Today is a big day to start this week. I think there is a real chance that if we don’t get some good numbers from the ISM Manufacturing Index, Ford earnings, and Loews’ earnings, the market could be set for a very weak week. Friday was a very awesome day for us. We bought into Ultrashort Proshares Oil and Gas ETF (DUG). We bought into the stock at 12.85 at the top of our range. We were looking for an exit at 13.22, which we hit in the morning for 3%. Our Short Sale of the Day was Tyson Foods Inc. (TSN) on an overvalued downgrade the stock got on Friday. We short sold at 12.75, and we were looking for an exit at 12.38. The stock never hit that, and we got out at 12.50 for 2%. We went 2/2 on the day.
Later tonight, I am going to post a virtual portfolio update for how we are doing based on the past two weeks of performance.
Let’s get into today’s picks…
Buy Pick of the Day: Arena Pharmaceuticals Inc. (ARNA)
The market is looking like its ready to rally, thus far, behind some very positive earnings coming out of Ford Motor Co. (F) this morning. The automaker reported a $1 billion profit for an EPS of 0.26 when estimates were for a loss of -0.12. Obviously, much of the success is based on the Cash to Clunkers Program, but no one was expecting this kind of success. The news has sent up futures this morning to as of 8:30 AM over 40 points. Humana beat estimates, reporting earnings of 1.78 vs. the expected 1.77. Loew’s also had solid earnings reporting an EPS of 1.08 vs. the expected 0.89. Before we start to count our eggs, though, at 10 AM we have the ISM Manufacturing Index, which can definitely play into where the market is heading or at least opening. Also, at some point during the day, CIT Group’s bankruptcy has to be a factor.
There are a lot of signals coming in this morning, so where do we turn? I think that the market sentiment should be positive even if the ISM numbers come in poor. In fact, if they come in poor, it actually may help create a better buying opportunity in the morning. I think since we are seeing such good earnings this morning, coupled with how beaten down a lot of stocks have been, I like the prospects for a lot of companies reporting earnings in after hours today. One of these would be Arena Pharmaceuticals (ARNA). The company dropped almost 25% last week after releasing some positive data from a pharmaceutical trial and has passed below its bollinger band.
This technical aspect of the stock has created a fantastic buying opportunity. Across the board, drug manufacturers have been beating earnings on a consistent basis. Last week, we saw Eli Lilly, Pfizer, Bristol Myers, Abbott Labs, etc. all beat. ARNA is not quite as robust as these companies, but it is very similar to Abbott, which had a successful quarter. ARNA is still losing money as they continue to develop more drugs through their pipeline, but their earnings are still key. WIth the market moving up and the earnings coming up, this stock has some potential for sure.
The stock’s technicals are absolutely terrific for a rally on pretty much nothing. Fast stochastics are riding the bottom of the chart, showing way too much selling has occurred and that momentum cannot be sustained. Further, the stock moved out of its lower bollinger band, and it is extremely undervalued.
I just adjusted the entry/exit.
Entry: We are looking for an entry from 3.46 – 3.51 this morning. (adjusted from earlier)
Exit: We are looking for an exit on a 2-3% gain on the day.
Stop Loss: 3% on bottom of buy in price.
Short Sale of the Day: Ultrashort Proshares Real Estate (SRS)
I hate to say this, but I am not liking the prospects for SRS very much. The stock rallied nearly 10% in the past couple weeks, and with a market that is looking to rally on Monday, this ETF could be facing a quick role reversal from last week. Further, compared to the other ETFs, SRS is only down a bit over 1%, which gives us a great entry point that is not too great on the downside already.
I don’t have any exact reason for this play. There wasn’t any major developments in the housing sector or any earnings, which is probably why I like SRS. On a day like this, everyone has their attention on CIT and the financials and the auto industry. SRS is a highly volatile stock that we can play as sort of under the radar.
The market has even come down a bit off of its futures, which I do not find as really all that scary. I think we should expect a rally today, but it is not going to be 3%, and we may dip into the red to start the day or sometime this morning. Can we not expect, however, on a day when Ford (one of America’s quintessential and homeland companies) really revs their engine, something good in the market. I think we can.
SRS is overvalued on the short term, overbought, and running into a momentum issue on fast stochastics. I would expect some good profit taking to occur as weakness starts to settle in and traders make the move out of the stock.
Entry: We are looking for an entry of 10.15 – 10.25 for a short sale.
Exit: We want to cover on 2-4% from short sale.
Stop Buy: 3% on top of entry price.
Good Luck and Good Investing,
David Ristau
