Still Hanging Tough

Market Remains Resilient, But for How Long?

Dear Bottarelli Research Member,

I’d like you to take a good look at today’s SPX chart, focusing specifically on the last three days of action:

Last Thursday we experienced a strong sell-off, only to be followed up on Friday with a strong intra-week recovery. And to kick off this week, the SPX has attempted to take out last Wednesday’s high of 1,513, but so far we’ve fallen short of punching through this level. If the SPX cannot mount any more upside momentum, then this week could trigger the next down-leg. That’s why I think it’s important to maintain our three put positions: SPY June 150 Puts (SYH RT), ISRG June 130 Puts (AXQ RV), and MON June 60 Puts (MON RL).

Looking at the ISRG chart, the stock was unable to mount any sort of rally on Friday’s big market up-day, which signals to me that the stock’s internals remain bearish. I’d still rate the odds of a $5 to $10 fall as the more-likely forecast.

The same goes for MON. It looks like the stock has begun its next downside trend line, which signals that it’ll soon be approaching the 50-day moving average at $56. And when you combine (what appears to be) an exhausted SPX with two puts on MON and ISRG, I think we’re well positioned to profit off any forthcoming downside move.

But once again, let’s not lose sight of the fact that this market has been remarkably bullish. For Dow, for example, has closed higher in 26 out of the last 31 trading sessions — hitting 21 new all time highs along the way! With a backdrop like that, we must respect the market’s ability to move even higher — which leads us to some potential call play candidates that I’d like to introduce to you below.

First off, we’re about to enter hurricane season — which starts on June 1^st and goes through November 30^th. It goes without saying that any major storm hitting (or even threatening to hit) Texas or the Gulf of Mexico would send oil and energy prices soaring. Therefore, I will continue to closely monitor our favorite oil and oil service plays like Transocean (RIG – NYSE), Diamond Offshore Drilling (DO – NYSE), Tesoro (TSO – NYSE), Valero Energy (VLO – NYSE), and Marathon Oil (MRO – NYSE).

The strongest chart of this group is MRO, which continues to set new 52-week highs seemingly every other day. With oil prices under $63 a barrel and inching higher, let’s use MRO’s upside momentum to add some call exposure.

PLAY: Buy the MRO June 110 Calls (MRO FB) at or under $3.30, good for the day. Current bid/ask spread is $3.00 to $3.20. Place a protective stop loss at $2.20.

Another play that I monitor is a company called Ceridian Corporation (CEN – NYSE). They company primarily offers Human Resource Solutions to companies in the United States, Canada, and the United Kingdom — but what interests me about CEN is that they also have another (rather un-related) business in the exploding retail gift card segment.

You see, CEN offers transaction processing services to merchants for various gift card products, and I see this as a business unit that will continue to experience tremendous growth. Over the last five years, for example, gift cards have exploded onto the retail scene — and the activation, management, and processing of these cards is big business. There is mounting pressure to CEN to spin off their gift-card segment, and this could return tremendous value for CEN shareholders (just look at the result when McDonalds spun off Chipolte Mexican Grill). When I look at longer-dated call plays, CEN is one that certainly is on my “short list,” especially if the 50-day MA serves as support.

Another interesting trading tactic comes after reviewing the “America’s 500 Best Companies” as tabulated by Barron’s. Using a data-set that includes 52-week total return, cash flow return on investment (3-year median and 6-year median) and 2006 sales growth, Barron’s listed, in order of #1 to #500, the companies that ranked the best on their list. Goldman Sachs (GS – NYSE) and Apple (AAPL – NASDAQ) ranked very high, of course.

What was very interesting to me was that four of the top ten companies (out of 500, mind you!) did not appear on this same list last year. I consider it quite an accomplishment for a company to not be listed among the top 500 companies in America one year — and then jump all the way into the top ten one year later. That’s exactly what happened for Terex (TEX – NYSE), XTO Energy (XTO – NYSE), Allegheny Technologies (ATI – NYSE) and Liberty Media Interactive (LINTA– NASDAQ). LINTA is especially attractive with such a cheap stock price. For example, you can own October 25 calls for under $2.00, so that could be a play that I initiate sometime soon.

Also making the huge jump from being “not-listed” in 2006 and into the top 20 in 2007 where Precision Castparts (PCP – NYSE), GameStop (GME – NYSE) and Reliance Steel & Aluminum (RS – NYSE).Every name on this list has remarkable year-over-year upside momentum — and they all warrant keeping a close eye on for any potential upside call opportunities. RS in particular looks primed to use the $62.50 level as the launch-pad for its next big run-up, so keep an eye on them as well.

If anything warrants your immediate trading action, you’ll be the first to know. But in the meantime, please don’t overlook this important announcement:

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