No-Thrills Thursday: Where's the Kaboom?

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Includes: BP, CEPH, DF, DIA, GLW, JJC, JOY, MEE, RIG, SPY, STP
by: Philip Davis

Where’s the kaboom? There’s supposed to be an Earth-shattering kaboom.

Well, it’s Thursday and the world hasn’t ended yet, contrary to the dire predictions we were getting last week, and I guess that means you’d better buy some stocks! We’ve been buying up a storm since falling below the bottom of our range with 50 long-term entries on our Buy List and another dozen longs in the first two days of this week including speculative longs (haven’t taken those for a while) on BP and Transocean (NYSE:RIG). We even took two very bullish earnings plays on Suntech (NYSE:STP) and Joy Global (JOYG) - both of which were just way too low to ignore.

JOYG was a complex spread from our 12:50 Alert to Members with a max profit at $55 but STP was a very simple, VERY bullish play where we bought the $9 calls for $1 and sold the $9 puts for .47, for a net .53 entry and no limit to our upside over $9. Even if your margin requirement is 50% on the puts, you can pick up a single contract spread like this for $497 in buying power and your risk is being assigned the stock at net $9.53 but a move over $10 nets you a 10% gain in one day. As long as you don’t mind owning the stock on a move down, these are fun earnings plays to make…

We didn’t expect to be getting bullish (and we are still well-hedged for the next fat-fingered fall) but at 12:27 on Tuesday, I posted the following chart for Members where I drew a line in the sand for the downturn:

Click to enlarge

Yesterday I noted in the Morning Post that we were completing that move down into the open, so all we really did was follow-through with our plan to flip bullish for at least a bounce. As we drifted along into the afternoon on a low volume move up, I re-examined the chart and decided it was a fine afternoon for a stick save and I drew this updated chart with the attached comment:

Click to enlarge

10,080 is the 0% line for the Dow and if I were Mr. Stick, I’d use that as my go point and jam the Dow up 100 from there, back to about 1,100 (on the S&P) so that’s the game(d) plan for the afternoon if we are getting back to the usual bullish shenanigans. Which would be fine with us as we WANT to be bullish now.

The S&P finished the day at 1,098 and the Dow exceeded our expectations at 10,249 and we’re just waiting for the NYSE to confirm a recovery (at 7,000) along with that critical S&P cross of 1,100, to confirm that we have a real recovery and we are safely back within our predicted trading range. Should we get comfortable with our outlook next week, it’s time to deploy a little capital on our more aggressive Watch List, which never got triggered as the market decided to throw a big sale on Blue Chip stocks, which we couldn’t pass up.

The Watch List has higher risk/higher reward plays like Massey Energy (NYSE:MEE), Cephalon (NASDAQ:CEPH), Dean Foods (NYSE:DF), Corning (NYSE:GLW) and a couple of dozen other stocks (with hedges, of course) that we think have lots of room to run. I’m going to have a very busy weekend updating these positions if we hold our levels into Friday’s close. I’m not expecting the market to run away and jump to new highs but, if we don’t get our consolidation at the bottom of our range, we sure don’t want to miss the next irrational run-up where we can make some very irrational profits!

For example, if you want to bet the Dow finishes higher than it is today on the 18th and you have a lot of cash and plenty of margin, you can play the DIA June $100/102 bull call spread for $1.30 and sell the June $100 puts for $1.05, which puts you in the $2 spread for net .30 with a 566% upside if the Dow holds 10,200 and you don’t have to give the putter a penny back unless the Dow finished below 10,000. We don’t usually do those plays, there are much more fun ways to make money with the leveraged ETFs, but this is an example of the silly money you can make by putting your money to work for a couple of weeks if we begin to trend higher.

I still have concerns as copper is unable to hold $3 (a big, bad sign for manufacturing) and oil is barely holding $72.50, which confirms copper’s weakness, and the Pound ($1.464) and the Euro ($1.225) are not impressing anyone but at least our Yen trade is more or less behaving itself again this morning as the Yen bottomed out at 92.75 to the Dollar at 4:50 (later than usual) and has already climbed back to 92.45 at 9am. Obama promised us a stong Non-Farm Payroll Report tomorrow, so it better be more than the 500,000 I expected or we’re going to flip short into the action.

Click to enlargeAsia loved this prediction and the Hang Seng rose 1.6% (314 points) to 19,786 but we need to see 20K to be impressed. The Shanghai dropped 0.73% to 2,552 and that’s a red flag, but the Nikkei leapt 3.25% to try to catch the Dow, moving back to 9,914, and the BSE got back over 17,000 with a 280-point gain on the day (1.7%). Europe is also perky with a 2% gain this morning - pretty much all on a gap-up open and, like I said, not over any particular good news other than hoping the US economy is turning up. In fact, the money parked at the ECB by EU banks hit a record last night, indicating a huge degree of fear among the monied crowd.

I was unimpressed by the MasterCard SpendingPulse survey this week, with Clothing Sales off 3.7% and electronics and appliance sales down as well. As I predicted 6 months ago in my "2010 Outlook - A Tale of Two Economies," the rich are getting richer as, according to the report:

Luxury sales, which includes sales in restaurants, food stores, department stores and high-end retailers, reported its sixth straight month of growth. However, it was the first time it fell below double digits since January.

With gas prices down 20% in May, the lack of retail spending is a huge red flag that cannot be ignored. It’s what’s preventing us from being gung-ho bullish here so, as I said yesterday, we’ll just have to go with the flow and watch our levels…

Correction: I got a note from the Disney Corporation (NYSE:DIS) regarding Tuesday’s post and I can understand why they may not have a sense of humor about their financial situation. What’s really strange about it is that they corrected me on the idea that they may have financial issues but did not correct me on my statement that they may be working their people literally to death but, in any case, I am happy to stand corrected by one of my favorite corporations:

Sir,

The article that appeared on your web site concerning Euro Disney (http://www.philstockworld.com/2010/06/01/tumultuous-tuesday-is-micky-mouse-missing-mortgage-payments/) is inaccurate as concerns the question of bank covenants. The journalist who wrote the Telegraph article confused the debt covenants with flexibility mechanisms that provide us additional liquidity during periods like the current economic crisis. We provided him with the following statement that you will find in the original Telegraph article.

We are providing this statement to you as well for you to update your post and provide your readers with our comments:

"The strategy we implemented in 2005 has delivered steady growth up to the current economic crisis, where of course we have been impacted like all other companies in our industry. We continue to invest in the development of our Resort while paying down our debt as it matures. Our company is on track to repay over 500M Euros, which is more than 25% of its debt by 2014.

Regarding our debt covenants, we have met and expect to continue to meet our debt covenants going forward. To clarify, there is a difference between our debt covenants and the flexibility tools included in the agreements with The Walt Disney Co. and our lender that provide us with additional liquidity during periods like the current economic crisis."

Euro Disney Corporate Communications