A “Calm” Market?

Someone Pinch Me

By Bryan Bottarelli
Monday, January 28, 2008 11:02 AM EST
Mon, 28 Jan 2008 16:02:00 GMT

Dear Bottarelli Research Member,

I can’t believe my eyes. The markets have been open for over an hour, and we have yet to see a move in excess of 100 points. To tell you the truth, I find this “calm period” a little slice of heaven. After all, it allows me to analyze the market action without getting whip-sawed by massive volatility swings. So let’s start by looking at the Dow chart below:

INDU

As you can see, the bears tried to push the Blue Chip average lower this morning, but the bulls have held their ground (at least for now). Leading into this Wednesday’s Fed meeting, I’m unsure if we’ll see any major moves to the upside or the downside. Rather, I think both the bulls and the bears will wait to make their next major move until after the Fed has spoken. Therefore, the game-plan over the next two days is to outline some stocks showing strong directional signals and carefully enter these plays if the right conditions are met.

Of course, the one play we’re carrying into the Fed meetings is the FRE February 35 Calls (FRE BG). As you know, we added to this position on January 25th which has lowered our cost basis down to $1.55. These calls have traded as high as $1.20 today, so all we need is one upside move and we’ll be in the money. Any signs of mortgage stabilization (or plans for fixing the sub-prime problem) could spark a bottom-feeding rally on FRE, and this play allows us to fully capitalize on such activity. So the game plan here is to sit back and hold tight.

FRE

Another company that looks interesting is FCStone (FCSX – NASDAQ). They call themselves a “commodity risk management” company, which means that they provide transaction and execution services to commodity producers in Asia, Latin America, the United States, and Canada. They just went public in 2007, which means that not many investors realize their shares are traded. But any stabilization at these levels could spark an upside move similar to what we see in other grain stocks like BG, MOS and POT. I’ll watch this one carefully.

FCSX

Another play that I’d love to make comes in the form of Freeport-McMoRan Copper & Gold (FCX – NYSE).As you can see, the copper, gold, and silver producer has taken quite a hit lately, but a P/E ratio of 7.9 combined with a 2.1% dividend yield makes the stock a super deal anywhere at or under the $80.00 level. Plus, I always like the idea of playing metals in times of economic jitters, so FCX could be an upcoming play as well.

FCX

Cummins (CMI – NYSE) is another name that I love to play. The worldwide diesel and natural gas engine company is one of the best global infrastructure plays your investment dollars can buy — especially in light of the new global diesel emission regulations. With similar ratios to FCX from above (CMI has a P/E ratio of 10.2 and pays a dividend yield of 1.1%), CMI is also a great name to buy on any market stability. In fact, after a strong run-up, CMI might dip a little here, and this could be a great time to enter a call position.

CMI

And finally, in terms of recession-proof plays, I’ve mentioned utility stocks like FPL Group (FPL – NYSE) in past alerts. But another name that sparks an interesting investment idea is energy company Kinder Morgan Energy Partners (KMP — NYSE).

KMP

Using 10,000 miles of pipelines, the company delivers gasoline, diesel fuel, jet fuel, and natural gas liquids to various markets. But what’s interesting about KMP is that the stock pays a healthy 6.6% dividend yield. This could be a very attractive safe harbor should the U.S. get settled with a recession.

In terms of puts, I have a full list of candidates as well, but we’ll explore those possibilities as the new trading week progresses. Until then, let’s all sit tight and be ready to jump on the next new trade when conditions warrant. As always, the moment something triggers, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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