We’ve got a great deal to report this week, so buckle up and get ready to roll.
We’ll start with a trade that we’re not so pleased with. It was set on June 16th in a letter called Homage to the Aged, a letter that attempted to convince you that the old-line tech stocks were where it’s at, and that concentrating on these issues over the short term would pay off handsomely.
And as it turns out, we were right – even though the trade didn’t work out.
As fellow Normandy analyst Matt McAbby pointed out last Thursday, it’s the big names that have thrived on the NASDAQ Composite, while the greater number of her components have actually declined.
Look here –
[care of Bourbon & Bayonets]
Whereas companies like Cisco (NASDAQ:CSCO), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL) have all risen nicely from the time of our call, a full 47% of the index’s remaining components didn’t. They’re all at least 20% below their mid-summer highs, as the chart shows, putting them on a level that, per definition, defines them as being in the grip of the bear.
But all that notwithstanding, we played a pairs trade on this information, betting that Microsoft would outpace fellow tech-grandpa Intel, as the latter was looking long-in-the-tooth-overbought at the time we set the trade.
We bought the MSFT September 44 CALLs for $0.54 and sold the INTC September 31 CALLs for $0.58 and took in a credit of $0.04.
But as of last Friday’s options expiry, Intel had not backed off in the manner we forecasted. She closed at $34.82, while MSFT closed at $47.52, and we now sit with $356 from the Microsoft side (coupled with the $4 credit we took in at the outset), and a short Intel position that’s exactly $382 underwater.
If you buy back the Intel shares now, you’ll book a loss of exactly $26 on the trade.
And that’s precisely what we recommend.
Get it done.
Our next trade also expired with last Friday’s options deadline. It was opened on July 7th in a letter called Trade the Weak against the Strong, where we urged you to set another pairs trade, this time using the NASDAQ Composite and the Homebuilders, about which we wrote –
“We believe the homebuilders, represented by the SPDR S&P Homebuilders ETF (NYSE:XHB) will better hold their latest gains, simply because they haven’t come as fast or as furiously as the NASDAQ’s tech laden rise of late.”
And, sadly, we were wrong.
We recommended you buy the QQQ September 81.63 PUTs for $0.27 each and sell the XHB September 30 PUTs for $0.25. Your total debit for the trade was $0.02, and as of last Friday’s expiry the numbers looked like this –
QQQ closed at $99.98 and XHB at $30.84.
That is, both closed out of the money. The trade was a dud. You lost $2.00.
Moving right along, we have a third trade that closed over the weekend. It was our NASDAQ iShares Biotech initiative (NASDAQ:IBB), opened on July 21st in a letter called To the Risky Go the Spoils.
In that missive we set a two way spread on the biotechs, expecting a quick zig lower before the sector returned to its winning ways.
And what happened?
Take a look –
Which isn’t all bad news, because we did have the wherewithal to close the CALL side of the trade back on September 1st for a tidy $340 per pair traded. And considering that our costs for opening the initiative back in July were only $310, we can still say we profited. Not a whirlwind, to be sure, but not a loss, either. We’re up $30 for every quartet traded.
Before we move on to this week’s money-making caper, we want to pause and revisit our fast-food venture of last week, a trade involving options on McDonalds (NYSE:MCD) stock.
It was a bullish bet, as you may recall, on which we purchased CALLs and sold PUTs, and MCD stock responded favorably. Let’s take just a brief glimpse at how she’s moved over the last five trading sessions –
After the initial bullish engulfing pattern (in blue) urged us to open the trade, we saw steady movement higher on increasing volume (in black), with RSI breaking above its key midway waterline and MACD on her way to confirm, likely over the next few trading sessions (in green).
In short, McDonalds is still a keeper, either until she hits resistance at her longer term moving averages in the $97 area (where we plan to unload the trade), or until we see something extraordinary from the stock itself or from the broader market in general.
Filthy Dirty Communist Chicken!
We’re going to stick with the burger and fry theme for this week’s trade, but veer to the other major player in the global franchise game, Yum! Brands (NYSE:YUM).
Yum! Brands control the fate of Pizza Hut, Kentucky Fried Chicken (KFC) and Taco Bell, to name just a few of her biggest holdings. While only a third the size of McDonalds, at $30 billion the company’s market cap is still three times that of Burger King (NYSE:BKW) and ten times as large as Wendy’s (NYSE:WEN).
And it’s growing – particularly in China, where the company’s chicken business has made the communist powerhouse KFC’s leading national market.
China Causes Problems
But it hasn’t been all wishbones and giblets.
Chicken maladies and bird flus have made operating in that country occasionally problematic. As late as this summer a dirty bird scare sent the poultry eating hordes of that nation in search of other fare, leading to a Rhode Island Red-sized drop in the stock.
See here –
After dropping almost 19% on increased volume and hitting an extreme oversold RSI read (in green), YUM bounced and chewed its way back above its long term (yellow) moving average, pulling RSI above its waterline along the way (in black). In a day or two, we expect MACD to confirm with a move above its own waterline, sending technicians into buy mode and moving the stock toward former highs.
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It’s for that reason that we’re recommending a long position – via options – on the company.
Wall Street Elite recommends you consider the purchase of the YUM January 80 CALLs for $0.80 and sale of the October 68 PUTs for $0.55. Each pair will cost you $$0.25.
With kind regards,
Hugh L. O’Haynew, Senior Analyst, Normandy Research