July 17, 2008, Thursday Evening

The financials had a big follow through today on the upside caused by the surprisingly profitable JPM, JP Morgan/Chase quarterly earnings that were announced before the market this morning. JPM earned a net profit of 54 cents a share vs. the 44 cents that analysts expected. This was the catalyst for the big up day in the financials which the market was craving.

After the market closed today, MER, Merrill Lynch announced earnings and they can’t seem to stop the bleeding. MER lost $4.94/share or $4.9 billion (with a “B”) recording 4 consecutive quarters of losses. They lost on their investments in bank stocks they held, mortgage holdings related to residential meltdown, bond investments, and their hedge funds related to collateralized mortgage holdings.

It is hard to tell how MER is going to affect the market on Friday. Their stock was down as much as -10.4% aftermarket today but rebounded to close at -6.7%. I would think some nervousness will return in the financial sector, especially after the two big days up that have resulted in gains like 39.5% in JPM in 3 days, 43.7% in BAC, and 40.4% in WFC, just to name a few financial stocks.
But it is possible that WFC, JPM and BAC go down only slightly while MER takes more beatings. It is still most likely that the nervousness will carry over into all financials and people will take their profits going into the weekend. There are always unknowns going into the weekend.

ICE peaked at 95.70 and closed at $89. The charts say it is still a hold even though it came back $6.70 from the peak.

ESLR gave a sell signal during pre-market hours this morning at $10.60. I sold this for $10.53 for a net profit was 22.6%. This is the stock I mentioned on July 10th report “….ESLR, Evergreen Solar looks interesting here under $9. Target profit potential is around 20% from here. It would be good to buy long around $8.50-8.75 for it.” I really didn’t see this as a huge winner like the financials stocksp--I call it a bread and butter trade.

GTLS is still a hold on the chart but I am keeping a $1.75 trailing stop loss on it.

EBS is still a hold and looking good; I’ve got a 50 cent trailing stop on it.
I am still watching the housing stocks I mentioned yesterday, DHI, CTX and KBH as possible shorts. I keep alarms on most stocks and my approach for this group is to just let them move up and see how they act. I am still interested as a potential short but won’t go in all at once. Discipline yourself to build small positions gradually, after the charts are giving sell signals on the daily chart, 10 day, 1 min-2 day and a 3 min – 1 day chart (you get that?). It isn’t an automatic short at the prices I mentioned in yesterday’s report.

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I am having problems with showing you a chart on this report. I will get this resolved early next week. I recorded a quick video on some oil stocks that I am looking at to buy long or buy call options long.

BP, British Petroleum, CVX, Chevron-Texaco and COP, Conoco Phillips are the main targets. Also, looking at DIG, Proshares Oil and Gas ETF. XOI is the AMEX Oil Index.

My guess is that they will be ready to buy tomorrow morning as we are likely to see the reversal in financials as they begin a slight correction. I don’t think we are going a nasty gut wrenching correction in the financials to a lower low but like I have always said to whoever listens, I base my thinking around putting the odds in my favor on any strategy. It doesn’t guarantee that you will win all the time but as odds always play out, you will win most of the time.

I’ve always felt that if you are right 70% of the time, you make real good money, 75% you are a star on Wall Street and 80% you create wealth in a short time span.

Back to the oil stocks I am looking at, my target for profit potential is not high but oil stocks don’t normally move up or down quickly. I am looking for 8% to 9% potential profit but September calls at the money should gain 60-70% in the next couple of weeks. Please don’t load the boat on these.
As with all investment strategies, you have to diversify by keeping any one position or sector a small proportion of your account size. Just because you score big on one stock idea because you loaded up on your position size, does not mean you are a good trader-investor because your account just grew by 25% that week. You have to look at your strategy on a risk to reward strategy.

See you this weekend.
Mitch King