A Trend Change?
Thus Far, Earnings Don’t Justify Rally
Dear Bottarelli Research Member,
Good morning. Once again, we’re kicking off a new trading session with losses in the financial sector. On Friday, it was JP Morgan. Earlier this week, it was Citigroup. And today, we have news that Bank of America reported a wider-than-expected quarterly loss of $5.2 billion. They’re also still getting stung by high loan losses. Thus far, we haven’t seen any financial announcement that has triggered a strong upside reaction, supporting the idea of holding our FAZ February 17 Calls (FEW BQ).
In terms of the market’s direction, the Dow chart below says it all. As you can see below, the Blue Chips are fighting a major battle between the 10,600 and 10,700 level. The large candlestick bodies from Friday, Tuesday, and today confirm this pattern.
I’d interpret this as the markets saying that they want to move higher, but the recent earnings reports cannot justify higher stock prices. As a result, the battle between the recent trend (up) and the development of the newer trend (possibly down) is in full effect.
Given this possible trend shift, we’ve seen some volatility with two call positions. Both the FDX February 90 Calls (FDX BR) and the WHR February 85 Calls (OFW BQ) are near our pre-determined stop prices, but let’s see if we can get an afternoon bounce. If so, it might be a good idea to use any bounce to sell into. After all, it’s just too volatile right now to own upside calls without some level of protection. Since FDX and WHR failed to move up on yesterday’s 115-point rally, it looks like their strength is weakening. Let’s watch for a bounce. Until then, hold.
Also this morning, in an announcement that seems a little manufactured, InterOil (IOC – NYSE) confirmed indications of oil at their Antelope-2 location. IOC is continuing to test whether this zone contains commercial quantities of oil, which means that they’re still not exactly sure what they’re dealing with. But with oil prices down, and IOC stock ready to breach a critical breakdown point, it seems like IOC management wanted to conjure up something to prop up the stock. Thus, we have today’s announcement. This is something we cannot predict, so we’ll do the best we can to react to it. Perhaps it’s sucking the last round of unsuspecting retail investors into buying IOC so that the pros have one last hurrah to sell their IOC shares off before the next pullback. At any rate, let’s give this one some room. Maintain your IOC February 70 Puts (IOC NN) in case we see a “sell into strength” situation.
After the close today, hard drive maker Seagate Technology (STX – NYSE) will report their earnings – and we’re positioned for a move in either direction.
In 2009, Seagate posted a remarkable performance, up nearly 300% during the calendar year. So, leading into this announcement, we have all the makings for a large price move. After all, if the numbers are good, investors will jump on board STX for more gains. And if the numbers come in weak, the over-heated stock could experience a sell-off. Thomson Reuters expects Seagate to earn $0.65 per share, which is a big improvement from the loss of $1.02 per share one year ago. By owning STX February 19 Calls (STX BY) and STX February 17 Puts (STX NS), we’re ready for anything. Hold.
As always, I’ll keep you fully informed. Until then…
Lock and load!
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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