Who Smuggled in the Laughing Gas?

Add to NKE, Exit RIMM, and Look at JOE (And More)

Dear Bottarelli Research Member,

It’s official: Laughing gas has perpetrated Wall Street and it’s sending investors into a state of buying euphoria.

For the last two days, the pre-market futures have been squarely in the red — only to see the open of trading absorb any selling and push higher. And the remarkable thing is, the only rationale for the continuous upside pressure is that people are buying because they’re afraid of missing out on the bull market. In my experience, buying solely on the “fear of missing out” always ends badly, especially when the latest economic reports are as lukewarm as you can get.

For example, modest September job growth and slower September economic expansion could indicate that interest rates will remain locked, but it certainly does not indicate an economy hitting on all cylinders — nor does it signal that there is enough growth to sustain job creation and corporate profits. Case in point, Wal-Mart (WMT – NYSE) the American symbol for everything retail, just announced cuts in their September same-store sales forecast. Is this warning a sign of what’s to come? If so, my “Red-October” thesis will certainly come into play sooner rather than later.

Meanwhile, oil and gold stocks continue to get clobbered — setting the table for some mouth-watering 2-3 month trading opportunities. With oil down to $58.20 a barrel (nearing its lowest level in more than a year) and gold extending its heavy losses $577 an ounce, a name like Freeport-McMoRan Copper & Gold (FCX – NYSE) presents an interesting opportunity. Unlike other “pure” gold plays, FCX is a diversified miner of copper, gold, and silver. If we can take on a longer-term trade, we could profit as FCX finds support at or near the $47.50 level.

Oil continues to get walloped, thanks to swelling U.S. inventories and doubts that key oil producers will any action to reduce supplies and prop up prices. As I’ve mentioned before, names like RIG could soon be witnessing a strong up-tick the moment oil jumps back over $60, as the oil news should have more of a negative effect on pure oil plays like Exxon and Chevron as opposed to oil service names like RIG.

While our upside call plays on the PPH and DA have done a decent job of participating in the euphoric upside run, the same can’t be said about my so-called “over-extended” put candidates RIMM and NKE. As I write, both names continue to defy gravity — an event that must eventually come to an end. Nike has never been this far above its 200-day moving average all year. In fact, the last time NKE approached the $90 level was mid-December of 2005. Five trading days later, was back down to $83. Based on this trading history, I’d like to get a little more aggressive and add to our NKE November 90 Puts (NKE WR) at or under $2.70 per contract. This would lower our entry price to $2.95, giving us the chance to take profits the moment Nike turns tail and sells off. Maintain your $2.00 protective stop.

I’m also convinced that Research in Motion will fill the enormous upside gap between $85 and $100. Although the Blackberry is a stellar invention, it’s receiving tremendous competition from the increasingly saturated smartphone category, with companies like Palm (PALM – NASDAQ), Motorola (MOT – NYSE) and Nokia (NOK – NYSE) all successfully entering the market. I get to see a small sampling of this competitive “skew,” because I see Charter Members adding mobile email addresses to their accounts. And for every “blackberry” email address, I see another address of a competing device. All told, it’s very close to a 1 for 1 ratio, which shows me that the Blackberry — while dominant — could be facing a slight dip. All it takes is one misstep and RIMM could be back down to $90 in a heartbeat. Having said that, our speculative RIMM November 100 Puts (RUP WE) were unfortunately stopped at $3.10, but I’ll continue to monitor RIMM for another downside play.

One downside event that IS happening (despite the rallying) is weakness the form of homebuilder stocks, particularly St Joe (JOE – NYSE). After heavily criticizing the homebuilder rally, it finally looks like the bulls have stepped aside — opening up the door for the bears to capitalize on the recent upside. For anyone still holding the JOE puts, you could be smiling soon as the stock looks poised to continue its recent downside pattern. If you’re profitable to the tune of 25% or more, certainly consider taking your money off the table.

Now as you know, I’ve been closely following the homebuilder sector and the US housing collapse, and I must tell you that the bearishness goes well beyond the homebuilders. For example, I expect to see future weakness in Weyerhaeuser (WY – NYSE), the world’s largest soft-wood lumber producer, Rohm and Haas (ROH – NYSE), a North American paint supplier where sales account for 10% of their $8 billion annual revenue, and even pool-equipment maker Pentair (PNR – NYSE). Looking at the WY chart, the stock’s inability to break its recent high of $63 points to continued weakness in the shares.

I also expect to see weakness in U.S. Gypsum (USG – NYSE), the largest supplier of wallboard known as “SheetRock” where a whopping 60% of their annual revenue came from new home construction. According to my research, a 10% decline in home starts translates into a 4% decline in wallboard demand. Ingersoll-Rand (IR – NYSE) is another name that could see weakness. The maker of Bobcat construction equipment could certainly come under pressure as new home construction contracts decline. Looking at the IR chart, we could possibly be looking at a quadruple top formation around $39, which could lead to another subsequent fall to $36 or under.

The bottom line is, there are plenty of downside opportunities that we can capitalize on due to a housing slow-down, and we don’t even have to touch the homebuilders. As soon as this market turns south, I’d expect to get things started with puts on WY. Until then…

Lock and load!

Sincerely,