Market Summary (continued)
Friday was the first day the Tuesday rally attempt could look for a follow through session, i.e. another strong upside session to show buyers were still interested.
It had its work cut out. GDP was nothing short of hideous. Michigan sentiment and Chicago PMI bettered expectations by a tad, stemming the negative tide of the past few weeks, but just a bit. The economic data is bad, but that is not the real issue. That the data is bad is no surprise. The market is not tanking when it hears bad economic news. It has not tanked all during the consolidation on really bad economic data. As the indices came off the November low that was the strength: taking all the bad economic news thrown at them and still moving higher.
The problem now is the next set of events supposed to help cure the prior problems. The stimulus package, the bank plan (or the lack thereof), higher taxes proposed as of October 2009, and a budget and policies (e.g. nationalized healthcare, trade restrictions, cap and trade, carbon limits) hostile to those that make the jobs and pay the majority of the taxes even before the hikes to come. Who knew that $40M to remodel the Agriculture Department headquarters, Depression-era trade policies, nationalized healthcare, and thousands of pet projects are the cure to the frozen credit markets? Dick Morris calls it a war on prosperity. No, it is a war on our Constitution and our progeny.
THAT is what is now weighing on the market. The credit markets froze again in response. Friday on the heels of the budget release the market opened sharply lower, tried to rally, but we didn't think it would hold and it did not. Friday was a microcosm of the entire week: a weaker open Monday, a bounce attempt, then failure and new lows. We used Friday to buy some downside positions in anticipation of some more weakness to start next week.
BIDU (Baidu Inc.)
Company Profile
There were many quality top stocks in position to lead the market, higher, but the selling over the past three weeks on the lack of a clear bank bailout plan and the rumor becomes fact about the stimulus bill took the majority of those top stocks out of their upside patterns. The Chinese stocks, however, given the Chinese stimulus plan that is perceived to be much more effective than that in the US, continued to hold good upside patterns.
BIDU had our attention. It broke higher on 2/9/09, breaking higher from a 7 week reverse head and shoulders pattern on excellent volume. We watched for a pullback to move in and on 2/11/09 it showed a candlestick chart doji right at the 50 day EMA and we put it on the report. Our play is a rebound off of that test. BIDU kept slipping, however. It did not break up its pattern, so we simply adjusted our buy point. On 2/20/09 BIDU gapped higher, clearing the 50 day EMA on a return to above average volume. We didn't chase that gap, but the next session it tested that gap and started back up. That is when we moved into the play with some stock positions at $136.15 and some June $135 strike call options at $23.60 per option. A high price but BIDU runs like the wind and pumps those values up.
BIDU was ready to move after this test. Over the next four sessions BIDU fought the overall market direction, moving up to $153 on the Thursday high. That move took BIDU through next resistance at the 90 day SMA, and it is always nice to clear such a key resistance level. It started to reverse off the high, and with a solid run over the prior six sessions and the poor overall market performance, it was time to take some of the gain off the table. We sold some stock at $151, not at the session high but it banked us a 10.9% gain and beat the closing price at $145.94. We also sold some of our options at $32.40, netting $8.80 per option or 37%. Great upside leadership in a weaker market.
BIDU hung tough, posted a gain back up to $148.32 on Friday after running up close to the Thursday high intraday. We will see how it tests and if it holds that 90 day SMA we will be looking to add some positions on BIDU. The US plan may not work but the Chinese plan is perceived to be working, and as long as it does there will be Chinese stocks such as BIDU, SOHU, ASIA for those wanting to play the upside in a weak overall market.
Stock Splits
Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays:
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the top stocks from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
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RIG (Transocean--$59.77; +0.01; optionable): Drilling rigs for offshore oil work.
Company Profile
After Hours: $60.04
STATUS: Flat base. After the selloff RIG put in an 8 week bottoming patter, and broke higher the first week of February, clearing that initial base. It rallied up to the 90 day SMA (59.47) and has slide laterally in a rather flat trading range on low volume. The past two sessions it moved through the 90 day but could not hold the move, closing just below that level. Looking for a breakout on strong volume to show us it is time to buy.
Volume: 8.893M Avg Volume: 10.865M
BUY POINT: $61.65 Volume=13M Target=$69.94 Stop=$57.77
POSITION: RKJ EL - May $60c (52 delta) &/or Stock
CERN (Cerner--$36.60; -0.12; optionable): Healthcare information software
Company Profile
After Hours: $36.59
STATUS: Put. You would expect CERN to perform better with the ambitious record transfer process but it is not one of the chosen as of yet. Thus it is struggling still in its 5 month trading range, just coming off a test of the peak but making a lower high as it did. It fell through a swath of support such as the 50 day EMA and 90 day SMA last week but did not break down. If it follows the short term indicators lower and breaks down to start the week we are looking to move in and ride it down to near the early February low. That move lands us a 50%ish gain.
Volume: 1.076M Avg Volume: 1.396M
BUY POINT: $36.31 Volume=1.5M Target=$34.22 Stop=$37.15
POSITION: CQN OT - Mar. $37.50p (-55 delta)
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