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Taking Stock of Four Recent Trades

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Let’s do some follow-up on four recent trades.

We’ll start with our position in LQD, the iShares iBoxx Investment Grade Bond ETF.

In our October 29 letter, we advised all those who were still holding the December 119 PUTS to roll out the trade to March, and buy the 112s.  The top-out on the corporates was taking far too long to materialize, and we had little confidence that we’d make money on the trade by last week’s expiry.

It turns out it was a good move.  LQD is only now showing signs of breaking down, and we’re confident we’ll be able to recoup much of our original position – if not turn a profit outright – in the weeks and months ahead.

Have a look at the chart:

 

The technical read is as follows.

First, we have a strong divergence between the stock’s price action at the top, in red, and the RSI and MACD indicators at the bottom (also in red).  As you can see, price has been rising while the indicators have been falling.  Never a good sign.

Add to that, that the above divergence began after RSI readings grew excessively bullish, registering maniacally overbought 80+ levels for most of July before retreating to less manic levels (black circle).

RSI and MACD have for two weeks also confirmed we’re in a bearish trend, with their concurrent dive below their respective waterlines (red boxes).

Finally, the big volume selloff we saw one day after highs were lodged in October (blue box) and the weak action of the moving averages (black box), give us reason to believe we’ll see a more or less orderly staircase retreat in LQD for months to come.

Trade #2: Financial Superiority

Our DIA/XLF zero premium initiative, launched on November 12th in Financial Stocks for the Home Stretch, has been profitable from the get-go, but not to the extent that we believe it yet will.

We’re in the black by $20 per pair traded and still believe the story – that the financials will outpace the broad market going into the New Year.  To that end, we’re leaving the trade open, and offer you the following chart as just one encouraging sign that it will pay to hang on.

 

Since last New Year, the financials have led every sector higher by a significant margin, while the utilities have lagged ignominiously, managing the only loss of all the major market sectors on the year.

And yet, the chart is also misleading, because the bulk of the financials’ outperformance came at the close of the year – since the beginning of August, to be precise – indicating that we’re still in the midst of financial strength rather than at the tail end of it.

So, too, incidentally, with the utilities, which have lagged in a far more profound way since that aforementioned August date.

Trade #3: Utility Bonanza

While the utilities were a losing proposition on the year, down almost 1% (not including dividends), he who managed to time the utility trade did rather well.

Without sounding too haughty, we were among those who accomplished just that.

Back on November 19th, in Mind the Doors, Please, the Doors are Closing, we recommended purchasing shares of Unitil Corporation (NYSE:UTL), which we then reasoned had been gratuitously pummelled by a market and media too quick to write off all northeastern utilities in the wake of superstorm Sandy.

We wrote:

[W]e’d normally wait to see a cross higher from the MACD indicator … before opening a speculative long position.  But this time we’re not waiting … We’re going to pre-empt the signal, catch the falling knife, assume the risk [and] dive in … We’re buying shares of Unitil Corporation (NYSE:UTL)… now trading at $24.45, and we believe we can take three dollars out of the trade – plus dividends – in fairly short order.

As it turns out, the move came extraordinarily quickly.  We didn’t have time for a dividend, nor are we waiting for our three dollar profit.  Instead, we’re selling with $2.07 worth of profit – that’s 8.5% – and getting out quick and dirty with what’s on offer.

Here’s why:

 

To start, we’ve hit some turbulence at the moving averages (blue box).  Three trading sessions have butted up against the $26.50 level and gone no further.  It could be that we’ll retreat and regroup before trying again for a run at them, or we could see some sideways meandering for a while.  Hard to tell, and not worth our while to wait.

We also don’t like seeing over twice the average daily volume on a day where resistance is not overcome (black box).  It smells a little like a waste of good ammo to us.

Of course, anyone wanting to hang in for a potential bump above the moving averages is welcome to do so.  There’s also a juicy $0.34 dividend waiting at the end of January, if you care to hold that long.  But we’re jumping here.  You’re on your own.  Best of luck to all.

Trade #4: Transport Glory

We’ll sign off today with a look at a trade we opened just three weeks ago in Transports are Back in Play.

There, we wrote:

We’re looking at a sector this week that continues to get bad press, even while it moves within its six month trading band that we expect shortly will be broken.

Within days that breakout occurred.

Look here:

 

We bought the IYT March 93 CALLS for $2.60, and they’re now changing hands for $4.60.  That’s 77% in three weeks, friends, or 1334% annualized.

Not that anyone’s counting.

Wall Street Elite recommends:

  1. Closing out your open UTL position at the market, and

  2. Closing out your IYT 93 CALLS at the market.

We’re initiating no new trades on the week.

A safe and happy Xmas to all our wonderful readers.  May Santa bring you health, happiness and profits, profits, profits.

With kind regards,

Hugh L. O’Haynew

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