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Phillip Wiegand, Optionetics.com
October 31, 2001

The averages have had a major run during the past couple of weeks and are continuing to show their resiliency—even in these pullbacks we’re getting.  Support levels appear to be holding and buyers are stepping in on the downdrafts.  This is bullish price action, but I am inclined to stick with more defensive issues when trading from the long side.  One of the classic defensive groups is the food/beverage sector, and there are some quality companies that would make for great long-term investments and hedges against more aggressive plays.  

Kellogg (K) is a major player in the consumer foods industry with more than $9 billion in annual sales.  The company is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, meat alternatives, pie crusts and cones.  Some of the major brand names from K are Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Austin, Morningstar Farms, Famous Amos, Carr's, Plantation, and Ready Crust. For the most part, people are going to purchase the products that K produces, which is why this stock tends to be a more defensive security.  The company is expected to release its next earnings report the week of January 25.  

K is not a very powerful stock and does not make very large intra-day trading moves, but it does attract capital when the market gets a little nervous.  Additionally, there are some positive technical developments in the price chart.  The price has just broken up through its 50-day moving average and this indicates some upward momentum coming into the stock.  I also like the way the 200-day moving average provided a nice area for the stock to lift from a couple of weeks ago.  There is overhead resistance at the 32-level and support is coming in around the 28-level.  This stock should head higher if the market shuns the more growth-oriented stocks.     

Many different strategies could be implemented at this point in K.  However, a collar would make a lot of sense in this situation for a couple of different reasons.  First, you will have a risk-free trade if the momentum stocks take off to the races again and the defensive names are sold off.  Second, a collar can continue to be adjusted and rolled out to new months for an indefinite period of time.  Since the stock will not expire, new options can be placed around the stock until you want to rid yourself of the position.      

Good Luck!


Phillip Wiegand
Senior Writer & Trading Strategist
Optionetics.com ~ Your Options Education Site
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