Friday was a lackluster close for a market that was mixed on the week. Friday was the mirror image of Thursday where the market rallied higher early but was unable to hold the moves and reversed with SP500 giving up a breakout over 944. Friday, the market was weak early but then managed to rally back late and cut the losses, actually turning positive on the Dow and SP500. The entire week was choppy - a series of advances and a series of declines (or declines and then recoveries) as the market digested some actually new news that it had not considered up to this point during the inflation and liquidity rally higher.
There were several factors impacting the market's trade this past week. The G8 talked of removing the stimulus and investors suddenly realized that the Federal Reserve may have to raise interest rates much sooner than anticipated - that bears directly on the inflation trade. After surging higher, all of the inflation sectors (such as commodities, precious metals and energy) retrenched, digesting that news. They have been riding high on the trillions of dollars printed by the central banks' printing presses, but if they are going to pull back some of that stimulus, there will not be as much inflation impetus, at least that is the initial hope - investors had to adjust to this change in the landscape.
The specifics on the inflation trade: Oil sold some on Friday but still closed the week at $72.19. It was down, but just a modest $0.49. It closed near the high for the week even with pulling back due to a stronger dollar on the Friday session. Gold was down as well, closing at $939.66, off $22.40. Gold rallied up near $1K over the past three weeks, but it came back this week doing some retrenching on its own.
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Company Profile
The inflation commodity trade retrenched some to end last week, but that did not stop us from banking some great gain yet again as investors pushed those top stocks to buy up yet again early on.
PCU set up beautifully in April and May, forming a classic pennant. Now a pennant can break upside or downside, but the longer leg was clearly the lower up trendline. It had been using the 50 day EMA as support for the higher lows, but when we saw PCU make a higher low at the 18 day EMA in late May we had PCU on the report and were ready to buy.
On 5-27 PCU broke higher on rising volume, moving off that near support after testing it and closing positive the prior session. That was our entry cue and we bought stock at $20.41 and some September $17.50 strike call options at $2.85. We could have bought the $20 strikes, but the 62 delta on the $17.50's and still nice price made those much more attractive.
PCU surged on the session but reversed to close lower though it held 18 day EMA on the close so we were not panicked about the action. Indeed the next session PCU bounced back up, starting its breakout and run. It gapped higher for a 3.3% gain. Then to start June it gapped again, adding 7.8% or $1.63. The next session PCU added another 3.6%. Nice run, but we still were looking for more from this copper best stock for 2010; just too good a base and momentum in the sector.
PCU tested near support the next session but bounced nicely off the 10 day EMA after an intraday tap. Over the next three sessions PCU chopped around, bouncing up and down, but always moving the bar higher. With that action we were happy to let it continue to work for us even with the overall market and commodities trade weakening some: a stock that won't give up its breakout gains despite a weaker market is one to let make another run for you. You cannot just ignore the overall market, but you don't want to cut off a strong mover prematurely.
Sure enough, on Tuesday PCU gapped higher again and closed at a new high on this breakout move, posting a 4.8% gain. It continued higher Wednesday and was once more Thursday, rising 3.3%. That put PCU up 21% for our stock position with the price hitting $25.24 on the high. It peeled off that level some, and with the other commodities selling it was time to bank some of this gain. We sold some of our stock at $24.71, banking part of that 21%. We also sold part of our option position for $7.60 per option, or a 166% gain.
We are keeping a good chunk of our play alive; great breakout and a strong trend higher above the 10 day EMA tell you to let the position work for you. While any stock can turn on you, in order to bank really large gains consistently you have to be willing to manage your positions. It is an old cliché, but if you let your winners run, i.e. work higher as long as they continue their trend (everything else being equal), you greatly improve your overall earnings. Taking partial gains after a strong move is a very good way to implement this strategy as it allows you to satisfy the urge to bank your gains after a good move yet it leaves positions still able to work for you and really ramp up your returns. Indeed PCU has already rewarded us big on the option position, but this kind of pattern can give us 3:1 or 4:1 returns on our initial buy just by being patient and letting great plays work for us.
Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays:
1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual stock split where the stock is showing continued or renewed strength).
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 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.
BLKB (Blackbaud--$15.37; -0.02; optionable): Business software
Company Profile
After Hours: $15.37
EARNINGS: 04/30/2009
STATUS: Cup w/handle. BLKB is another stock that has formed a solid short 6 week base consolidating the March to May move. Very nicely formed, using the 50 day EMA (14.20) on the low. Spent last week working laterally in a tight range, testing lower intraday and then snapping back; that is good shakeout action and is classic handle work that weeds out the sellers and sets up the breakout. Time to sit back and wait to see if BLKB can deliver. Software is picking up buyers, trying to step out as a new leader, and just in time.
Volume: 91.474K Avg Volume: 225K
BUY POINT: $15.83 Volume=335K Target=$18.84 Stop=$14.77
POSITION: QDO IC - Sept. $15c (60 delta, low OI) &/or Stock
APH (Amphenol Corp.--$33.96; -0.50; optionable): Electronics
Company Profile
After Hours: $33.96
EARNINGS: 01/15/2009
STATUS: Ascending triangle. Nice 6 week triangle sporting higher lows over the 50 day EMA (32.11) has formed to consolidate the March to early May run. Tried the breakout Thursday but faded. Friday APH tapped the 18 day EMA (33.39) on the low and rebounded. Looks to be making the final higher low in the pattern before the breakout.
Volume: 798.685K Avg Volume: 2.056M
BUY POINT: $34.55 Volume=2.5M Target=$39.94 Stop=$32.04
POSITION: APH JG - Oct. $35c (47 delta) &/or Stock
BLKB (Blackbaud--$15.37; -0.02; optionable): Business software
Company Profile
After Hours: $15.37
EARNINGS: 04/30/2009
STATUS: Cup w/handle. BLKB is another stock that has formed a solid short 6 week base consolidating the March to May move. Very nicely formed, using the 50 day EMA (14.20) on the low. Spent last week working laterally in a tight range, testing lower intraday and then snapping back; that is good shakeout action and is classic handle work that weeds out the sellers and sets up the breakout. Time to sit back and wait to see if BLKB can deliver. Software is picking up buyers, trying to step out as a new leader, and just in time.
Volume: 91.474K Avg Volume: 225K
BUY POINT: $15.83 Volume=335K Target=$18.84 Stop=$14.77
POSITION: QDO IC - Sept. $15c (60 delta, low OI) &/or Stock
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