5 Stocks To Watch This Week

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Includes: AGR, BAC, C, GOOG, GS, HD, ISRG, JPM, NTRS, PNC, SPY, SWKS, UPLMQ, WEC, WFC, XEL
by: David Ristau

Market Opinion: Last Friday the SPDR S&P 500 (NYSEARCA:SPY) opened in the red but managed to rally into the close. The opening weakness was due to a not so dazzling earnings report from JPMorgan Chase (NYSE:JPM) as the company forecast a bleak outlook for the next quarter. JP Morgan's CEO said "no one seems in control" of the global financial system, and that his bank could lose up to $5 billion from the "PIGS" countries in Europe.

Jamie's statements during his conference call were certainly not bullish, and it gives the market a moment to check into reality from its recent rally. My view on the SPY has not changed. We need to close the gap at 125.50 (1255 on the S&P 500). The market has been determined to slowly chug higher without remembering that we were beginning to second guess whether a Christmas rally would occur back in December.

Based on my bearish suspicions we entered three bear call spreads last week. First on Jan. 10th which was a Feb. 18th 136/137 bear call spread on SPY. We subsequently entered two other bearish spreads on Jan. 13th after JPM reported earnings (Home Depot (NYSE:HD) Feb. 18th 44/45 bear call spread and JPM Feb. 18th 39/40 bear call spread). I'm confident in all three of these positions to expire in February. All three positions are betting the equities will not rally over their 10 year max returns during the Dec.-Feb. option expiration time frame. These positions could get a bit dicey, along with their trip to expiration. We may experience a period where we are losing on all three of these positions. However, I have planned ahead. If we are stopped out that I will roll up to a higher strike for the same time period and bet the equity will not rally to an even higher extreme. Our timing of entering these bear call spreads was very good given that we initiated them before a three-day weekend, which means they may lose a lot of time value.

As for my outlook this week: I'm going to be mainly focused on the banks: Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), Northern Trust (NASDAQ:NTRS), PNC (NYSE:PNC) and Goldman Sachs (NYSE:GS), but I will also be watching Google (NASDAQ:GOOG), Skyworks Solutions (NASDAQ:SWKS) and Intuitive Surgical (NASDAQ:ISRG).

I've been surprised and pleased with the recent strength in gold despite the dollar trading at 12 month highs. Our Feb. 18th 20/21 bear call spreads look in good shape, and I'm expecting them to continue to decline due to leverage decay and gold strength. As per oil ... the headlines on a war with Iran are increasing, thus, I do not expect oil to move below $95/barrel during this period of geopolitical tension (even with an oversupply).

Now let me show you a few positions I'm looking at for this week.

Ultra Petroleum (UPL)

Ultra Petroleum (oil and gas company .. primarily a gas company) has been in a downtrend since July as natural gas continues its move lower. Oversupply due to fracking and a mild winter have caused natural gas prices to trade at $2.63 (a far cry from $13 in winter 2008). Since Ultra petroleum is so heavily weighted in the natural gas market, it can wait out this perfect bear storm. However, I think UPL will experience short term support as natural gas should hold support at its 2009 lows, at least temporarily. To support my case let's look at the Dec-Feb option expiration returns of UPL since 2001.

As the data shows UPL seems to have a long term bullish bias during this period. Technically UPL is trading at resistance turned support from 2005. Although a recent nine-month daily chart looks very bearish, I think UPL could bottom for a short while. We see that the worst return over this period has been -5% from Dec. 09-Feb. 10. Currently UPL is down -15.41% since Dec. 17th. Either we are seeing a negative fundamental shift in the company, or an overreaction to a Hold from Buy downgrade at Stifel Nicolaus last Friday. I think we can expect short term support in natural gas in both a technical and fundamental sense (temperatures have recently dropped since a few weeks ago). Based on the information above I can suggest the following trades:

Suggested Trade 1: UPL - Sell Feb. 18th 24/25 put spread (Bull Put Spread)

Size - 5% of Giorgio's Corner Portfolio Size = (5 spreads)

Entry: Sell Limit: 0.35

Stop Loss: 0.70

Exit Price: 0.00

Max Return: 53.84%

(Note: Return calculation does not include commission. Max Return is calculated as Return at Risk not Return on Margin.)

This trade is for those who are following a short term bottom, and are willing to take some risk with extra coin. The stock is by no means in an uptrend so enter these trades at your own risk. However I think the risk may be worth a shot.

Suggested Trade 2: UPL - Sell Feb. 18th 23/24 put spread (Bull Put Spread)

Size - 5% of Giorgio's Corner Portfolio Size = (5 spreads)

Entry: Sell Limit: 0.25

Stop Loss: 0.60

Exit Price: 0.00

Max Return: 33.33%

(Note: Return calculation does not include commission. Max Return is calculated as Return at Risk not Return on Margin.)

This trade bets that UPL will not post a return worse than -20.60% on Feb. 18th from Dec. 17th. I think this is safe trade, and it offers a nice return.

Wisconsin Energy Corp. (NYSE:WEC)

Utilities such as Wisconsin Energy (electric utility company) have rallied dramatically since 2009. In December alone the stock broke out of its $33 price high and rallied up to $35.50 (a 7.5% move in just one month). Technically the stock is in a strong uptrend between $33 and $36. However, I'm skeptical that the stock can continue rallying at its current pace. Let's take a look at WEC's 10 year historical returns from Dec. to Feb. option expiration.

Notice WEC does not necessarily show a bullish or bearish bias. One can only trade the stock to if it trades close to its estimated max high/low extremes. Given WEC closed at $34.21 last week, the stock is closest to its max high extreme. The best way to play the stock is with a bear call spread near its max high.

Suggested Trade: WEC - Sell Feb. 18th 35/40 call spread (Bear Call Spread)

Size - 5% of Giorgio's Corner Portfolio Size = (1 spread)

Entry: Sell Limit: 2.00

Stop Loss: 3.25

Exit Price: 0.00

Max Return: 58.73%

(Note: Return calculation does not include commission. Max Return is calculated as Return at Risk not Return on Margin.)

I think this trade will be able to play out nicely since WEC just received a downgrade to Neutral from Outperform at RW Baird last Friday (Price Target: $35). However, there is one risk you must know about this trade. The option premiums for this stock were oddly not that high last Friday. Yes, utility stocks have low volatility, but given how close the stock is trading to $35, I think a bit more premium should be demanded. Thus, I have increased the sell limit to 1.85 (despite a mid-point of 0.60 last Friday).

XCEL Energy (NYSE:XEL)

Xcel Energy is another electric utility company that I'm interested in, and it's another company that was downgraded to Neutral from Outperform by RW Baird (price target: $27). The company recently said they see 2012 earnings to be in the low end of expectations, implying the strong technical uptrend in the stock may need to take a breather for a few months. For back testing purposes, let's see if the 10-year historical returns on XEL from Dec. to Feb. option expiration can tell us anything.

These data are relatively more bearish than that of Wisconsin Energy. The average return for WEC was 1%, and here it's -2% for XEL. The stock closed at $26.75 last Friday which is closer to its estimated max high than low. Based on the data I suggest the following trade.

Suggested Trade: XEL - Buy Feb. 18th 25/30 Put spread (Bear Put Spread)

Size - 5% of Giorgio's Corner Portfolio Size = (1 spread)

Entry: Buy Limit: 2.80

Stop Loss: 1.35

Exit Price: 0.00

Max Return: 78.57%

(Note: Return calculation does not include commission. Max Return is calculated as Return at Risk not Return on Margin.)

This position starts ITM (in-the-money) but we're being rewarded by paying only a little bit of time value relative to purchasing outright put options.

UIL Holdings Corp. (UIL)

My third and final electric utility company I want to show you is UIL. This company was also downgraded last Friday by RW Baird, and the 10-year historical returns on UIL from Dec. to Feb. option expiration are the most bearish.

With an average return of -4% during this time frame, I think it's safe to try and short this stock. It must be noted that even if you adjust the -25% return to only 0% it almost ties XEL for an average return of -1%. I suggest the following trade on this stock.

Suggested Trade: UIL - Sell Feb. 18th 35/40 call spread (Bear Call Spread)

Size - 5% of Giorgio's Corner Portfolio Size = (1 spread)

Entry: Buy Limit: 2.50

Stop Loss: 3.00

Exit Price: 0.00

Max Return: 100%

(Note: Return calculation does not include commission. Max Return is calculated as Return at Risk not Return on Margin.)

Please note that my sell limits are estimates based on last Friday's close mixed with my feeling of how much I want you to get paid for taking on the risk of certain spreads. If I were to choose to short a utility stock, this one would probably be my first choice.

Citigroup Inc. (C)

Citigroup reports earnings tomorrow and I'm excited to see what they will say. After bleak statements from Jaime Dimon last week, I think Citigroup will not be able to say anything bullish. Citigroup stock has rallied over 25% since November. Technically I don't think C will be able to surpass $34 by Feb. 18th. For assistance in a trade let's look at the 10-year historical returns from Dec. to Feb. option expiration.

The data listed above is overwhelmingly bearish. There are a couple bearish points to state from this price information.

1. Citi has performed poorly for many years even before the financial crisis occurred.

2. Citi just closed 12.47% above its estimated max high for Feb. 18th

Even if Citigroup reports great earnings the stock is probably not going to perform very well during this period. I think the stock is overbought and suggest the following trade:

Suggested Trade: C - Sell Feb. 18th 32/33 call spread (Bear Call Spread)

Size - 5% of Giorgio's Corner Portfolio Size = (5 spreads)

Entry: Buy Limit: 0.35

Stop Loss: 0.80

Exit Price: 0.00

Max Return: 53.84%

(Note: Return calculation does not include commission. Max Return is calculated as Return at Risk not Return on Margin.)

I think this is a great trade that I will be considering to enter this week. If Citigroup pops after earnings then of course a higher strike spread will be more attractive, but based on last Friday's close in Citigroup, I like this position.

Charts courtesy of finviz.com.

Disclosure: I am long GOOG, SPY. I own a bear call spread on HD. I do not own any investments in SPY, UPL, WEC, UIL, XEL, or C.

Additional disclosure: I am short SPY, JPM, HD.We may initiate positions in any stocks mentioned long or short in next 72 hours.