What Propels Stocks Now?
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INVESTMENT HOUSE.COMTM
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Weekend Newsletter for
July 31, 2005
Table Of Contents 1) MARKET SUMMARY 2) PRE-ANNOUNCEMENT 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
GDP disappointment prompts sellers to enter from the get-go.
– GDP sets early negative bias that market cannot shake.
– Preliminary GDP disappoints market but has positive undertones as well as problems.
– Chicago PMI surges past expectations.
– Bulk of earnings over, results strong. What propels stocks now?
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Market Summary (continued)
After a Tuesday through Thursday move higher that saw NASDAQ join SP500 with a breakout over 2005 resistance we expected some profit taking on Friday. The market had some momentum from the Thursday close and so we were looking for an afternoon fade. Futures were solid but then the preliminary Q2 GDP number was released, and despite some good news deeper in the report, the headline number was below expectations. The futures faded, the market opened soft, and it could never get on track for the session.
In short, those ready to take some profits got a reason before the open to do so. After three days of rallying on top of the overall strong July move the buyers were exhausted. There was no one to come in to push stocks back up after the profit takers took their shot. NASDAQ gave up its breakout over the January high, but volume was lower and all of the indices remained above the 10 day EMA and in their uptrends.
The market eased out of the week pretty much as expected though it got an earlier start on the profit taking on the day. As noted, the indices have maintained their uptrends to the weekend. With the bulk of earnings now in the book, however, stocks are going to have to find a catalyst to push them further in the summer rally and overcome the continuing strain of Fed rate hikes and rising oil prices. In 2004 stocks sold through the July earnings season, bottoming in early August and then rallying to year end. The rally came earlier this time around and now the market heads into a traditionally weaker time period having a good run under its belt. So far it remains in solid shape, but it is smart to be aware of where the market is in its rally history. Strong move to this point and still showing good action, but earnings are winding down and the market is entering a period with some pitfalls, particularly after a summer rally.
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
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http://investmenthouse.com/quote/stkquote.php3?smbl=
GLW”>
GLW (Corning, Inc.)
http://finance.yahoo.com/q/pr?s=glw”>Company Profile
The market was all abuzz last week about a new proposal to finally actually deregulate the telecom industry (the 1996 act said it did but it really just made a bunch of small monopolies), and telecom stocks enjoyed a modest bump. The financial stations were acting as if the move just started. No, telecom stocks had anticipated some good news (there are few well-kept secrets in any industry, and with legislation, forget it) and started to move long before the announcement.
We saw GLW, an old blast from the late 1990’s, break higher out of an almost 16 month base in late April and early May. When it tested that move we wanted to be there. Well after the run it came back nice and easy to tap the 18 day EMA. We were ready, and when it jumped higher on rising trade off that level in late May we moved in with some stock at $15.23 and some August $15 call options at $1.20.
GLW rallied further in that move, hitting 16.65, and then came back to the 10 day EMA for a low volume test. It rebounded on rising volume, tested, rebounded, tested, etc. A strong stock will advance up the 10 or 18 day EMA after a breakout, bouncing higher then testing, making higher and higher lows and higher and higher highs as it does. We let it run because the action was perfect. Then when the telecom news hit last week GLW made a nice little gap and run and hit our target. We banked some excellent 24.5% stock gain and 233% option gain.
It is nice to be in stocks when the good news hits, taking gains as others buy in and drive prices higher. By watching the technical indications in GLW we were able to brush aside our misgivings about it being a former leader that fell from grace. It was showing us it was ready to buy so we did. Stocks usually tell you well in advance that good news is to come. That is what we look for in our plays.
http://www.investmenthouse.com/1daily1.htm”>Learn more about “The Daily” with Stock Picks! – Issued 5 Times Per Week
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.
Pre-announcements are where we put in the long hours of research, chase down leads and rumors, and pump our contacts for information in order to determine if a split is in the works and to pinpoint an announcement date. Pinpointing the date is our primary goal as this allows us many more options in how we play a split. As we primarily focus on leadership stocks in good technical patterns, if we see the stock make the breakout we will get in earlier and ride the wave of speculation up to or through the announcement. Pinpointing a date and time also allows us to open positions immediately prior to an announcement, minimizing our exposure time to the market whims. We employ this strategy regularly in a number of situations. When we have ridden a stock for a few days, a week, a few weeks, up to the forecast announcement, we often have a lot of profit built in. After all, these are leaders and they attract attention moving into earnings, shareholder meetings, etc. We often sell some positions (all or a partial), lock in the profit, and take positions with higher strike call options near the current stock price at a cheaper cost if the stock is not overextended, i.e., has done all of its running before the forecast announcement. This way we bank some profit from the early run, and take some of that profit to play the actual split. Even if the board pulls a fast one on us and does not announce, we still have profit in the bank. This method also works well when the market is choppy, and we do not want to hold positions long. We can often buy right before the announcement and then sell when we feel the split announcement has run its course and the stock starts to pull back. Narrowing the predicted date and time of the split gives us these options.
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Here’s a pre-announcement play to watch and our current analysis.
Chart by http://www.stockcharts.com”>StockCharts.com
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http://investmenthouse.com/quote/stkquote.php3?smbl=
WFMI”>
WFMI (Whole Foods)
http://finance.yahoo.com/q/pr?s=wfmi”>Company Profile
We were looking at WFMI as a potential stock split announcement even though management has cooled to the idea of splits, thinking along the lines of a Berkshire Hathaway or something along those lines. Nonetheless, stocks split plays are all about leaders, and WFMI is certainly a leader. Good things happen to leaders; with their good sales, earnings, market position, etc. they tend to get more than the fair share of good news that drives the stocks higher. Thus we were looking for an entry point to WFMI ahead of its late July earnings. When the stock tested the 50 day EMA in mid-June following an early May breakout and run to 120 we were ready to take some positions. It dipped and started to rebound so we initiated some positions in stock and options. We picked up some stock at 118 and some November $120 call options at $8.90. If we got the split great; if not, we were in a leader that was likely to report more blowout earnings and give us a gain.
WFMI worked higher the next few weeks, then got some cold feet in mid-July before earnings, testing toward the rising 50 day EMA. We were not too concerned, let it make the test, and even picked up more shares and options as it did. Then came the news Thursday after the close; no split (we suspected as much) but more blowout earnings and guidance. The stock vaulted almost $15 the next session. We always like to lock in a good gain on good news and let some positions run because a leader will continue on after a brief test. So we banked some stock at $133, a 12.5% gain. We banked some option gain at $16.80, an 88% gain. Love playing leaders because they tend to not disappoint. That is what playing splits is all about.
Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
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Chart by http://www.stockcharts.com”>StockCharts.com
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3) TECHNICAL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
ARQL”>
ARQL (ArQule–$7.59; +0.14; no options): Drugs
http://finance.yahoo.com/q/pr?s=arql”>Company Profile
STATUS: Breakout test. Nice low volume test of the 10 day EMA (7.34) is underway and looks to be over already. It broke out two weeks back with a big volume surge off the 50 day EMA (6.68), moving out of a 26 week cup with handle base. Very tight flat handle and then a high volume breakout. Held the 18 day on the test and looks ready to resume the move. Excellent 7 to 2 accumulation (7 up price weeks on rising volume to 2 down price weeks on rising volume) shows plenty of buying. Money flow is rallying ahead of the stock as well. Looks super.
Volume: 241.481K Avg Volume: 236.709K
BUY POINT: $7.73 Volume=310K Target=$9.25 Stop=$7.24
POSITION: – Stock (no option chain).
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
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4) COVERED CALL PLAYhttp://investmenthouse.com/quote/stkquote.php3?smbl=
TOL”>
TOL – Toll Brothers, Inc. is currently trading at $55.42. The September $55 Calls (TOLIK) are trading at $3.70. That provides a return of about 6% if TOL is above $55 on expiration Friday in September.
http://finance.yahoo.com/q/pr?s=tol”>Company Profile
http://www.investmenthouse.com/1coveredcalls1.htm”>Learn more about our Covered Call Tables – 8 Tables Updated 5 Times Per Week
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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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