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Author: Mike Celeste Editor: Tony Ponzo January Circulation: 13763

Stat Sheet Week Ending January 14th 2006

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+10.00.0%+242.40.0%
S&P+3.0+0.2%+39.3+0.1%
NAS+11.0+0.5%+111.70.0%
Splitmaster Strategies
Basic...............+2.2%
Big Dipper..............0.0%
Option Calls..............+76.0%
Option Puts..............+72.0%
Highlight of this past week
PZZA closes early, showing a 300% rise in the price of the CALLS and 67% profit in the written PUTS>

In this Issue---Looking ahead - 2006---
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My student was very kind to me during Christmas and gave me several books on stocks, options, etc. Maybe he wanted to divert me and take some heat off the relentless list of questions I give him, but I have to say that the books are proving to be very interesting, and I think you will be interested in some tidbits I will give out over the course of the year. (He continues to amaze me, by the way--he's answered some very tough questions--some of which after I throw out a little hint--but others he even anticipates before I ask the question---very satisfying to the "Teacher", I can tell you.) OK, enough bragging about him, on to the book info.

This particular book is titled "Stock Trader's Almanac 2006". Since it is an almanac, it goes thru the months and offers historical bits of information about each month. We have all heard about the "January Indicator". Actually, there are 2 parts to the this. One covers the market results for the first 5 days of Jan. and the other covers the results for the whole month---and how those results translate into predictors about the whole upcoming year. The almanac states that "The last 35 up First Five Days were followed by full-year gains 30 times for an 85.7% accuracy record. The five exceptions include flat 1994 and four related to war." We have seen a very strong opening to Jan., where the Nas was up a record tying 7 straight days, and starting that string the first trading day of 2006.

Looking now at what it says about the whole month of January. Quoting again--"Devised by Yale Hirsch in 1972, our January Barometer states that as the S+P goes in January, so goes the year. The indicator has registered only 5 major errors since 1950 for a 90.9% accuracy ratio. Vietnam affected 1966 and 1968: 1982 saw the start of a major bull market in August (Note--how well I remember that--the 1969 Dow figures were not seen again until that Aug. 1982 rally--13 years): two January rate cuts and 9/11 affected 2001: and the anticipation of military action in Iraq held down the market in January 2003......Bear markets began or continued when Januarys suffered a loss."----------Let's see how the month ends up on this one. Also, we will try to remember to quote the months that follow.

Testimonial---
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"R" Reports almost $22,000 credited to his account just from written PUTS in Jan. His calls showed a profit of over $4,600 on CALLS. He says "I would like to say this is a combined effort. 1. Great picks from you guys. 2. Commitment to trade 'em from me. 3. Reasonable analysis 4. A LOT OF LUCK WITH TIMING!!!"

Auto Trading System---
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This is a new project for us, and we made connections for it because we had so many requests for such a program. Keep in mind that we don't set the rules for the brokerage that has the program. I will say that they are working with us closely to get a smooth running operation, based on our systems. Everything works out pretty well almost all of the time, when we are dealing with opening prices. Even stocks, tho, sometimes seem to have different opening prices, off a few cents here and there on the Nas, as there are many different market makers in Nas. The NYSE stocks all have one opening price, and I don't remember a problem there. Options are a whole different ballgame. There are 5 different exchanges that deal in options. Opening prices are usually pretty consistent, but they can differ some. We post the first actual sale price we see on CALLS, but the market makers sometime adjust the prices very quickly. The difficulty in the auto program comes on those very rare (2 or 3 times a year) occasions when we send out alerts to close out positions earlier than that posted. The reason we do that is that the stock or option has run up so fast for whatever reason, and we are more than satisfied with the prices at those lofty levels. Options are the tricky part here. Orders go out, and again, the market makers might raise or lower the bid/ask prices quoted. We have heard results that auto traders got more than prices we mentioned in the alerts, and we have heard about prices being lower for some of the members--and some got it both ways on different plays. That came when we quoted an exact price, or higher. Because of this potential difference, we are going to change our alerts to be market orders at the time we send out the alert--we will quote the current price, but there is no guarantee that the price will stay there. That's another reason we like the opening prices for our normal plays---they don't open until all orders are filled--usually, as discussed earlier.

We hope to eliminate this from being a problem in the future. It will apply to all members, whether they have an auto traded setup or do their own trading. I'm sure you can see the logic of this.


SplitMaster Basic System---
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Yes, as many of you have noticed, it has been a rather slow start with new plays in January. So, I went back into the records and looked to see how other years have done with this in mind. It was interesting to see that this is one of the slower times of the year. On the other hand, the biggest numbers of splitters have come at different months. March has been fairly consistent as a double digit month in numbers of splitters closed out. I can't tell you with any assurance that certain months will show numerous plays, but I can tell you that those months will come. Last year we had some people begging to take some of the plays off the board, as there were so many new plays coming out it strained the budgets. That is one of the tough calls---allotting investment dollars so that you get to play in all of them. That's one reason we say that there were about 9 plays per month, ON AVERAGE, last year, so that is one possible guiding factor to take into consideration.


Big Dipper System---
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This system has been giving us lots of back and forth feelings. Going back to the volatile days of 2000, our first full year (1999 had 3 months) had 98 Big Dipper plays. Let me tell you, the prices were flying all over the place, up, down, and up again--then crashed. We managed to have profits on this system for all the years that we have had it in operation (as have our other systems, of course). The number of BD's dropped to 11 for 2002, from that 98 figure. A good part of the problem is that splitters became much less volatile. We have gone up from that 11 figure each year since, but it hasn't been easy to calculate what we consider to be a "Dip" in price.

It seems splitters just haven't wanted to go down much after their opening buy prices hit the system. Don't get me wrong, tho--there have been some that took real big dips--and some that didn't come back--but overall, the system has worked as it was intended to. We want you to know that we are continually looking at this system and cutting back on the amount of the dip as a criteria, while still trying to avoid the deep losses. Better safe than sorry--and keeping it profitable is the no. 1 goal.

Options---
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Several of the team members have written in to ask if we can put out some PUT options to buy. Our PUT programs deal only with writing/selling PUTS at this point, and that is based on the reasoning of our systems. We feel that our historical studies show that there could well be repeat actions on our picks--by far that applies to the splitters. We do have access to data, but it requires a great deal of analysis to put together a system, and then to constantly monitor it to see if it performs, or do we have to tweak the criteria? At some point we would like to get to going long on PUT options, and one of the areas to look at is when the Chart Indicator goes negative, for instance. At present our workload doesn't give us time to start from scratch on the negative angle, but we would like to in the future. Also, some team members are writing puts on Pattern/Probability plays, which we don't calculate at all. The logic is the same, as we have mentioned--and so far, it looks profitable.

S+P 500 Options---
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This system continues to roll along, showing very good percentage gains for our Jan. positions. As you know, this is a system based on writing PUT options on the SPX offerings in this area. We like to think we are conservative in this play, and so timing becomes a very important factor. The S+P 500 made new highs this past week, and we have started wondering if it is topping out. If it is topping out, new entries by selling PUTS for other months indeed needs good timing. It appears that our Chart Indicator is getting quite a bit above the moving averages that we use to determine where the CI stands. As in most things, when the pendulum swings too far one way, it changes directions and swings the opposite way. We have seen that happen at other times, when looking at these figures. Our moving averages, by the way, are our own criteria, not the usual 50 day, or 200 day Moving Averages. That was another thing that took quite a while to settle in on. So--we are going into our wait and see mode on this, while still holding the present plays, looking for the PUTS to expire worthless next week.

The Quest---
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It appears that we are going to take a loss on one that we cherry-picked in this system. Dow should have been sold earlier, but we kept it, and it looks like we are going to pay the price, with a good chance of worthless CALLS on our hands, as they expire this coming week. We win some and lose some by cherry-picking, and every once in a while I test it. EBAY was another one, but it made an additional profit by holding (not as much as this DOW loss looks like, tho). We will try to get back on track to the upside, even tho we are still quite a bit ahead of our goal timing, having just ended the first year with a total that exceeds the 2nd year goal (before DOW).

Chart Indicator---
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See the above comments in the S+P 500 section. Meanwhile, the CI continues to be positive.

Stock Split Comments---
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Any reader of this newsletter that has been with us for a short time knows how I feel about "analysts" and "experts" that are out there affecting stock prices so greatly. I don't think I mentioned it last week, but wanted to before I ran out of time (and readers, it was so long). I went on the internet and put my search words as "Stock Predictions 2005". Boy, was I more than ever convinced that these highly (very highly) paid "analysts" and "experts" were far more often than not, way off the mark. That's why I put quotes around their titles---I don't think they deserve those titles. Have some fun and look on the net for those predictions--heck, look them up for 2004, too. It really galls me how seldom CNBC goes back to check out the results of these people that manage funds or are strategists for brokerage houses. The mutual fund results came out this past week, by the way, and the average US mutual fund made a return of 6.7%. And these are the people we are supposed to listen to for advice. Our SplitMaster returns make them look like something less than "experts", wouldn't you say? Now--is there any specific reason I am ranting again about them? Yes, there is. We had a very nice profit going on a stock and the related CALL options---on ANF. That ol' bugaboo came up and bit us hard---a downgrade. The stock dropped almost 5 points, including about 1 1/2 points the day BEFORE the downgrade came. Could it be that maybe someone had advance notice about the downgrade? I can't prove it, but it doesn't give me a whole lot of faith in the downgrade system. The stock hadn't even made a new high--but the word from "Mr. Expert" did its job. Those downgrades have hit us before, and it is just one of the obstacles that we have to overcome during the course of the year. Upgrades do not have the same power, unfortunately.

Pattern/Probability System---
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The above mentioned ANF is in the PP system, and we have made some adjustments by an alert sent to our team members about how we are handling this for our own investments. We have 2 new entries coming on line next week, so we continue to dip our toes in the water on this new system. Also, I want to mention the choice of rolling over options, from one month to the next. We have a problem with option months not being available on many stocks, past the next month out. For instance, if we have a sell date of Jan. 31, and it is before the Dec. options expire, there isn't any Feb. option available until after the expiration of Dec. options--on many of them, as we stated. Well, we usually would buy Feb. CALLS to cover the period of our Sell Date. When they aren't available, we get the Jan. CALLS and then, towards Jan. expiration (this coming week) we can buy Feb. CALLS to replace the Jan. CALLS. This can be done thru the broker or it can be done by selling the Jan. CALLS online and at the same time, buying the Feb. CALLS. It will cost a bit more to get the next month, but that was the intention in the first place, to get the Feb. CALLS, if they were available. This could apply to any option system we use, also.

Credit Spread System---
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Tony is rolling along with profitable spreads and still trying to get just the right format for putting it on the site. I talk to him about whether it is more profitable to just buy the one strike price CALL, but it seems there are pros and cons---sometimes better and sometimes not. In the meantime, Tony is comfortable with being able to make a profit if the stock goes up or down a certain amount.

Tip of the Week---
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This is one that I bring up every now and then, to keep everything in perspective. Sometimes a definition of "Good" in the market is not losing. It doesn't always have to be that the only definition of "Good" is when our investments go up. Saving our investments from losing is definitely "Good" to me, at times.

The Economy---
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Housing continues to show signs of the pendulum starting to swing the other way. Here is a recent report---
WASHINGTON (AP) -- Sales of new homes plunged in November by the largest amount in nearly 12 years, providing the most dramatic evidence yet that the red hot housing market over the last five years is starting to cool down.

Some of that price moderation was evidenced in the November report, which showed that the median price of a new home sold was $225,200 last month. That was up just 0.3 percent from November 2004, the weakest year-over-year price change in two years. The November median price was down 4.1 percent from the October median sales price of $234,800.

We continue to say that we feel that a "soft landing" of no rise in prices, but no decline in prices, is going to be a myth. Nothing stays the same, and we feel that housing as a sector is no different. We look for further declines and more foreclosures, too, as the higher new interest rates take their toll.

Gasoline has popped back up again, as an evil ogre picking money out of our pockets. Here in Southern California, our prices jumped 26 cents in about 2 weeks. It took months of penny declines to lower the price, but only days to raise them---AGAIN. And another "again"---One of the main reasons given by the "experts" is because of increasing demand. The weekly petroleum report stated that demand went DOWN, both for the same week last year, and for the same month last year. So much for accurate reporting. Gasoline inventories were up 4.5 million barrels (not gallons). The market is not made by logical reasoning, that much is more than evident. I haven't checked (but should), but have heard reports that energy stocks made new highs this past week--and are still considered good investments by many. This is the only way I say that we stand a chance--if you can't beat them, join them (owning their stock), as I've said before. I laugh out loud when I hear that our government agencies are holding hearings on price-gouging, etc. Nothing ever comes out of that and I don't think it will. Let me know if I'm wrong, and we consumers benefit from a government investigation.


Today's Thought---
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May you have enough happiness to make you sweet, enough trials to make you strong, enough sorrow to keep you human, enough hope to make you happy.

Mike

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