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Author: Mike Celeste Editor: Tony Ponzo March Circulation:

Stat Sheet Week Ending March 5th 2011

ChangesWeeklyFebruaryYear to Date
IndexesPointsPercentPointsPercentPointsPercent
Dow+40.0+0.3%+334.0+2.8%+592.0+5.1%
S&P0.00.0%+41.0+3.2%+62.0+4.9%
NAS+4.0+0.1%+82.0+3.0%+132.0+5.0%
Highlight of this past week: The Momentum Strategy once again brings in an aggressive trade on a SPY option that made over 32% in about 1 hour. This Week's Results

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In this Issue---
SplitMaster Basic System---
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As expected, the list of new split announcements continues to grow. This week we had 3 new ones report splits. This gets a bit tricky, as the market has moved into a more volatile stage as it has moved up to new recovery highs. Will the splits come out as the market dips? We have 2 choices here, if this is the case. We can wait for a Big Dipper, or we can go in and buy in the Basic System and figure that we are still going to make a profit, but maybe a little less. On the other hand, we could just as easily hit a really good profit level, too. For now, we are moving ahead according to the strategy.

Big Dipper System---
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We had a sell on a Big Dipper stock, FCX, and it lost this week. It was a tough call on whether to sell it now, or hold. The CEO was on TV and everything looks rosy for the company (copper) for the rest of the year. However, some of the commodities took a hit this week and FCX was among them. Even though that was the first loss we have had in the last six splitters that have been closed out on the Basic and the first close out on the Big Dipper, we elected to sell on the planned date and move on. One thing to note- since December of 2010, we only had two splitters hit the Big Dipper. That is a real verification of how strong the market has been.

Options---
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It was difficult to get into option plays in our Support/Resistance system (SR Play), as there weren’t enough outstanding levels of support or resistance. We did have a net win for the week, with one great play overcoming a smaller loss.

Option Lesson of the Week: Today we want to talk about a Call Debit Spread. This is a particularly interesting option combination trade because it really gives a lot of protection and gives us time to make a profit as I'll illustrate in an actual trade we have going on POT. First let me explain what the Call Debit Spread is. It is an option combination trade in which a long (buy a) Call and a short (sell a) Call on the higher strike is entered, creating a small debit play. You would enter the play if you thought a stock was headed up. Our trade on POT was entered into about three weeks ago and that was prior to POTs 3 for 1 split. But to make it easier to follow, we'll keep everything post split .

We entered this spread when POT was about $61.50 (Post split). We went long on the first out-of-the money March 19 - 63.33-strike for $1.91 and shorted (Sold to open) the March 19 - 65-strike for 1.41. That gave us a debit of $.50. ($1.91 debit + $1.41 credit = $ .50). So why this play? Because it limits your loss to $.50 a share in this case. The most you can lose is the net debit (Your investment). You also have a maximum profit you can make which is the difference between the two strike prices minus the net debit. In this case the difference in the strikes is $1.67 minus your $.50 investment equals $1.17 possible profit. Those are pretty good odds. If you put in your mind that for the worse case scenario you are prepared to lose $.50 you can hold the trade for a long time, giving it a chance to work for you. To lose the entire investment, the stock would have to wind up below both strike prices on expiration date. And if you don't like the way the trade is working and time is running out, you can always close it out by selling the 63.33 strike and buying back the 65-strike and recoup some of your investment. But if the stock goes the way you think it will and ends up above both strikes you will be able to get out with the maximum profit. Say Pot is at $65.10 on expiration Friday. The 63.33-strike will be worth at least $1.77 in intrinsic value and the 65-strike will be worth $ .10 in intrinsic value thus giving your max profit of $1.17. (Sell the 63-33 strike for $1.77 - $.10 to buy back on the 65-strike = $1.67. Subtract your investment of $.50 = $1.17 profit)

Note: When we entered the play pre-split, we went into 10 contracts. After the 3 for 1 split we now have 30 contracts. If we were to wind up with the maximum profit $1.17, that would equal a total profit of $3,500. Not bad!

So how are we doing on the Spread? . We have been ahead by as much as $.26 and down as much as $.25 as POT's price moves around a lot. On Friday POT was about $2.33 below our entry price and the srpead is still worth about $.33. So even though the stock is down, we are only behind $.17. This particular stock can easily move $3 in one day so all we need is one or two days of up to get back into a profit and we have two weeks left to see if it can do it. We'll let you know how it turns out.

Momentum Plays---
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It was a slow week in terms of number of plays but we did wind up with another profitable week. We had one loss in the aggressive trades but overall we came through with over a 15% profit due to the one big 32% win. And this week we had no losses in the conservative plays. This Week's Results

The market has definitely become more volatile with several triple digit days. The trouble is, one day it is up triple digits the next day it is down triple digits. It is really confusing traders on which way to play the market. The question has to be, is this leading to a correction or flattening of the market or to a further march upwards. If only we had a crystal ball. The only thing we can say is it looks a lot like what the market does prior to a correction. If this is true, let's hope it is not too damaging.

Indicator Play---
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We finally took a breather in this system. We had a string of consecutive days of plays going and it finally paused. We couldn’t get an entry point on our last one, and it was a winner, so our only consolation was that the signal again turned out to be correct.

The Economy, The Markets & Commentary---
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The economy is definitely putting out positive results, based on reports that came out this week. The big question is whether we can stand being robbed blind on the oil front. Without any increase in demand or even a lesser supply of oil, the price just keeps rocketing upward. Our wallets are being drained by the price of gasoline, and price increases are already being seen because of this. The term “Highway Robbery” really applies in this instance. We are being robbed of taking any discretionary highway trips as gasoline prices take that away from us. I don’t know about you, but when I read that the prices have not hit a point to change driving habits, they must be talking about people on another planet. Everyone we know is cutting back. If you have to pay these outrageous prices for gasoline, it just means that you can’t spend on something else—like better food for instance. Our “leaders” still insist there is no threat from inflation. CNBC had some good battles between Rick and Steve about inflation, and we are definitely in Rick Santelli’s corner when he talks about the inflation that has already hit us—with more to come.

It’s a bit funny to hear of no threat at present from inflation and then see on the same TV channel that so many sectors have already raised their prices. The economic reports also continue to show that we are completely able to cut foreign energy if we would only develop the energy fields that we have here in the US—oil and natural gas, along with coal. It appears that natural gas is slowly gaining some headway, but we are a long way from seeing it materially help the situation. Then, again, if you never start developing it, you will never get to your goal of self sufficiency. Again, we repeat, we are allowing this to happen because we have become beaten down, or just feel we can’t beat them---but we can. If there was enough pressure to do one little thing, it could stop this rampant rise in oil prices. If we did it, time would take care of developing and changing our use of natural gas. That one thing continues to be the margin requirement for buying oil contracts. The speculators continue to drive up the price, with no supply/demand factor ruling the market. We believe in supply and demand—a fair approach, that is. When you allow the margin to be about 5% for oil contracts, that is not fair. No more oil is delivered when you have tripled the number of contracts. When you get down to delivery, that’s what counts, and we are not using what we have. One story on TV showed that oil storage tanks have to be increased in numbers because what they have are so full.

As we said above, economic reports based on earnings have continued to show improvement. The employment report came out favorable this week—if we can trust it. The bigger point, tho, is that we don’t know how long the increase in earnings can continue because of the negative impact of oil prices on just abut everything. If the companies can pass on the increasing costs, the consumers get a double hit—high gasoline which cuts spending on something else, and when you do spend on something else, those goods cost more, too.

The artificial stimulus by the Fed is still a concern, too. Does it feed fuel to the fire and drive up prices even higher? Tough question to answer. The debt load is still that "can" we keep kicking down the road that will have to be addressed at some point. Cut spending and you cut employment—except for federal workers, that is. Pink slips are being prepared all over the country, with a few exceptions at states that were fiscally responsible. The way we see it, time will be a major factor, and it will be a long time before we can come out of this.

The Mid-East is seeing the boiling point being reached in more and more pots---now threatening even Saudi Arabia. The domino effect is being seen on a very large scale in that part of the world. And what is accomplished by the rioting, etc.? Do we really expect the people to see raises in pay and real democracy? I don’t think so—at least not for too long a time frame to be helpful. They have had their systems in place for a thousand years, probably, and it isn’t going to change overnight. They have such an influence from the many levels of religion that it does not appear that they will be able to overcome that obstacle alone.

Whether we like it or not, we are smack in the middle of the global economy, and there is a whole list of things that affect us, and over which we don’t have much control. What we can control, we don’t—or at least we are not doing a very good job of it --think oil. (Think of what was said at the Oscar show by the documentary winner—not one person involved in the mortgage scam—legitimately provided for by our government “leaders” has gone to jail. In fact they got out huge multi-million dollar winners. Didn’t someone say at one time “Crime doesn’t pay”---you could fool me, but then again, it was not an official crime because all up and down the line, it was allowed legally.)

Stay tuned..........it’s not too often you can see yourself being carved to pieces by these practices..........interesting times. Roll on.

Today's Chuckle---
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How do crazy people go through the forest?----They take the psychopath................

Mike

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