Commodity Shakeout Continues

Hold SDS Calls

By Bryan Bottarelli
Tuesday, September 09, 2008 11:39 AM EDT
Tue, 9 Sep 2008 15:39:00 GMT

Dear Bottarelli Research Member,

The brutal sell-off in the commodity sector continues.

As I look around, it’s shocking that some of the most well-positioned commodity, materials, metals, engineering, drilling, solar, steel, energy, natural gas, and fertilizer companies are all getting clobbered across the board.

For example, while the nation cries out “drill, drill, drill!” shares of domestic oil service company Weatherford International (WFT – NYSE) are now trading for $30.00, nearly 50% lower than they were in July.

WFT

Despite blockbuster earnings amidst strong global demand, shares of U.S. Steel (X – NYSE) have lost half of their value in less than three months.

X

And despite a global infrastructure build-out that has a 3-year back-log, shares of Foster Wheeler (FWLT – NASDAQ) have moved from $75.00 down to $35.00 in less than three months.

FWLT

MAKE NO MISTAKE ABOUT IT: We’re seeing a major shake-out in the commodity sector, and I truly believe that we’ll look back at this in 6-12 months and call it one of the buying opportunities of the decade. But of course, the big question is, “why is this happening?” And the even bigger question is, “how do you address this situation right now?”

First off, I personally think we’re seeing this shake-out due to hedge funds, banks, and individual investors selling off their top-performers to cover their debt obligations. When money is an issue — and you need cash — you sell stocks no matter what. That’s what banks and hedge funds are doing right now, which is pushing some of the best stock names lower. And now, individual investors are beginning to follow. And the problem is, when liquidity is an issue, you don’t see money flowing back into these strong stock names at reduced price multiples. As a result, you have a cascade of selling pressure with no support levels. And in many respects, this event (however short-term) is what we’re facing right now.

How do you address it right now? Well, as I mentioned above, I think this is opening up tremendous opportunities to own the top companies for wonderful prices. But before diving in, I want to let the shake-out run its course. Therefore, from a trading perspective, we’ll continue to play things close the vest — playing downside and index-based positions that can hand us quick profits. For example, the SDS September 69 Calls (SDS IQ) that we entered yesterday for $1.90 have traded as high as $2.25 today, good for a slight 19% gainer. Let’s continue to hold this position for more downside.

SDS

Should any other trading opportunities arise, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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