Priced to Perfection?

Does LMT Foreshadow the Maket’s Next major Move?

By Bryan Bottarelli
Tuesday, April 24, 2007 10:30 AM EDT
Tue, 24 Apr 2007 14:30:00 GMT

Dear Bottarelli Research Member,

There is no question in my mind that the markets are getting very uneasy at these high levels. Case in point: Today’s action in Lockheed Martin (LMT – NYSE).

LMT

By all counts, the nation’s largest military contractor reported fantastic numbers. First-quarter earnings jumped 17%, beating Wall Street estimates by a full $0.23 per share. This allowed the fighter jet, missile, and military information maker to raise its 2007 financial targets — which is everything you want to happen on earnings day. But unfortunately, this is still not enough to push shares of LMT higher. Since their sales increased 1% to $9.28 billion (which was still up from $9.21 billion last year), this number trailed Wall Street estimates of $9.57 billion. And this one ever-so-slight earnings “blip” is pushing the shares lower by $2.67 on the day.

It’s this sort of reaction that shows me just how nervous the markets are at these levels. In other words, everything appears priced to perfection — and all it takes is one minor shortfall to push things dramatically lower. Based in this, we’re forced to close out our LMT June 100 Calls (LMT FT).

More importantly, this reaction is why I’d like everyone to maintain a protective position in the SPY June 150 Puts (SYH RT).After Friday’s big run-up, the SPY (shown graphically below) is now showing a stalling pattern — which means we could see some “softness” over the next three trading days. Owning the SPY protective puts will allow you to profit off any pending downside action — while at the same time giving us the flexibility to carefully play upside calls at the same time.

SPY

But first thing’s first — let’s take some of our profits off the table. Yesterday we entered the INFY June 55 Puts (IUN RK) for $2.75 based in the stock’s inability to maintain itself above the 50-day moving average. As I write, the stock has continued to fall, pushing your puts up to a high of $3.30 in the early trading action. This represents an overnight gain of 20%, so let’s go ahead and take our profits off the table.

INFY

PLAY: Sell your INFY June 55 Puts (IUN RK) at or above $3.30, good for the day.

Continue to maintain your existing positions — but I’m currently searching for more downside put candidates to balance out our ledger. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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