Profit-Taking Sets In

Top Names Dropping (Some on Great Earnings)

By Bryan Bottarelli
Thursday, April 24, 2008 10:07 AM EDT
Thu, 24 Apr 2008 14:07:00 GMT

PLAY: Buy more ABX June 42.5 Calls (ABX FV) at or under $1.70, good for the day.

Dear Bottarelli Research Member,

The Dow is down only fractionally, but many of the top metals, agricultural, and energy plays are taking substantial hits early in today’s session. Diamond Offshore Drilling (DO – NYSE), for example, has opened the session down over $4.00 after reporting a 30% increase in Q1 income. The numbers came in at $2.09 a share, which were down only $0.04 from the $2.13 a share estimate, and this has pushed DO lower.. Although this down-move has pushed the DO May 135 Puts (DO QG) that we sold yesterday up to $8.00, I still think we made the right move by selling in advance of this earnings report.

Case in point, just look at Apple Computer (APPL – NASDAQ). No matter how you look at it, Apple reported blockbuster numbers — and seconds after their earnings release the stock jumped over $10.00 in after-market trading. But as investors learned of Apple’s conservative guidance going forward, the stock actually reversed course and traded over $3.00 lower in aftermarket! This earnings-based volatility is a prime example of why I prefer selling in advance of earnings reports — because you simply never know how a certain stock will react to good or bad numbers. And like I mentioned earlier, a bird in the hand is worth two in the bush.

Another example comes this morning from Potash of Saskatchewan (POT — NYSE). In their earnings report, POT beat estimated by a wide margin on top and bottom line. And unlike Apple, POT offered full year guidance WAY ABOVE the analyst estimates. In fact, they forecasted earnings between $9.50 and $10.50, a stunning increase over their prior guidance between $6.25 and $7.25. But once again, shares of POT are getting creamed this morning, down over $11.00 as I write. And unfortunately, this has sparked yet another round of selling pressure in the agricultural sector, which triggered our stop loss on the MON May 130 Calls (MFP EF).Therefore, this position is now closed.

Now let’s not lose sight of the big picture. The forward-looking thesis for all of the top agricultural, commodity, and metals plays continues to remain quite strong. What we’re seeing today, however, is nothing more than a profit-taking sell-off sparked by the old “sell on news” tactic — and this means that we could have a super buying opportunity once the dust settles. If something comes up, like a call-buying opportunity on a name like APA, BG, or EOG, you’ll be the first to know.

And in that spirit, I’d like to hang in there with our ABX June 42.5 Calls (ABX FV). As you know, we entered these calls for $2.50 and placed a protective stop limit at $1.10, so let’s maintain this position in anticipation of a bounce-back. From a chart perspective, ABX has dropped over $6.00 in the last 6 trading days, making it way over-sold at current levels.

ABX

In fact, since we have June expiration working in our favor, this represents a strong opportunity to add to our position. After all, a market sell-off could spark investment flow back into gold, and this could benefit ABX. Therefore, let’s go ahead and add to our position now.

PLAY: Buy more ABX June 42.5 Calls (ABX FV) at or under $1.70, good for the day. Lower your protective stop limit to $0.70.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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