1. Commentary
2. Intel Jumps
3. Triple Witching Friday
4. Earnings
5. Current Trades
6. Monday Morning Playbook
7. Closing Thoughts


1. Commentary

We got the bounce we were looking for. After testing its lows and being pushed to its limit, the market caught fire last week as the financial stocks led the way with a 35% gain. I mentioned last week in the Weekly Wrap that we needed some catalysts to take the market higher and even if we didn’t we could still get a “bear market bounce”. We got both.

Some of the things being talked about could be catalysts like the suspension of mark-to-market accounting and the reinstitution of the uptick rule, but it’s important not to get too excited because the market still has a long way to go before any sustained rally will stick.

The springboard that propelled the market to bounce off its lows came on Tuesday when Barney Frank said he believes the SEC will reinstate the uptick rule as early as next month. That, and the fact that a couple of the big banking names said they had earned a profit in the first two months of 2009.

Thursday was another big day for the market, which rallied on better-than-expected retail sales data, and more positive news out of the financial sector. Friday was a choppy day but all three of the major indexes finished the week on a four-day winning streak.

As a result, the Dow rallied 9.0% and added nearly 600 points to finish as 7,223. The Nasdaq jumped nearly 140 points, or 10.5%, to close at 1,431 while the S&P 500 charged 73 points higher, or 10.7%, and ended the week at 756. The closes represent a signifcant step in the market holding its support levels but we will need further proof that what the governement is doing is going to work before the bulls are ready to run.


2. Intel

Back in January, I talked about Intel (INTC, $14.70, up $0.18) after the company reported earnings and how the shares might be stuck in the $12-$14 range over the next few months. Here is the piece from the 1/18/09 Weekly Wrap (quotes are from January):

“Intel (INTC, $13.74, up $0.45) got through the week in relatively good fashion despite a 90% drop in the company’s 4Q profits. The company reported profits of $234 million, or $0.04 a share as revenue fell 23% to $8.2 billion. Intel issued two revenue warnings for the quarter over the past three months and didn’t provide much guidance for the current quarter except to say it expects sales of $7 billion.

The results met Wall Street’s expectations and analysts believe there could be a turnaround in store by the second half of the year. The stock was at $14.15 heading into the week and traded as low as $12.71. The 52-week low is $12.06 and traders had to be pleased that the stock held this level.

The January 20 2010 calls (WNLAD, $0.68, down $0.01) were trading for 92 cents and the January 15 2010 calls (WNLAC, $1.93, down $0.04) were going for $2.30 and both got cheaper. The premiums were a little juiced as you can see and I still don’t think they are attractive enough to go long. If you are thinking of buying the stock, you could maybe write covered calls on them but I still think there are better opportunities than Intel.

We will keep an eye on the stock and see if things pick up but right now I think shares are stuck in the $12-$14 range.” —

The January 20 2010 calls are now at 60 cents but the January 15 2010 calls are going for $2.10. Intel hit a low of $12.30 on Monday and $12.07 the Friday before that so my prediction held up pretty well. However, the stock has broken through three key resistance levels and a break above $15.50 could help the stock rally even further.

The shares broke through their 20, 50, and 100-day moving averages and appear ready to challenge its 200-day average of $17-$18. Even if the stock doesn’t break this level, if the market can continue to rally, then there may be an opportunity for a quick trade. I’m not really interested in the 2010 calls although they could do well. Instead, the April 15 calls (NQDC, $0.75, up $0.05) look appealing at current levels but only if the market continues its rally.

Another interesting option is the March 15 calls (NQCC, $0.22, unchanged) which option traders are most likely to target this week. The stock is only 30 cents out-of-the-money and if Intel can get to $16 by the end of the week then these calls will be worth $1. That is a tall order but even if the stock only makes it to $15.50, these calls will be worth 50 cents or 100% higher from current levels. Again, I like the April 15’s way more than the March 15’s but keep an eye out on how they do.


3. Triple Witching Friday

This Friday is “Triple Witching” and I wanted to explain what this means and what impact it could have on the market. Triple Witching is when the contracts for stock index futures, stock index options, and stock options all expire on the same date. Triple witching happens four times a year and occurs on the third Friday of March, June, September and December. It is an event dubbed as “Freaky Friday” on Wall Street.

I have talked about the key support levels for the Dow, Nasdaq and S&P 500 and despite the title, triple witching has actually proved to be a bullish time for the market. In fact, 9 of the past 12 triple-witching expiration weeks have been positive.

That means over the past three years, the market has advanced, as the bears close out their short positions in the options and futures markets which in turn helps the market. It can have a huge impact as their actions will help shape the market substantially this week.

No one has really talked about this yet but expect this to be the Monday morning water cooler talk which will pick up steam as we head closer to Friday. With the rally we got last week, chances are we continue higher this week given the history.


4. Earnings

Monday: Connecticut Water Service (CTWS, $19.88, up $0.94) and Landry’s Restaurants (LNY, $4.56, up $0.06).

Tusday: AAR (AIR, $11.64, up $0.46), Adobe Systems (ADBE, $18.68, down $0.75), Consolidated Water ($7.88, up $0.60), ($38.95, up $1.16), FactSet Research Systems ($38.95, up $1.16) and Guess (GES, $15.12, up $0.24).

Wednesday: Cintas (CTAS, $20.95, up $0.35), Darden Restaurants (DRI, $28.60, up $0.48), General Mills (GIS, $52.60, up $0.60), Nike (NKE, $44.67, up $0.08) and Oracle (ORCL, $15.56, down $0.07).

Thursday: Barnes and Noble (BKS, $18.82, up $0.41), Blockbuster (BBI, $0.65, up $0.18), FedEx (FDX, $38.00, down $0.56), Ross Stores (ROST, $33.01, down $0.05) and Winnebago (WGO, $4.95, up $0.40).

Friday: Kirkland’s (KIRK, $2.99, down $0.01).

The earnings calendar is limited this week with just about 100 companies reporting. First-quarter earnings season will not “officially” start until April. However, there a few firms that will actually be reporting 1Q results as companies with fiscal quarters ending in February start to release results.


5. Current Trades

Amgen (AMGN, $51.25, up $0.98)

April 55 calls (YAADK, $1.05, up $0.20)

Entry Price: 90 cents (2/27/09)
Exit Target: $1.50 (Open)
Return: 15%

March 47.50 puts (AMQOW, $2.40, up $0.45)
Entry Price: $1.25 (2/27/09)
Exit Price: $2.50 (3/6/09)
Return: 100%

Amgen added 5% for the week after dropping 4% the week before. We bought the March 47.50 puts as insurance and got a quick double while maintaining our long position. The break above $50 was nice to see and we may have seen the bottom at $45. If the stock can build on its momentum this week, we could hit our target price.

Bank of America (BAC, $5.76, down $0.09)

The May 6 calls (BYOEF, $1.50, down $0.05)

Entry Price: 75 cents (3/11/09)
Exit Target: $1.50 (Open)
Return: 100%

July 10 calls (JLWGB, $0.51, down $0.08)

Entry Price: 30 cents (3/11/09)
Exit Target: 60 cents (Open)
Return: 67%

On Wednesday, in the “Banking on Bank of America” blog I talked about the idea of going long on these call options and they have already performed well. I left these two positions open because they have plenty of time left before expiration but you will notice that both have reached 100% returns. The July calls traded as high as 65 cents on Friday. Of course, the smart money closed half of the trade at 100% profits and let the rest ride.

IBM (IBM, $90.36, down $0.04)

April 95 calls (IBMDS, $2.25, down $0.10)

Entry Price: $1.20 (3/6/09)
Exit Target: $2.40
Return: 90%

IBM bounced back last week after hitting a low of $83 on Monday. The stock closed near its highs on Thursday and Friday which was a bullish sign. The calls did hit a high of $2.40 on Friday but I did not send out an alert. If the market can continue its winning ways then the April 95’s will continue to provide us with exceptional gains.

Potash (POT, $76.76, down $0.90)

April 100 calls (PYPDT, $1.45, down $0.35)

Entry Price: $1.70 (3/4/09)
Exit Price: $2.25
Return: -25%

After a slow start, this trade finally came to life last week as Potash added $10 for the week. The calls traded as high as $1.85 on Friday so we were slightly positive for a minute as the shares were pushing $80. Springtime is here this week which means the farmers are starting to spread fertilizer on their fields. The risk for this trade is the news that several potash producers in Russia have dropped prices 25%, putting pressure on others to do the same. Potash, the company, has responded by slashing production which should help support prices. Because of this, I’ve lowered the exit target to $2.25 and raised the stop to $1.25.


6. Monday Morning Playbook

Here are a few trades I’m watching this week. If I take any action I will mention it in the blog, otherwise, hang tight until you hear the whistle blowing.

General Mills is bouncing off its lows and a lot of analysts were upgrading this stock at the end of 2008. ConocoPhillips got hammered last week and could be a good rebound trade. Morgan Stanley looks strong and IBM could make a run to $95 if the market can rally.

General Mills April 55 call (GISDK, $0.90, up $0.15)

ConocoPhillips April 40 call (COPDH, $1.00, down $0.35)

Morgan Stanley April 30 call (MSDF, $1.40, up $0.50)

IBM April 100 call (IBMDT, $1.00, unchanged)


7. Closing Thoughts

Oil finished at $46.25/ barrel, down 78 cents on Friday. OPEC decided today not to directly cut oil output in an effort to raise prices, instead it will focus on stopping individual members from producing above their quotas.

Crude oil has risen nearly 20% in three weeks and if the demand continues it could mean increasing industrial production in the future which could push oil past $50/ barrel. I don’t see demand rising at a rapid pace and the decision by OPEC not to cut should stabilize prices in the $40-$50 range. If OPEC would have lowered output limits it would have likely resulted in higher crude prices.

Members also agreed to meet in special session on May 28 to review prices and supply so we shouldn’t have to worry about any surprises. However, if OPEC believes that crude is too cheap when it meets again, it could reduce oil’s output levels. Right now, even OPEC knows the economy is too fragile to cut production.

Futures are up as I go to press. The Dow futures are up 30, Nasdaq futures are up 5, S&P 500 futures are up 6. The futures are up before Bernanke’s “60 minutes” 15-minutes of fame so we will see how we look in the morning.

Rick Rouse