Position Update

Possible Plays on LFC, ALL, STLD

By Bryan Bottarelli
Monday, March 10, 2008 10:51 AM EDT
Mon, 10 Mar 2008 14:51:00 GMT

Dear Bottarelli Research Member,

As we approach the critical 2008 lows, let me quickly point out a few important trading notes. First off, short interest on the NYSE rose 4.1% to a new record high last week. Short interest is calculated by dividing the number of shares sold short by the average total shares traded each day, and this tells you that the markets could be setting up for a short-squeeze. If we see any signs of upside strength, these shorts will cover their positions and the markets will rally. Additionally, you better believe that our good friends at the PPT are carefully watching the January 2008 lows, standing ready and able to support this level with a new infusion of cash.

INDU

Both of these situations could result in a sharp market pop to the upside. That’s why I’d like us to maintain some upside exposure via our DE April 90 Calls (DE DR) and our JASO April 15 Calls (QJP DC).

Looking at DE, I admit that the shares moved lower than I expected last week, but most of this loss came due to the overall weakness in the entire agricultural sector. Today, for example, shares like POT, MON, and MOS are all trading $3.00 to $4.00 lower, and this has cast a dark shadow over this high-flying sector. Nevertheless, we all know that this group of stocks can pop rather quickly and aggressively, so my plan on DE was an attempt to but this dip.

DE

After all, we have an upside catalyst with their March 14th earnings announcement, and if I were to wager a guess, I would think these numbers would come in strong. After all, farmers have been enjoying some prosperity lately, and on the verge of planting season, a shiny new John Deere in the barn sounds like an awfully good idea. Therefore, let’s continue to stick with the position for a bounce-back.

At the same time, let’s turn our attention over to puts — and specifically the insurance industry. In his annual letter to shareholders, Warren Buffett wrote, “it’s a certainty that insurance-industry profits margins, including ours, will fall significantly in 2008.” We already know that shares of AIG have gotten clobbered lately, and if this will be a continuous trend for all of 2008, then I’d like to take a close look at China Life Insurance (LFC – NYSE).I’ve mentioned before the extremely high P/E rations of Chinese stocks, and if insurance-related weakness makes its way over to China, than LFC could extend upon its downside pressure. As you can see below, the stock has already experienced some recent weakness, so I’ll watch this one for a possible entry point.

LFC

A better possibility comes in the form of Allstate (ALL – NYSE). As you can see, the stock looks poised to trade below its previous low at $46.00, and the April puts are very reasonably-priced. The only threat is that the stock could re-test its 50-day moving average again. But if we see this re-test and subsequent failure, that’ll be the time to enter puts.

ALL

Also noteworthy is the recent management actions of Steel Dynamics (STLD – NASDAQ). The mini-mill producer of structural steel products just raised their dividend 33% and declared a 2 for 1 stock split, both of which are very bullish triggers. While I don’t want to over-weight our ledger too much on the call side, I will also be monitoring STLD for a possible April call play.

The moment a new trading opportunity arises, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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