Large Caps Take on Some Leadership as SP500 Rallies on Volume (Weekend Newslet
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INVESTMENT HOUSE.COMTM
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Weekend Newsletter for
June 19, 2005
Table Of Contents 1) MARKET SUMMARY 2) POST-SPLIT PLAY 3) TECHNICAL PLAY 4) COVERED CALL PLAY
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http://www.investmenthouse.com/1splitnotification.htm”>Stock Split Notices http://www.investmenthouse.com/1questions.htm”>Investing Q & As http://www.investmenthouse.com/1glossary.htm”>Glossary
1) MARKET SUMMARY > >From “The Daily” at InvestmentHouse.com
Large caps show some spine, take the lead while NASDAQ, SP500 take a deserved breather.
– Large caps take on some leadership as SP500 rallies on volume.
– Just when market gets comfortable with the Fed oil hits a new record in current dollars.
– NASDAQ tests 2100, but not ready to make that move just yet.
– Healthy rotation versus spiking oil prices key to this week.
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Market Summary (continued)
The trade gap was wider than expected and setting a new record, and oil moved to 58.47 (+1.89), a new dollar record as well (adjusted for inflation it is still below the early 1980’s). Stocks did not seem to mind that much. While the trade gap is at a record, as a percentage of GDP it has dwindled the past three years as the economy zoomed out of the recession. Thus even with the record number in May it was still lower as a percentage of GDP than it was in April when the gap was lower. Does this matter? You bet it does. So many are worried that foreign investors and holders of dollars will think the US is not a safe bet if its debt gets too high. But if you are growing your income faster than you are taking on debt so much so that the debt percentage shrinks, that is no problem. Think of it this way. If you are looking to obtain a mortgage to buy a house and the payments will be $4K per month, it is a big deal if you only make $100K per year. If you make $500K per year the monthly note is a much smaller percentage of your income. The higher the income the less percentage the payment is and the more credit worthy you are. The US is growing its income so much faster than its debt that the debt, even though it is rising, is a smaller percentage. Thus the ‘credit risk’ of the US is falling even as the trade gap widens.
The market seemed to figure this out intuitively, and along with the much better than expected preliminary Michigan sentiment report (94.8 versus 88.8 expected and 86.9 in May) investors found reasons to hang onto stocks. They were not necessarily out scooping them up, but they were not selling them.
After a week of leading the market (and indeed since the August low), however, NASDAQ and SP500 took the day off. It was a day for the large caps to finally get with the program. SP500 rallied 0.5%, no great shakes, but it took the index decisively through 1208 on very strong (though option expiration related) volume. NASDAQ started at 2100, the breakout point from its base and key resistance, but it could not make the move just yet.
Even with NASDAQ stalling at 2100 again, however, this was very good action. The market needed the large caps to come to life, and that is what they did Friday. No problem with NASDAQ and SP500 taking the day off; this is healthy rotation and it was needed to balance the move higher. NASDAQ may have not been ready for the breakout move, but it is now getting some support from SP500 and even DJ30; that will make NASDAQ’s break higher all the easier.
http://www.investmenthouse.com/1weekendmarketsummary.htm”>Read “The Daily” Entire Weekend Summary
Here’s a trade from “The Daily” and insights into our trading strategy:
Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/parlsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
PARL”>
PARL (Parlux Frangrances–$28.82; +0.81; no options): Designs, manufactures and markets fragrances and beauty related products.
http://finance.yahoo.com/q/pr?s=parl”>Company Profile
After Hours: $28.63
STATUS: Breakout test. Volume surged two weeks back as PARL broke out from a solid 16 week cup with handle base. It has moved up the 10 day EMA (27.10) since, coming back to test the move last week. Solid 5 to 3 accumulation in the base has set up the breakout, and with strong money flow moving higher ahead of price we are looking to move in as PARL continues the breakout run. A market leader moving to a new high.
Volume: 222.752K Avg Volume: 420.545K
BUY POINT: $29.45 Volume=631K Target=$35 Stop=$27.54
POSITION: – Stock (no option chain).
http://www.investmenthouse.com/1daily1.htm”>Learn more about “The Daily” with Stock Picks! – Issued 5 Times Per Week
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2) 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: 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.
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Here’s a post-split play to watch and our current analysis.
Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/abvsm.gif” width=”360″ height=”208″ border=”1″>
http://investmenthouse.com/quote/stkquote.php3?smbl=
ABV”>
ABV (Companhia de Bebidas das Americas)
http://finance.yahoo.com/q/pr?s=abv”>Company Profile
We use several different types of plays on stock splits; indeed that is one of the reasons we like them so much: we can play a leading stock several times as it moves through the process of a split (before, after the announcement, and after the split). ABV set up a great pattern as it moved into its split date in early June, a nice 13 week cup with handle base. On the day of the split it started to move higher. When it continued the move the next session (6-10-05) on strong trade, making the breakout from its base, we entered some new positions. Given the strong base we bought both stock and option positions. For the options we purchased some October $25 strike call options for $3.50 per option. The 68 delta made them appealing, providing a lot of movement in our option as the stock moved. It was a solid breakout. ABV moved higher the entire following week, running to our initial target with ease and strong volume. Thursday we banked some nice 15% stock gain and 85% option gain (sold the options for $6.50). Love post-split stocks that set up a strong base and then breakout because they typically have done their consolidating and are ready to move.
Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
http://www.investmenthouse.com/a/StockSplitReport.html”>Details Here.
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Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/lrcxsm.gif” width=”360″ height=”208″ border=”1″>
3) TECHNICAL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
LRCX”>
LRCX (Lam Research–$30.63; +0.32; optionable): Chip equipment
http://finance.yahoo.com/q/pr?s=lrcx”>Company Profile
After Hours: $30.52
STATUS: Cup w/handle. Getting better and better, tapping the 18 day EMA (30.17) on the Friday low and rebounding to post a gain on rising, above average volume. Very good action that shakes out the last sellers here in the handle and shows buyers stepping in as the price tests near support. Just about ready and watching for the high volume breakout this week. To recap: LRCX has spent the last two weeks pulling back to test the strong run from mid-May, forming the handle to its 14 week base. Strong 4 to 2 accumulation in the pattern (4 up price weeks on rising volume to 2 down price weeks on rising volume) shows net buying that is setting the foundation for the breakout. Nice pattern, but want to see very strong volume on the breakout move to make clear the buyers are rushing back in.
Volume: 2.859M Avg Volume: 2.603M
BUY POINT: $31.88 Volume=4M Target=$36.65 Stop=$30.42
POSITION: LMQ IF – Sept. $30c (59 delta) &/or Stock.
http://www.investmenthouse.com/1tech1.htm”>Learn more about our Technical Traders Report – Issued 5 Times Per Week Chart by http://www.stockcharts.com”>StockCharts.com
http://www.investmenthouse.com/cc/cydsm.gif” width=”360″ height=”208″ border=”1″>
4) COVERED CALL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
CYD”>
CYD – China Yuchai International, Ltd. is currently trading at $13.52. The August $12.5 Calls (CYDHV) are trading at $1.90. That provides a return of about 8% if CYD is above $12.5 on expiration Friday in August.
http://finance.yahoo.com/q/pr?s=cyd”>Company Profile
http://www.investmenthouse.com/1coveredcalls1.htm”>Learn more about our Covered Call Tables – 8 Tables Updated 5 Times Per Week
* * * SCOTTRADE * * *
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The foregoing is commentary for informational purposes only. All statements and expressions are the opinions of Online Investment Services, LP., or Split Ventures, Ltd. This information is not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on the related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolios of writers for this issue may, in some instances, include securities mentioned herein and on the related web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors. No one associated herewith receives compensation in any manner from any of the companies that are discussed in this newsletter or on the related websites.
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