A Busy Weekend

Bailout Sparks Early Upside

By Bryan Bottarelli
Monday, July 14, 2008 9:49 AM EDT
Mon, 14 Jul 2008 13:49:00 GMT

PLAY: Buy the HGX August 100 Calls (HGC HT) at or under $6.70 good for the day. Place a pre-determined sniper sell at $8.40 and a protective stop limit at $3.90.

PLAY: Buy the ICE August 95 Calls (ICE HS) at or under $6.90, good for the day. Place a pre-determined sniper sell at $8.40 and a protective stop limit at $3.90.

Dear Bottarelli Research Member,

It was a busy weekend for the Treasury Department.

It began with federal regulators seizing IndyMac Bank, one of the nation’s largest savings and loans. As a spin-off of Countrywide Financial, IndyMac had $32 billion in assets, making them the largest American lender to fail in more than two decades. After seeing this news, many banking experts predicted that as many as 150 other banks could fail over the next 12 to 18 months.

This alone was major news. But then on Sunday, Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, offering an explicit guarantee of both Fannie Mae and Freddie Mac debt. Both companies buy (or finance) almost half of the $12 trillion worth of mortgages in the United States, so this is major, major news. And at the same time, the Federal Reserve separately authorized the firms to borrow directly from the central bank.

Now, I personally feel that major events like this tend to coincide with major market pivot points. For example, the Time Warner/AOL merger in 2001 marked the top of the technology market, whereas the fall of Enron marked the bottom 2003 bottom. Could today’s Fannie & Freddie news signal the true bottom in the housing market? If the answer is “yes,” then we could have a great opportunity to play calls on the Philadelphia Housing Index (HGX – PHLX).As you can see from the chart below, the HGX has gotten pummeled lately, and today’s news could be the trigger that officially forms a bottom. Therefore, let’s make a quick August upside play now!

HGX

PLAY: Buy the HGX August 100 Calls (HGC HT) at or under $6.70 good for the day. Place a pre-determined sniper sell at $8.40 and a protective stop limit at $3.90.

At the same time, I think we have a severely over-sold condition on many of the market’s top exchange plays. Names like CME Group (CME – NYSE) have dropped more then 50% of their market valuation in the last few months, and I feel these price declines are totally overdone. In fact, the best opportunity comes in the form of the InterContinental Exchange (ICE – NYSE).As you can see, shares of ICE were $130 in mid-June, but they’re now trading for the bargain price of $88.00. Let’s get positioned to ride a quick upside pop using August calls as well.

ICE

PLAY: Buy the ICE August 95 Calls (ICE HS) at or under $6.90, good for the day. Place a pre-determined sniper sell at $8.40 and a protective stop limit at $3.90.

As always, I’ll be out with further updates as the day progresses. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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