October 55 Puts (JOE VK). If you have yet to enter this position, do it now.

Lock and load

Sincerely,