A Dull Monday

Economic Calendar Promises More Volatility

Dear Bottarelli Research Member,

It’s been a relatively uneventful trading day, but I suspect that won’t be the case for long. Starting tomorrow, the economic calendar is chalked full of upcoming releases which could all give the market a shot of volatility. First up is retail sales, where economists predict a 0.3% drop in October after a 0.4% decline in September. Any down-tick would be the third decline in the past five months, painting a gloomy picture in the month leading up until Christmas.

On Thursday, economists are expecting a second straight decline in consumer prices, as October is expected to be 0.3% decline after a 0.5% drop in September. And on Friday, housing starts are projected to fall another 4.5% to a seasonally adjusted annual rate of 1.69 million in October. As you can see, every one of these releases is projected to come in weak, which could be a catalyst for pushing the markets lower. For that simple reason, maintain your DIA December 120 Put Hedges (DAW XP).

Also making news today is the upcoming IPO of the New York Mercantile Exchange. Although the deal is not expected to price until Thursday evening, the early indication is that Nymex plans to offer 6 million shares priced between $48 to $52. The timing for the IPO couldn’t be better, as NYMEX just reported that Q3 profits rose 82% to $40.7 million spurred by average daily volumes that rose 42% to 1.3 million contracts. If I were to wager a guess, I’d expect the NYMEX IPO to be huge. Although I don’t recommend stock here in BottarelliResearch, I feel that getting in on this IPO will prove to be a great move.

Our current positions are a little light as we’ve been taking most of our current profits off the table. Today, our SUN January 70 Calls (SUN AN) have jumped around a lot thanks to oil prices that are back down around $58.60 a barrel. You know the drill here. Oil stocks fall as oil prices move down to $57 and $58 a barrel — but then they all pop right back up as oil prices move past $60. As you can see by the chart below, SUN tested the 50-day moving average this morning and called it support, which points to more upside. Hold your SUN January 70 Calls (SUN AN), as I may add more to the position if prices continue to soften.

Our other oil play comes in the form of the PVX March 10 Calls (PVX CB). Although Provident Energy Trust (PVX – NYSE) is down today, I’m not too concerned because we’re playing longer-dated calls that expire in March of 2007. Let’s not forget that on November 9^th, Provident Energy Trust reported third quarter 2006 cash flow of $120.1 million compared to $86.3 million in 2005, a strong 39% increase. As the dust continues to settle from the Canadian tax debacle, we’ll continue to bottom-feed on plays like PVX.

Our quick downside play on POT December 125 Puts (POT XE) is bouncing off the lows it set late last week, but let’s see if the bullishness can continue into tomorrow. If not, POT could keep falling down past $120.

And unfortunately, our CAT January 65 Calls (CAT AM) were stopped last week at $0.90. The fact that CAT has not been able to mount a recovery, even in the midst of a strong Dow, means that the rebound process could take longer than I originally expected. Therefore, let’s close off the CAT play and put our money to work in plays that exhibit more strength.

Expect more trading tomorrow as the markets pick up the speed thanks to a packed economic calendar. Until then…

Lock and load!

Sincerely,