1. Commentary
2. Bounce or No Bounce?
3. Apollo Group Heads Lower
4. Earnings
5. Current Trades
6. Monday Morning Playbook (Take-Two)
7. Closing Thoughts

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1. Commentary

The market took another pounding for the week as all three indexes lost between 6%-7%. There was a flurry of expected and unexpected events but the entire mood on Wall Street was down. We didn’t see any “panic selling” from investors. Instead, we got a slow drip that continues to take the market to new lows but nobody seems to care.

There has been so much bad news that people are giving up investing and trading altogether. Many people have seen their 401K’s slashed to 201K’s and are afraid to open their statements. Some go months without even opening their monthly statements from there brokerage accounts.

The financial stocks are a mess and there seems to be no end in sight. AIG (AIG, $0.35, unchanged) and HSBC (HBC, $25.50, down $1.12) reported a steep drop in earnings but that was expected. Well, maybe AIG losing $60 billion in a quarter was unexpected which now puts the losses in one year for AIG at $100 billion. And guess what? For such a fine performance, the government tossed them an additional $30 billion in aid. HSBC plans to raise capital in a stock offering and will cut over 6,000 jobs along with its dividend.

Elsewhere, U.S. Bancorp (USB, $8.82, down $0.19) dropped nearly 40% for the week and Wells Fargo (WFC, $8.61, up $0.49) fell over 30%. These two banks are considered by those on Wall Street as among the “better run banks” but shareholders weren’t too happy when the companies slashed their dividends by roughly 85% to 5 cents a share.

Bernanke and Geithner testified before House and Senate finance panels on Tuesday and Wednesday and that failed to rally the financial sector as Bernanke basically said “we” will through as much money needed to save AIG. Oh boy…

Tech broke down after showing signs of life. There are some good stories out there but a lot of the solid names are getting crushed once again. Google (GOOG, $308.57, up $2.93) has dropped $50 in six trading sessions and briefly fell below $300 on Friday before rebounding.

General Electric (GE, $7.06, up $0.40) fell below $6 at one point on capital concerns and joined the growing trend of companies that has slashed its dividend. However, GE was doing some damage control after more chatter on the health of its finance arm — which accounts for over 80% of GE’s assets — made the market nervous. Several big wigs came in and tried to show their support by buying shares in the open market but don’t let that fool you. They nibbled but they surely didn’t go all-in. The stock ended the week with a 17% loss but it was much worse than that.

Ford Motor (F, $1.70, down $0.11) and General Motors (GM, $1.45, down $0.41) said February sales sank nearly 50%, basically, and it only fueled the fire on concerns regarding a GM bankruptcy. It is looking more and more like these two companies are racing to $0 instead of the finish line.

There was no good news really for bulls to stage a rally and as a result, all three indexes finished at fresh lows. The Dow dropped 435 points, or 6.2%, and closed at 6,626. The Nasdaq fell 84 points, or 6.1%, to settle at 1,293 while the S&P 500 plummeted 7%, or 51 points, to finish at 683.

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2. Bounce or No Bounce?

It’s hard to believe in some ways that the market is down another 25% on average for 2009 and 20% since we got a new President. The continued drop in the stock market has flushed out the wishy-washy investors as many of them closed up shop and liquidated their funds. Many of them figured they better save what they had left and bailed on the market.

Yeah, it’s scary but only scary if you don’t know how to short the market. I’ve been cautious of any rallies and we have seen the signs that the market was giving us that it was headed lower. I’m still getting those vibes but am now cautious of the snap-back rally that many have been expecting. Of course, no one knows when it will come but my best guess is that it will be this week or next.

March is normally a pretty bullish month for the market so I buy into the logic of a bounce which is why I initiated half positions in a few stocks. However, we are also looking at the possibility of a bounce and then another retest of the lows. The fact that the volatility readings didn’t spike markedly higher is one of the reasons why I can picture a bounce and another reason I see us going lower.

With the Dow failing 7,000, the Nasdaq not being able to hold 1,300, and the fact that the S&P 500 broke below 700 was not a good sign. When things like this happen it’s important to do a little research to see where the market could be headed.

From the look of things, the support levels that were broken now become resistance. Even if we get a bounce, does anyone believe it will sustainable with unemployment at 8.1%? People are hoarding money and they are scared of losing their job. I don’t think that is going to entice America to rush out and buy new cars and houses.

If we take another 10% off we get Dow 6,000, Nasdaq 1,080 and the S&P 500 would be at 600. What is scary about the charts is that the Dow could sink as low as 5,500. I don’t think the gloom and doom is that bad but never say never with the market. What has been working should continue to work and that is short rades for quick profits. Until we get some solid catalysts, we are stuck with a lower trending market.

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3. Apollo Group Heads Lower

I wanted to run Apollo’s story once again for those who may have missed it in the blog. So far we have been right on with trade and I’m hoping for a continued fall but we have already done well. Do not start new postions as the March puts that are mentioned have already reached their target. Quotes are from Thursday’s close:

“I know we have a lot going on but there is one stock that I have been watching this week that really looks ready to fold like a cheap lawn chair. Many of you have probably heard of the company before and I’m sure you have seen the commercials for online education popping up like mad lately. I’m also sure that many of you have heard about the proposed $150 billion education stimulus package.

Obama’s budget means that most of the nation’s nearly $90 billion in student lending will run through the direct-loan program run by the U.S. Education Department. Stocks of “non-profit” and “for-profit” education providers slipped on the news. Many of these stocks have fallen dramatically since the news but some have held up better than others.

For instance, Sallie Mae (SLM, $3.38, down $0.60) which is a “non-profit” entity has dropped over 50% in less than two weeks, falling from a high of $8.89 to nearly $3. The one stock I am targeting is Apollo Group (APOL, $66.79, up $0.28) which is a “for-profit” business and runs numerous educational programs and services at high school, college, and graduate levels. Perhaps you have heard of The University of Phoenix, Inc.?

What has been interesting with Apollo’s stock is that it held up pretty well until yesterday when shares broke below $70. That is when my “Watch List” alerted me of the stock. I’m not sure if the “for-profit” stocks are supposed to benefit from the package at the expense of the “non-profit” businesses but what really got me interested in shorting Apollo was the shady business practices and lawsuits I have been reading about. Type in “Apollo Group Lawsuits” in a search engine and you will some interesting stories.

Student lenders were embarrassed by a scandal in 2007 that revealed some had given money and gifts to college financial aid officers to A-B-C (Always Be Closing…) business and these stocks were punished back then. As for Apollo, there are allegations of misconduct and “boiler room” practices which are locked up in lawsuits.

In fact, there was a lawsuit that was re-filed back in January that portrays this unmistakable “boiler room” work environment. The former employee claims that he was harassed because he would not commit “unlawful acts” in recruiting students. The suit also confirms that his salary was based on enrollment goals. Apollo Group has said they do not pay their enrollment counselors incentive compensation for performance.

What is really a red flag is the amount of insider selling that Apollo’s management has dumped over the past 3 years. Sales are in the hundreds of millions of dollars while at the same time, the company continues to delay the inevitable court cases that are on its agenda. This could get messy.

The U.S. Education Department is set to assess the value of $2.5 billion of government guaranteed student loans being funneled through Apollo and that could also get interesting. Given the current crackdown environment that the government had bestowed on Wall Street, this could really get interesting if some of the company’s officers are found guilty of engaging in unethical practices.

I could go on and on but after doing some chart work, I’m convinced that Apollo Group could be headed for a major sell-off. The stock recently broke through its 100-day moving average and is poised to bust below its 200-day. Where there is smoke, there is usually fire and I’m getting that feeling with Apollo.

If the stock breaks through this level, there is very little support at $60 which could lead to the low $50’s. That is asking a lot but check out the chart and you will see what I’m talking about. If you need help, email me and I’ll send you the link…

The March 55 puts (OAQOK, $0.70, down $0.25) are a possibility but they expire in two weeks. There were 3,300 contracts that traded hands on Thursday and the high was $1.25. If the stock can get to the low $60’s today or by early next week, these options could easily double.

The April 55 puts (OAQPK, $2.80, down $0.30) traded 750 contracts and were at $3.40 when the stock fell below $65. They lost a little mustard but they have a longer expiration period. I’m targeting the low $50’s for the shares by then and if this holds true these put options could also double.

Both contracts are risky, especially the March 55’s which, if you did enter a position, would have a short time frame for a trade. Maybe buy them on Friday and get out by next week. The one thing I should point out is that there are a slew of analysts who love the stock and bulls like it as a counter-recession play. You could use the March 75 calls (OAQCO, $1.10, down $0.05) for protection as a 1-to-2 cover ratio.

The April put options give us 7 weeks for some action. Also realize that holding any options over the weekend is sketchy so you will have to confirm the stock’s direction throughout the day. Try and get in the March puts for under a $1, the April puts under $3, and make sure the stock is in a downtrend.

Of course, these trades are time and news driven but I’m not sure if we need any news to make this stock head lower. It’s already in the process.” -

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4. Earnings

We are at the bottom of the barrel with earnings as we get ready for the start of first quarter earnings which will begin to flood the market in April. There are a couple of notable names reporting this week but nothing to get excited about.

Monday: AeroVironment (AVAV, $31.78, down $0.43), Casey’s General Stores (CASY, $18.81, up $0.42), Comtech Telecommunications (CMTL, $36.03, up $0.83), ResCare (RSCR, $12.48, up $0.20) and Safety Insurance Group (SAFT, $29.16, up $0.63).

Tuesday: Boston Beer Company (SAM, $21.77, down $0.71), Clayton Williams Energy (CWEI, $20.26, down $0.77), Ferrellgas Partners (FGP, $11.84, down $0.63), J. Crew Group (JCG, $9.28, down $0.68), Kroger (KR, $19.85, down $0.29) and Take-Two Interactive Software (TTWO, $6.21, up $0.53).

Wednesday: American Eagle Outfitters (AEO, $8.91, down $0.22), Diamond Foods (DMND, $21.11, down $0.34), Elbit Systems (ESLT, $40.90, up $0.40), Men’s Wearhouse (MW, $9.73, up $0.21), Quiksilver (ZQK, $0.99, up $0.01), Speedway Motorsports (TRK, $10.74, up $0.13) and Staples (SPLS, $14.81, up $0.09).

Thursday: Aeropostale (ARO, $22.52, down $0.57), Hibbett Sports (HIBB, $14.08, up $0.22), IMAX (IMAX, $4.10, up $0.03) and Smith & Wesson Holding Corporation (SWHC, $4.43, up $0.64).

Friday: Not worth mentioning…

Note: Notice the surge in Smith and Wesson? The March 5 calls (UWJCA, $0.35, up $0.20) traded over 1,000 contracts on Friday. In February, the company announced it plans to nearly double its annual revenue and improve margins and market share over the next few years. Option traders are trying to push this stock over $5 and the shares are already up 80% for the year. I’m not saying this is a good trade or not but the 52-week high for Smith and Wesson is $7.77. Is there a hidden message here?

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5. Current Trades

Amgen (AMGN, $46.38, down $0.82)

April 55 calls (YAADK, $0.50, down $0.10)

Entry Price: 90 cents (2/27/09)
Exit Target: $2.00 (Open)
Return: -44%

March 47.50 puts (AMQOW, $2.40, up $0.45)

Entry Price: $1.25 (2/27/09)
Exit Price: $2.50 (3/6/09)
Return: 100%

Amgen continued its slide last week and the stock got removed from Goldman’s “conviction buy list” on Friday. The shares fell 4% for the week but we were prepared for that. We bought the March 47.50 puts as insurance and I had mentioned if Amgen kept falling that the puts could double. The profit in the puts have now totally covered the call side of the trade which means we have 6 weeks for a rebound. If you wanted, you could close out the calls and walk away with a great total return or wait and see how the call options trade this week.

Apollo Group (APOL, $64.69, down $2.10)

March 55 puts (OAQOK, $0.70, down $0.25)

Entry Price: $0.70 (3/6/09)
Exit Price: $1.40 (3/6/09)
Return: 100%

The April 55 puts (OAQPK, $3.50, up $0.70)

Entry Price: $2.95 (3/6/09)
Exit Price: $4.50, then $6.00 (Open)
Return: 19%

I felt really good about this trade when I was researching it Thursday night. I wanted to make sure I finished the blog in time before the market opened on Friday to get these trades in. The March 55′s were risky but the put options opened at 70 cents and traded as high as $1.40 which is where our target was.

With the March profits already in the book it makes it easy to manage the April position. We can set an early stop of $2.00-$2.50 for these and I hope we don’t get stopped out. Apollo made a nice move lower on Friday and lets hope it continues into this week.

Celgene (CELG, $41.16, up $1.21)

March 40 puts (LQHOH, $1.35, up $0.55)

Entry Price: 95 cents (3/2/09)
Exit Target: $2.00 (3/6/09)
Return: 122%

I mentioned this stock for “Monday Morning’s Playbook” in last week’s Weekly Wrap. Monday morning the stock opened below it’s close of $44.73 and the puts could have been entered at 95 cents. Our initial target was $2 for the put options and I said if Celgene failed to hold $40 we were golden. The stock finished higher on Friday but not before hitting a low of $39.32. Once we got below $40, all you had to do is set your stop to take you out of the trade. The puts traded as high as $2.10 before falling back. Once again, by having our stops and exits in place, we were able to take advantage of the market’s gift.

Exxon Mobil (XOM, $64.03, up $1.81)

April 70 calls (XOMDN, $1.58, up $0.39)

Entry Price: $1.25 (3/5/09)
Exit Target: $2.00
Return: 26%

We entered the calls last Thursday when Exxon was on the way down and I figured we would find support in the stock where we went long at. The shares traded as high as $64.59 and the calls traded up to $1.67. This trade is off to a good start and I’m hoping Exxon can rebound like it did last November when it was down at these levels.

Genentech (DNA, $90.86, up $9.22)

March 95 calls (DWNCS, $0.25, up $0.05)

Entry Price: 95 cents (1/12/09)
Exit Target: $2.00
Return: -83%

Well, it’s about freakin’ time Roche raised its bid for Genentech but it did us absolutely no good. I was stubborn on this one I’ll have to admit but I have been watching this soap opera for nearly two months. Roche came out with a higher bid all right but it was another slap in the face. The company raised its bid to $93 a share in a tender offer to shareholders until March 20. That likely puts a ceiling on the shares and the 95 calls only jumped a nickle following the news on Friday. We’ve come this far and I doubt Genentech can reach $96-$97 in two weeks which is where the stock would need to be for us to breakeven. There was no stop on this trade but I’m done with it and will close it Monday. I still say Genentech trades over $100…

IBM (IBM, $85.81, down $1.67)

April 95 calls (IBMDS, $1.50, down $0.45)

Entry Price: $1.20 (3/6/09)
Exit Target: $2.40
Return: 25%

We either went bottom fishing on Friday or we are about to catch a falling knife. I send out a quick update on Friday saying to start half positions when the stock was at $84.44. The calls were trading for $1.20 at the time of the blog and closed slightly higher as IBM bounced off its lows.

CBOE Market Volatility Index (^VIX, 49.33, down 0.84)

VIX March 70 calls (VIXCP, $0.40, down $0.10)

Entry Price: 80 cents (3/2/09)
Exit Price: 40 cents (3/6/09)
Return: -50%

The VIX is telling us a rally is store because the index actually went down in a week the market fell 7%. This is a “fear” index and back in November, the VIX was up in the 70′s. That is what I was banking on because I felt like the market was going to set new lows last week and it did. However, the VIX let us down which means people were more nervous back in November than they are today. Go figure. Anyway, the 50% stop was hit on Friday.

Potash (POT, $66.31, down $3.18)

April 100 calls (PYPDT, $1.40, down $0.20)

Entry Price: $1.70 (3/4/09)
Exit Price: $3.40
Return: -29%

When I wrote “we could probably do a straddle option trade with the March 75 strike prices” on Wednesday, that should have been my clue to leave these calls alone. We are in but we weren’t hit too bad. The stock’s plunge has been swift and hopefully we get a bounce next week. If not, set stops at 85 cents.

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6. Monday Morning Playbook (Take-Two)

We have quite a few positions open so I’m not going to recommend anything new. However, that doesn’t mean I’m not watching stuff.

I think there could be something in the works with Take-Two Interactive Software. The stock took a huge hit back in December when the company lowered its guidance and fell 25% from $12 to under $9. Of course, that drop pales in comparison if you account for its 52-week high of $28.

Take-Two turned down Electronic Arts (ERTS, $15.31, up $0.02) hostile takeover offer of $27 a share and told its shareholders that the company would be better off if it remained independent. The deal never went through but Take-Two is trying to show us why they wanted to stay single.

Take-Two just released its first add-on to its blockbuster Grand Theft Auto series and it can be purchased only through Microsoft’s (MSFT, $15.28, up $0.01) Xbox 360 live marketplace. I think this could help the company in the long run as they look to cut costs and use the internet to push new titles.

We are going to see some consolidation in the industry and Take-Two could still be an acquisition target. I don’t expect earnings to impress anybody on Wall Street and hopefully this has already been factored into the stock price. There is a chance the stock heads back to $5 but I think the June 10 calls (TUOFB, $0.25, up $0.05) are worth a look. They are cheap “out-of-the-money” options and would be worth $1.00 if the stock can make it to $11. If the shares can make it to $10.50, it would still be a double.

For $500, you could buy 20 contracts and take a chance on the stock market recovering and Take-Two making it back to double-digits. Your investment would be worth $2,000 if the stock is at $11, $1,000 if the shares are at $10.50 by June 19th.

The company reports earnings on Tuesday so there should be some movement in the stock. I’ve already mentioned the company has guided lower so there is a slim chance the stock goes up if numbers come in better-than-expected. There is also the chance that the stock makes a fresh 52-week low if they come out with some cruddy numbers.

I’m going to do some more research but I’m leaning towards buying at least 10 contracts sometime on Monday with a limit order of 30 cents.

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7. Closing Thoughts

Futures are up as I prepare to send this out. The Dow futures are higher by 7, Nasdaq futures are up 6.5 while the S&P 500 futures are showing a 0.3 pop. If the market can’t get a rally this week or next then we will head into 1Q earnings season with plenty of question marks.

First quarter earnings start in April and Wall Street will be gauging that as to how well the rest of 2009 is shaping up. The biggest thing to watch for is unemployment because if that gets worse, we could really start to see wallets clamming up.

The market needs some catalysts but many of those won’t factor in until 2010 or beyond. The unemployment rate hasn’t reached the 10.8% level reported back in November 1982, but this recession is not over and that is what the market is dealing with.

Rick Rouse
Rick@OptionsMentoring.com