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Market Numb to Bad News

By Bryan Bottarelli
Friday, May 22, 2009 10:34 AM EDT
Fri, 22 May 2009 14:34:00 GMT

Dear Bottarelli Research Member,

Good morning. As we begin the last trading day before a 3-day holiday weekend, we’re being greeted with some truly awful news. In California, taxpayers continue to revolt against their new borrowing plan. In Florida, the failure of Bank United will cost the FDIC $4.9 billion, making it the most expensive seizure since IndyMac. This marks the 34th bank failure in 2009, and this one could possibly bankrupt the entire state of Florida.

At the same time, the U.S. dollar continues to fall, the Fed president is predicting rising inflation, GM is expected to file bankruptcy early next week, and above all, the USA could lose our AAA rating. But through it all, the Dow has still opened the day to the upside. I fear that we’re truly becoming numb to news that gets more and more concerning with each passing day.

From a specific company perspective, Wal-Mart, United Parcel Service, and British Airways have all recently given lukewarm guidance about future revenues. If you read between the lines, they’re basically saying, “what green shoots?” To tell you’re the truth, I searched Google this morning for an image of green shoots growing inside a landfill full of trash, but the search came up empty. But either way, that image would’ve perfectly described the market situation as I see it right now. Perhaps there are some glimmers of hope here and there, but if you look around at the big picture, we still find ourselves in a towering heap of feces.

Looking at the major market averages, the Dow is taking a slight pause right around 8,300 this morning, but I still think we’re headed for 8,000. To be perfectly honest with you, our next series of trades will be determined by whether or not the Dow can find support at 8,000. Until we have an answer to this question, we must keep the trading ledger light.

INDU

After yesterday’s sell-off, the fertilizer names are popping back up today. As you can see from the AGU chart below, the stock is attempting to brush off yesterday’s losses and fill the downside gap set at the open. Perhaps it’ll fill this gap, and then continue to fall below our target price of $45.00. Therefore, continue to hold your AGU June 50 Puts (AGU RJ).

AGU

We’re also seeing a divergence in the dry bulk shipping sector. For example, both DRYS and EXM operate in the exact same market sector. Both are based out of Athens, Greece, and they each manage a fleet of 40 to 47 vessels. But if you compare the two company’s charts, you’ll see that EXM is pushing aggressively at the 50-day moving average, while DRYS remains well below this level.

DRYS

EXM

In theory, a strong operating environment will be good for both DRYS and EXM. Yesterday, Excel Maritime reported a three-fold jump in first-quarter profits, which proves that the sector is heating up. Therefore, if DRYS mirrors the same technical pattern of EXM, it should be over $20.00 per share. That’s why I’d like to hold onto our DRYS June 7.50 Calls (OOC FU).

I’ll follow up later in the session with more updates. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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