Stocks to Watch Tuesday 6/5

Prepare for two scenarios in overall market: 1) reversal some time in the first two hours, or 2) well, no reversal!

Click [HERE] for quotes of stocks.

• Elan (ELN)- if you trade biotechs, you definitely will be watching this one! Elan and Biogen Idec (BIIB) will have a conference call 8:30 am to discuss the FDA’s approval of Tysabri back in the market. The key issue is their adjusted guidance on sales now that the FDA has brought the drug back with restrictions. Ty is supposed to be a $1 billion drug as it is the #1 cure for MS. If the target remains on track, expect this stock to fly. If not, well, I don’t know, I just cannot put a price on this one. Pre-market trading will give us a clue.
• Peru Copper (CUP)- the “fastest COP in town”, just made a new high as it broke the $6 barrier. Still, there’s no significant news surrounding copper or the company (other than a new vice president), that warrants today’s 14% gain. A set up for a day trade short.
• Titanium Metals (TIE)- the “big 3 specialty metals” stocks took 7% hits today. As I’ve pointed out before, TIE follows the Dow quite nicely, so any reversal and TIE should be back strong.
• Dynegy Inc (DYN)– This energy stock should pick up fast within the first few minutes, but from there it’s a wildcard. Cramer recommended this stock late in the evening, so my guess is the limited buying time will continue on at the opening bell. Even without Cramer’s rec, the stock is sitting pretty as it’s in a breakout phase. I like!
• Ryan Air (RYAAY)– no big companies reporting tomorrow, but of the group, I’ll watch this one because I’ve flown on this airline in Europe, and the options call premiums are rediculously high.
• Here is a good investing idea: Hedging against hurricane season.

Finally, just wanted to give a heads up that ethanol will be back this summer! I missed Pacific Ethanol (PEIX), but VeraSun’s IPO is coming soon. I’ll keep a watch on their exact date.

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I havn’t seen a drop this big on a Monday in a while, but clearly there were no signs of life in the indexes today. The first 100 or so point drop in the Dow was attributed to rise in oil prices and fears it will continue to rise this summer on higher energy consumption and Iran’s possible halt on shipments; the rapid drop that occurred shortly after 1 pm was caused by Bernanke’s remarks that inflation is worse than expected, and that rates will continue to be raised. I expect the downward trend to continue tomorrow, at least for the first few hours before “buy-the-dippers” start to pick up shares (that is if they have any firepower left). Once again, I just want to point out that the Dow is once again flirting with the psychological 11,000 point, which could be the final blow of the bear trifecta. OIL FEARS + INFLATION FEARS + BEARISH SENTIMENT.

UPDATES
– Titanium (TIE) follows the Dow very closely ever since May 10. According to my back-of-the-napkin calculations, TIE emulates Dow at a 4:1 percentage ration. For example, if the Dow closes down 1%, TIE closes down about 4%, if Dow closes up 1%, TIE closes up about 4%, and today’s case: Dow down 1.77%, TIE down 7.86%. Every trade I’ve done (on paper or in real time) has been successful as long as I followed direction of the Dow (only this past Friday seemed to be the only day to violate this pattern). I’m not sure how long TIE’s volatility will keep this pattern in check.

– Elan (ELN): The FDA finally announced that Elan’s Tysabri will be back in the market. Well, that news was pretty obvious since the panel met with consumers back in May and MS patients were crying and demanding for Ty to come back, “I’d rather die, than live with MS” some patients would say. Elan had a sell off today though because FDA put restrictions on Tysabri– MS patients can only use Ty if other treatments don’t work. So my question is, how are we supposed to value Elan now?

– Vaalco Energy (EGY): Today my small cap energy pick in my “Summer Portfolio” made it to IBD’s “Highest-Rated Stocks Under $10.” Cool! As for Tri-Valley, I’m waiting for the correction to continue.

– Mastercard (MA): Moved opposite of the market today, approaching $50.

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Last week I expressed concern over oil prices as OPEC discussed production matters with Chavez. This week I expect oil to dominate the headlines now that we have fresh new worries for oil. Actually, they’re not new worries, but recurring ones- attacks on oil in Nigeria, uncooperative Iran, and just as I suscpected… hurricane season! We can’t predict the weather, but we can predict people will be worried about the weather, as memories of Katrina ripping through the U.S. Gulf’s rigs begin to surface.

I found a really good website that’s everything oil, http://www.worldoil.com/, it’s sort of what Kitco.com is to gold, copper, and other metals.

To put things in perspective, I’ve also found an awesome chart that shows the relationship between macroeconomic events and the price of oil:

What sticks out to me is that everytime the U.S. has some kind of war (especially with in the Middle East), the price of oil jumps. Currently, the U.S.’ problems in the Middle East with Iran and Iraq are not going to end any time soon, and that’s what makes going long Oil a good strategy (ie, once tensions ease, you can flip your position on oil).

Anyway, you don’t have to travel to the Middle East to realize how expensive oil is, just look at the gas pumps. I guess that’s one good perk for working at home- I don’t really drive around much.

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It’s June, it’s summer, it’s time to give our portfolios a new look. Okay, okay, so I usually don’t hold a stock for more than a week, and historically I haven’t been great at picking medium or long term stocks, so now I’m going to give it a shot. So far, I’ve narrowed my top five to four stocks from different sectors that I believe will perform well for the rest of the year. Within these sectors I picked companies with huge growth prospects, while their stocks trade with high risk and return behavior. I’ll spend the rest of the week discussing each stock in detail.

So far I have two oil/energy picks, Tri Valley Corp (TIV) and Vaalco Energy (EGY). I’m going for the small-caps here, because it seems the big oil companies are a bit crowded. There are so many oil plays out there, but I think the entire sector should do well until the end of the year.

As a financial stock play I picked Master Card (MA). The company’s recent IPO was the second largest in history, but what’s even more appealing is Master Card’s solid business model. This international company handles trillions, yes, trillions of dollars and takes a small percentage as revenue… a trillion multiplied by anything is a lot of money.

I had a tough time deciding which hot sector to pick a stock from- Chinese internet companies, or metal working. I decided to quit the Chinese thing because I’ve lost on almost all my Chinese trades (I just don’t understand Chinese). So under the “metal working/specialty production” sector (I made that up), I could have gone with Titanium Metals (TIE) for their titanium, Zoltek (ZOLT) for their carbon fiber, but this time I decided to go with Dynamic Materials (BOOM) for their explosion-weilded clad metal plates. This is one company I’m really excited about, and it has fallen back down to a price where I first discovered it, in the high 20s, so I feel like I’ve been given a second chance to hop on board.

My fourth pick produces a product that fits the current health trend America is going through. No not Nutri-Systems (NTI) which everyone has now caught on to, but the small cap Medifast (MED). The stock has taken off quite fast so I do expect a correction back to the low teens (ouch!), but I think it’s worth investing in this one for the product after any correction. As you can see, in the final two hours of trading on June 2, the stock jumped 10%! Could the big boys be buying?

I’m still debating what my fifth and final pick should be, but I’m leaning towards the biotechs and pharmaceuticals. So far, I like Elan (ELN) and OSI Pharmaceuticals (OSIP), both have nice charts at the moment, and both have huge rebound potential. As for the technology sector, I’m still not convinced that there’s a new dominating product out there, in fact I think the industry is lacking innovation- most companies are just adding new features to their product and calling it a new product (for example, Apple’s Ipods) or we see new companies that just copy a product (ie, Creative Labs… ha!). I’m still waiting for the next “it” (ie, the way the Ipod swept us away), or the next new way to store 1,000 gigs of data. I don’t really track the sector so I’ll leave that to a friend who’s always on the watch.

Anyway, I’ve given these stocks much thought, and I’ve mentioned them a few times in past posts, so I guess I’ve done my DD. If you have a top 5 for the summer please share, you can type them in the “leave a comment” part at the bottom of this post. For now, I’ll be using Investopedia to track my performance; currently the portfolio has a double entry of BOOM, so I’ll fix that this Monday. I’m also tracking the performance in trading options in SPY.

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Here’s your chart of the day:

We’re still well off from the all time high of the S&P 500, but the trend does seem to be moving higher. Well, we all know how bad the month of May, and it’s been one of the worst months for the S&P for years! You can see it on the chart.

Here’s another chart I keep an eye on, the Spyder ETF (SPY), one the largest traded stocks in the world. The Nasdaq version is the Cube ETF (QQQQ), the Dow version is Diamond (DIA). These ETFs are very liquid, and are very good indicators of the market. Notice how the month of May shows a relatively significant sell-off, which I believe presents a good buying opportunity.

“But the volatility of this stock is very small!” True, but that’s what makes SPY and QQQQ so desirable to trade by the big investors- they can throw in a few million dollars, or tens of thousands… multiply that by a small percentage move and you still get a big dollar amount. When you invest that kind of big money the most important thing to consider is risk.

“So how can the little guy make money off this stock?” We don’t… we make money off the option, where we have major leverage. Here’s a [LINK] to the options prices of SPY. The SPY contracts have a unique aspect: the strike prices are in $1 increments, where usually a stock trading this high would have strike-prices in $5 increments, and this gives us better positioning. Another attractive feature of trading these index options is that we don’t have to understand one stock, but just “feel” where the market is going. For example, if we know inflation is going up and oil is going up in a given week, chances are that the market will head south which makes buying PUTS in SPY, QQQQ, or DIA a good trade. And because we have leverage, a small move in the stock can easily be a 30%+ move in the option. Of course, that can be 30% up or down, so be careful and be prepared to lose money.

Finding the optimal strike price and date is always a challenge, but the rule still applies: the further away from the stock price out of the money, the more risk. That’s why we see the most traded contracts to be the next strike outside the current stock price (ie, 10,000 call contracts @129, and 30,000 @128).

“What’s my experience trading this type of options?” Well, admittedly, it’s very limited so far. I kind of took for granted these options because I was more used to the 500% gains and 100% losses of the “normal” equity options. I’ve traded the SPY and DIA successfully in the past, but I brushed them off because they were never huge gains. I’ve also paper-traded the oil etf OIH, which has a higher beta (volatility), but have failed over and over. So yes, I’m not good at it, so I’ll have to limit my principle invested, gains, and losses. Easier said than done!!

Well, for now I’ll be using Investopedia to test out this strategy, and I’ll invest a small amount in real-trade to see how I perform under real pressure. As always, I’ll track my record, and keep some notes posted on the other site.

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Gold sank to $630 in London as dollar bounces. I wonder how this will affect the overall market. I’m starting to feel this is the beginning of the correction we’ve been waiting for. I’m still long gold, but in the meantime I’m looking for heavy shorting in the metal sector for next few days:

1. Silver: SLW
2. Gold: GG, GFI

Today is June! That means we’ll see a lot of restructuring of fund manager’s portfolios. I suspect Apple’s (AAPL) sell off yesterday was due to a lot of investors moving on to other stocks. I will spend the weekend doing the same, but for now I can tell you I really like these two stocks: Medifast (MED), and Tri-Valley (TVI).

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