Add K Calls

The One Sector Showing Earnings Strength

By Bryan Bottarelli
Monday, July 06, 2009 12:22 PM EDT
Mon, 6 Jul 2009 16:22:00 GMT
“Economic growth will have to catch up the expectations if stocks are to bust out of their recent range and climb anew.”
– Barron’s columnist Kopin Tan, July 6th 2009

PLAY: Buy the K August 45 Calls (K HI) at or under $3.40, good for the day. Place a protective stop limit at $1.90 and a pre-determined sniper sell at $5.00.

Dear Bottarelli Research Member,

As I mentioned this morning, we’re at a very vulnerable spot on the S&P 500. Anyone with any technical analysis training can identify the clear head-and-shoulders formation on the S&P 500, which makes me nervous that we could see another round of mysterious buying from the forces steering this market from behind closed doors. Therefore, it’s best to proceed with the utmost caution. In Barron’s this week, I thought that the quote (above) summarized the current market conditions perfectly. Over the last three months, the markets have been rallying in anticipation of improved market conditions. But now, the anticipation period is over. It’s time to prove it. This set’s the tone for today’s alert.

You see, on July 1st, the one company that actually came out and exceeded expectations was General Mills (GIS – NYSE). They reported that their fiscal fourth-quarter net income nearly doubled from the year-ago period. And with commodity prices coming down, the makers of cereal, baking products, and Yoplait yogurt expects even better numbers going forward. As a result, the stock has been in a strong upside trend, as you can see below:

GIS

But in the context of today’s alert, I’m not going to recommend call options on General Mills. Rather, we’re going to piggy-back this GIS strength by playing upside calls on their competitor, Kellogg Co. (K – NYSE).

While Kellogg doesn’t report earnings until July 30th, the maker of cereals, cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods should enjoy the same upside tailwinds created by GIS. From a chart perspective, today’s upside tick signals buying momentum is now coming in, which could spark a move up to $50.00 in the days ahead.

K

Therefore, as a way to own some upside exposure within a sector that’s actually delivering strong earnings, let’s add K calls to our ledger now.

PLAY: Buy the K August 45 Calls (K HI) at or under $3.40, good for the day. Place a protective stop limit at $1.90 and a pre-determined sniper sell at $5.00.

At the same time, I’m also seeing some interesting formations that could lead to new plays as well. First off, insurance dog AIG (AIG – NYSE) just performed a 20-for-1 reverse stock split on July 1st, which has now pushed the stock back up to $17.00 per share. As it turns out, AIG continues to trade options, which means we can play puts on these newly inflated price levels. In my view, AIG could be headed right back down to $10.00, which could be a great opportunity to play August puts. More to come.

AIG

Plus, the recent dip in oil prices has also pushed the Oil Services HOLDRs (OIH – NYSE) down to $90.00, which falls right at the 200-day moving average. As is the case with most trading vehicles, Wall Street over-extends both the upside and the downside moves. Therefore, of the OIH dips below the 200-day moving average (and into over-sold territory), we could have a chance to play a quick pop.

OIH

Once again, let’s wait until the timing is right. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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