DELIVERANCE! Profits of 156% and 115% – While Avery Dennison Comes Unglued (AVY, ACI, XYL)

Two trades to close today before we move to wrestle with all you home-office types!

But before we begin, a quick note.

We’re booking the trades with closing numbers from last Friday.

But with S&P futures set to open lower, it’s very likely you’ll fare better than what we’re posting here.

May the G-d of Heaven and earth, the Holy One of Israel, deliver you redemptive winnings– and may the Yoke of Heaven ever be upon you.

The first is our bet on ACI from August 8^th that arrived in a communiqué called Albertson’s CEO Defies Shorts: Claims Batflu Delirium Led to Craving For Finer Cuts of Beef.

There, you’ll recall, we urged you to sell the ACI October 15^th 29/32 CALL spread for $1.05 and buy the ACI October 15^th 31 PUT for $2.75.  Total debit on the affair was $1.70.

And now?

Today, you can buy back the short 29 call for $0.15 and sell the long 31 PUT for $3.80.

That gives you a full $3.65 on just $1.70 laid out – or 115% inside two months.

And that’s lip-smackin’ good!

Now we turn to our XYL trade of September 13^th.  The letter was called Xylem’s Turn to Get Hosed, and therein we recommended you sell the XYL January 21^st 135/140 CALL spread for $1.90 and buy the XYL January 21^st 125/115 PUT spread for $3.05.  Total debit was $1.15.

And whaddaya know…

Today the short CALL spread can be repurchased for $0.95 (2.00/1.05) and the PUT spread can be sold for a water-logged $3.90 (8.10/4.20).  That gives you a NET take on the trade of $1.80 on $1.15 spent.

And that’s a very handy 156%.

Let’s roll it again!

You got it, Gerald.

We’re trading Avery Dennison today (NYSE:AVY), because these sticker machers have essentially come unglued from stock market reality.

How so?

Well, there may have been a case when the Batflu home-office craze was at its viral peak, but as you’ll shortly see, the stock has done nothing for the last half year, while fundamentals remain stretched.

To wit –

• Price/Earnings is a sticky 23.63 (far too high for an old-line, industrial outfit like AVY),
• Dividend Yield is 1.32%,
• Price to Book is absolutely adhesive at 10.07 (!),
• And the company is carrying too much debt ($800 million of which was just added a month ago to finance their acquisition of Vestcom, the price tag mavens).

Altogether, we don’t believe it will play out well when Q3 earnings are announced on October 27^th.

In fact, we think the band-aid is already getting ripped from AVY’s downy soft skin.

Just look at the chart –

This is the daily for the last six months, and it shows –

1. An overbought RSI read in April/May (circled in red), that led to…
2. Steep negative divergence against price on both RSI and MACD indicators (green arrows), indicative of waning buying momentum.
3. Both indicators are now sub-waterline (boxed, in green), a signal that the bears have assumed control.
4. In addition, we see that price has broken below its short term moving average and is barely holding the all-important 137 day MA (in blue).
5. Once it loses that handle, a quick trip lower to 198 and/or 185 could be in order (in purple). Those levels represent weak, then stronger mid-term support.

Look now at the weekly –

The weekly technicals offer additional indictments.

1. First, RSI signaled a hugely overbought condition through April AND May (circled, in red), after which…
2. Steep divergence against price ensued (green arrows).
3. Weekly RSI is now about to move sub-waterline and MACD’s decline is gathering strength – both signs that the selling quicken in the near term.
4. Price has no strong support on the weekly chart until roughly 150 – a decline that would both devastate stock-holders while making us very happy.

And it’s for all the foregoing that we’re stepping out in the following fashion –

A Jew and His Money recommends you consider selling the AVY November 19^th 200/210 CALL spread* for $4.80 (12.40/7.60) and buying the AVY November 19^th 210 PUT for $10.90.  Total debit on the trade is $6.10.

[*Sell the 200 CALL and buy the 210 CALL.]

Rationale: the trade offers an UNLIMITED return for a debit of $6.10.

Maximum potential loss is $16.10 (difference between the CALL strikes plus the initial debit).

Breakeven on the trade arrives at $202.95, a mere 1.8% below the current price of $206.77.

The overall technical picture and existing support lines indicate a potentially steep fall over the short term, which would offer an opportunity for quick closure of the trade.

May it be His will.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew