Picking on the Laggards

Playing the Weak Stocks on a Big Up-Day

By Bryan Bottarelli
Monday, March 19, 2007 3:04 PM EDT
Mon, 19 Mar 2007 19:04:00 GMT

Dear Bottarelli Research Member,

Something that I always look for on big market up-days (like today) is that small collection of stocks that are under-performing the broad-based indices. In other words, which stocks are showing downside tendencies during a time when the majority of stocks are trading to the upside? I’ve learned that isolating this group of laggards offers you a good opportunity for put options — and today I’d like to capitalize on some of these names.

Of course, we already own puts on one of these stocks in the form of Qualcomm (QCOM – NASDAQ). As you can see, a wonderful red candlestick formation occurred in QCOM today, which offers a good indication that the bullish momentum is coming to an end. As I write, the QCOM April 45 Puts (AAO PI) that we entered for $2.37 are trading for $2.65, so maintain your position for more gains.

QCOM

At the same time, two of the names I mentioned this morning are also showing this same bearish pattern. First off, I’d like to establish a new put position on KB Home (KBH – NYSE).It looks very clear to me that the 200-day moving average is a now a strong level of resistance — which means we could witness pending downside leading up to their Thursday afternoon earnings announcement. Let’s go ahead and enter KBH puts and capitalize on any near-term weakness.

KBH

PLAY: Buy the KBH April 45 Puts (KBH PI) at or under $2.00, good for the day. Current bid/ask spread is $1.90 to $1.95. Place a protective stop loss at $1.15.

Also moving lower on a big market up day is Weyerhaeuser (WY – NYSE).To my eye, 12 Weyerhaeuser insiders can’t be wrong, and its’ clear the stock is in need of a breather. As I noted this morning, there is a lot of room for WY to fall before finding a support level below the 50-day moving average, so let’s carefully add some WY puts for a breadown below the blue line (shown below) as well.

WY

PLAY: Buy the WY April 80 Puts (WY PP) at or under $2.80, good for the day. Current bid/ask spread is $2.60 to $2.75. Place a protective stop loss at $1.60.

And remember, adding these two new puts doesn’t mean that we’re un-exposed to any follow-on market upside. In fact, our LMT June 100 Calls (LMT FT) and our NDAQ June 30 Calls (NDQ FF) are each showing nice gains today, so we’re covered no matter what direction the market should happen to move. This un-biased trading position allows us to continue our successful pattern of picking off intra-day winners on any position that moves our way. So add today’s two new puts to go alongside our open calls — and as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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