The Market Direction…

Research in Motion (RIMM) made a nice rally from its Dec-02-2009 low @ $58.13 to its Dec-11-2009 high @ $66.50 before failing to break resistance at its 200 day moving average and then retreating to form a bearish engulfing candle pattern at the close of last week’s final trading session.

Today, it ceded further ground by completing a 38.2% retracement of this upward move and now barely trades above its next key support level @ $62.74 or 50 day moving average.

Despite securing a distribution partnership with China Mobile, which allows it to tap into the Chinese smartphone market and eventually grow its top line revenue, bulls appear to be exhausted as the stock is succumbing to an overbought condition.

Volume in today’s options trading was relatively heavy for its December $60 (15,441 contracts) and $65 ($15,136 contracts) calls, in addition to the January $80 (13,746 contracts) calls. All three were down in price to suggest some selling or paring back.

Should RIMM fail to hold support at its 50 day moving average, the potential for more bearish retracements to its 50% level (@ $62.32) and 61.8% level (@ $61.33) increases.

Overall, the fundamentals are still bullish even though the smartphone landscape is becoming more competitive with Google’s Android invading the market next year.

However, this stock deserves to be monitored as it could present a buying opportunity on either a retracement pullback or successful retest and breakout above its 200 day moving average.

Author’s Disclosures: Author has bullish exposure to RIMM via long December 55 calls and short December 60 calls and short December 55 puts as of Dec-01-2009.

*Disclaimers: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Values>>> Advanced Auto Parts (AAP) broke above resistance levels to attain a new 52 week high in Tuesday’s trading session. As Hillbent.com has assigned the stock an overall fundamental rating of "B", with "A" being the strongest on a scale of "A" to "E", my curiosity led me to take a look underneath its hood and kick the tires.

Here is what I found:

1. As a member of the auto parts industry group, AAP is not only a good stock, but it also resides in a pretty nice neighborhood. Its industry group ranks in the 83rd percentile in terms of relative strength performance year-to-date and remains in strong primary, intermediate, and short-term uptrends.

2. Fundamentally, the auto parts industry and AAP both face a tough economic environment and the prospect of declining sales. AAP faces some uphill challenges since @ 75% of its business is derived from "do-it-yourself" customers. However, with tighter credit conditions and thrifty consumers, both by-products of the current economic recession, replacement of older auto parts and increased maintenance are still preferred to new vehicles.

3. Under such conditions, one should not be surprised to see AAP still firing on all cylinders. For the past 3 quarters, it has averaged 20% earnings growth and its 3 year earnings growth rate averages @ 10%. Management is effective and delivers @ 25% return on equity and already intends to close down some of its less profitable outlets.  It is one of few companies out there still capable of delivering top line growth, in addtion to the bottom line.

4. Technically, AAP remains in a bullish trend across it daily, weekly, and monthly time-frames, with the caveat that the stock is approaching overbought levels (see chart below). Institutions own @ 98% and have been increasing their purchases for the past 8 quarters. Given the run-up in the stock, a pull-back or consolidation could be imminent.

5. From a valuation perspective, the stock trades at a discount to its industry average with a PE @ 15.8 vs. @ 24.3 for the industry mean. Its PEG ratio is @ 1.28 and also provides a nice GARP (growth at a reasonable price) opportunity.

In summary, AAP offers good value for investors shopping the market for a growth vehicle to get them thru this recession. Going forward, the stock might be in for a bumpy ride as the industry deals with potentially softer sales, but pullbacks or market corrections should be considered buying opportunities. Otherwise, an out-of- the-money bull put credit spread @ 40 strike price range at least 3-4 months out seems like a safe strategy.

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Regarding guest commentaries and contributing authors, note that Hillbent.com does not officially endorse the commentaries of any contributors and the sole purpose of providing such content of for the convenience of our readers and to further assist their research efforts.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Analysis>>> With the rain ceaselessly falling in our little town of Piedmont and the bike tuned and waiting for just a spot of sunshine, it is time to re-evaluate midyear market action. 

      Does the stock market reflect, in its pricing, all information available at any given time? This question has been batted about for years by the efficient market or “random walk” theorists on one side and the market timing specialists on the other. In this week’s Barron’s, Burton Malkiel author of, A Random Walk Down Wall Street, stands firm in his belief that the individual investor is best served by buying and holding broad market exchange traded funds (ETF) such as SPY. Whereas Bill Gross in his July publication states that “the efficient market hypothesis was always dead from the get-go.” He foresees stock markets performing below average for an extended period of time allowing astute investors to beat the markets’ random walk.  

      Alpha is the pay dirt to which the active manager devotes his/her working days and sleepless nights. Judging by the popularity of and the tremendous energy dedicated to the internet site Seeking Alpha, thousands of bloggers also subscribe to the theory that it is possible to outperform broad markets without additional risk. 

      I am one of the devotes to the alpha camp, believing that the time invested in searching profitable opportunities does pay off with returns better than just buying and holding the broad market as represented by the S&P 500 (SPY).  

      Like Bill Gross, I assume markets will produce below historic returns for the next several years. We will continue to pay the price for past errors of excessively easy money and overly hyperactive consumers. Higher savings rates and corporate taxes   will yield lower corporate profits. In addition, some 15 trillion dollars of equity was wiped off the American household balance sheet from the recent economic crisis making them reluctant to make risk investments anytime soon. 

      There is an investment strategy for every market condition and in a single digit return market covered call writing is ideal. Receiving cash for time both lowers risk and improves performance. It is the alpha tool for a directionless market. 

      Returns of 1-2% monthly can be found by writing in-the-money calls on large cap stocks. I have a few suggestions for August, six weeks away:

      CVX at 63.35 with August 60 calls at 4.90

      WMT at 47.9 with August 47.5 calls at 1.75

      JNJ at 56.6 with August 55 calls at 2.50

      ABX at 33 with August 32 calls at 2.7  

*Note that S&P 500 @ 893 on July-07-2009 at time of writing of this commentary report

By Brent McCosker (from Quebec, Canada)
Canadian Market Strategist and Contributing Author @ Hillbent.com

Author’s Disclosure: The author is long the following companies and short the calls: WMT, JNJ, ABX

(Editors Note: Brent McCosker worked as a research scientist for the aerospace and petroleum industries, first with McDonnell Douglas (now Boeing) and Lockheed then Unocal (now Conoco Phillips). He followed his father into finance working as a financial advisor with Morgan Stanley for eight years. In 2002 he and his family moved to Quebec, Canada (his wife is Quebecoise) where they purchased a water analysis laboratory which they owned and operated for three years.  Brent is now a private investor and collaborates with J Clinton Hill on Hillbent.com’s Market Direction blog and investment research products and services. He also holds a Masters degree in Chemistry and in his free time enjoys cross country skiing and long distance cycling.)

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Regarding guest commentaries and contributing authors, note that Hillbent.com does not officially endorse the commentaries of any contributors and the sole purpose of providing such content of for the convenience of our readers and to further assist their research efforts.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Options>>> A mentor of mine, Carl Hullick, at Morgan Stanley once told me; when the markets get tough go to the movies.

Not the best behaviour for today’s markets, most would say downright denial. But as diversion is sometimes the best medicine, I recently took delivery from Amazon of James Jones’ novel, From Here to Eternity.

The preoccupation of most serious investors at the beginning of the year is, what will the New Year bring and where will markets be, come December 31? This is especially true for 2009 and particularly unclear.

The consensus says: 1) that the economy will be weak the first half of 2009 recovering modestly in the second half responding to both fiscal and monetary stimulus; 2) underweight US treasuries; and 3) buy corporate bonds.

Serious investors also know that consensus is quite often wrong and that conventional wisdom is not that wise. These three ideas lobby in favour of an aggressive and determined new administration succeeding in the long run and we have reason to be optimistic. Family formation is still on the rise and these new families hold the dream of home ownership. In fact the rate of family formation now exceeds the rate of new home construction. University graduates still dream of being entrepreneurs creating new industries and new markets. For these reasons and many others, the current stimulus in the economy will eventually have a positive effect.

So the question is not if, but when? Certainly any experienced investor can be confident in owning dividend paying stocks when the SPY and DIA dividend yield is equal to or greater than 3% while the ten year US treasury hovers between 2 and 2.5%. But stable to improving GDP in 2H 2009 (against easy comparisons) still may be overly optimistic.

What is an investor to do to make money over the next several months while economies heal and consumers rebuild their balance sheets? I currently use in-the-money to deep-in-the-money call write strategies with large (mostly DJIA members) dividend paying companies. The strategy does not work when using a full service broker where commissions will destroy most of the gains. A successful trade involves three commissions totalling about $50-$70 for a 1000 share trade through discount brokers for the two opening positions (buying shares and selling call options) then the desired exercise at option expiration (or possibly before). A minimum of $100,000 is required to be properly diversified.

My selection criteria are as follows:

–limit company selection to dow components (ex. JNJ, WMT) and largest companies in their sector (ex. SLB, ABX)

–minimum calculated gain after commission of 1%

–if the stock trades below down side protection offered by the call premium the position is closed

(Click this hyperlink for example of spreadsheet details on trades I have executed recently.)

I call this my fish or cut bait strategy. I’m doing something, hopefully productive, and still have plenty of time to go to the movies.

Author’s Disclosures: Author holds positions in JNJ, WMT, SLB, ABX, DNA along with the call writes.

(Editors Note: Brent McCosker worked as a research scientist for the aerospace and petroleum industries, first with McDonnell Douglas (now Boeing) and Lockheed then Unocal (now Conoco Phillips). He followed his father into finance working as a financial advisor with Morgan Stanley for eight years. In 2002 he and his family moved to Quebec, Canada (his wife is Quebecoise) where they purchased a water analysis laboratory which they owned and operated for three years.  Brent is now a private investor and collaborates with J Clinton Hill on Hillbent.com’s Market Direction blog and investment research products and services.

Brent holds a Masters degree in Chemistry and in his free time enjoys cross country skiing and long distance cycling.)

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Regarding guest commentaries and contributing authors, note that Hillbent.com does not officially endorse the commentaries of any contributors and the sole purpose of providing such content of for the convenience of our readers and to further assist their research efforts.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Technical Analysis Alert>>> Yesterday, we noted that the Dow Jones Real Estate ETF (IYR) initiated a new short-term downtrend. This situation has reversed itself as the IYR resumed its short-term uptrend. This back and forth action is typical of a consolidation phase.

Under such a scenario it probably better to take a neutral bias until a stronger confirmation signal is given. Support for the IYR remains @ 30 to 31 and resistance @ 39-40.

For option players, such a wide range is ideal for spread writing, i.e. selling naked calls and puts or bull put and call spreads.

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.