Conviction is defined as having a fixed or firm belief. And, at the start of May, our conviction was that the month would not end without a sharp decline that would take most by surprise! Last week was that surprise for many. Not for us, however and not for Phil. We were all quite skittish during the second run up to 13,100 just 6 trading days ago.
We went out on a limb late last week to call the top in oil also and backed up our conviction with a Trade Alert on the DUG. Unfortunately, we didn’t get the pullback we wanted today on the DUG, so we decided to be patient before executing the trade. If it comes in… great! We will add it to our Exxon bear call from a few weeks back, which is in good shape now. If the DUG never retraces, we will remain disciplined and will refuse to chase it. We went bullish on the FXE and benefited from a perfect open last Monday before Tuesday’s pop. The timing was equally spectacular on the FXI before that so we can’t expect the market to give us perfect opportunities every week!
One of our members asked recently about long-term plays and General Electric has popped up as a company that would fit well into this category now. We had an internal price target of $30 in the short-term and $30.40, where it closed today, is good enough for the purposes of this article. GE has not been this low for nearly 4 years (5-20-04). In fact, you would have to go back to 2003 to find a 10 year low for this international behmoth!
When GE was trading at $32 per share, its CEO was purchasing stock. With the stock trading almost $2 lower, we believe the $30 level could act as strong support. Technically, the RSI is quite oversold and fundamentally the reward to risk ratio is becoming ever more attractive. Even if $30 was broken, the next level down is $28, a point at which the stock hovered back in 2003.
The question is, does GE deserve to trade at the same price level as 5 years ago? Did the dollar not decline in that period? Does the company’s international exposure count for nothing? Does the diversification mean nought? Although diversifcation counteracts fast growth, surely its exposure to so many markets should insulate it from any single shock. If $2 down and $10-$12 up is considered possible over the next 12-24 months, then this stock looks primed for a long-term play.
For those who tend to lean conservative, another attractive feature is the reduced guidance that was stated recently. This could result in a nice upside surprise in the near future. Even if not in the next report or two, the likelihood is high within the next year or so.
On the downside, the purchase of shares at this level is like catching the proverbial falling knife. So, there would be no reason to deploy full capital allocation to the position at this point in time. This is not poker, amigos! We do have to go "all in". One could simply scale into 2010 LEAPS calls at strike 30 over time.
For example, if a full position constituted 10 contracts, then 3 could be initiated around these levels and another 4 contracts on a $2 price drop and the balance on another $2 price drop. Or for more aggresive investors, a half and half commitment could be made with the first tranche at these levels.
With the Jan 2010 long call at strike 30 costing $4.20, a 100% return on risk over the timeframe is not out of the question. And if that was achieved, half the contracts could be sold and the rest held so a Risk FREE trade could continue to profit. At that point, you could shoot for the moon with the remaining contracts!
Have a Wonderful Wednesday
Stock and Option Trades
