Could This Be the Beginning?

May is Here: Time for Puts

By Bryan Bottarelli
Tuesday, May 01, 2007 10:40 AM EDT
Tue, 1 May 2007 14:40:00 GMT

Dear Bottarelli Research Member,

April 2007 is history.

That means the best stock market month in the last 3.5 years is now an afterthought.

More importantly, we’re now beginning one of the bearish months of the year — and we’re already seeing the negative effect the next 31 days could have on the markets. As I write, the Dow is clinging onto a small 2-point advance — but there are many, many quality stock names experiencing downside weakness. I’ll highlight some names in just a moment.

But even more importantly — we’re now at a critical market turning point — and let me tell you from experience, turning points like this are difficult to time correctly. For example, we’ve just experienced a tremendous upside run that set an all-time high on the Dow above 13,000. But now, all of the indicators signal a coming downside move — yet forecasting exactly when this downside move will happen is next to impossible. For that very reason, you have a market that’s now unsure about the next major directional move, and this indecision could lead to flat trading and option pricing complacency.

For example, I expect to see some sharp intraday moves here at the beginning of May — and it’s important that we don’t get too caught up in the subtleties of this action. To tell you the truth, the only smart course of action will be this: “Let the market do the talking.”

In other words, we don’t care if the market moves higher or lower. We just want to profit either way. Now, if the markets do move lower, there’s a very good change that some of the high-flying names we’ve played to the upside with great success will experience tremendous weakness this month. MEMC Electronic Materials (WFR – NYSE) is a good example. Just look at this stock — it’s getting crushed:

WFR

This illustrates an important point: Let’s not be afraid to trade puts on our favorite stock names. After all, if the market wants to fall, why fight it? Like I mentioned yesterday, we’ll soon enough be able to pick up great companies like Valero Energy (VLO – NYSE), Tesoro (TSO — NYSE) and Allegheny Technologies (ATI – NYSE) on the cheap. But until that happens, let them fall. And in the meantime, I’ll isolate any candidates that look primed for a move to the downside — and we’ll jump all over the puts.

And of course, maintain your AMZN June 60 Puts (ZQN RL) and your SPY June 150 Puts (SYH RT). Any coming weakness and each position will shoot much higher.

SPY

AMZN

In terms of new positions, we’ll look to add more puts this week — perhaps starting as early as today. And if you haven’t already done so, your CMC June 35 Calls (CMC FG) triggered our stop, so close this position.

Like I mentioned, the market wants to move lower. Strong stocks are pulling back. And now looks like the time to over-emphasize the put side of the ledger. And just to emphasize this point, the CBOE Volatility Index (VIX) has just popped above its 50-day moving average. Take a look:

VIX

This is a clear illustration that investors are getting nervous and uneasy at these high market levels, so let’s use puts to profit off any coming downside action! I’ll be out with more later today — but until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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