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Author: Mike Celeste Editor: Tony Ponzo January Circulation: 6879

Stat Sheet Week Ending January 23rd 2010

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow-432.0-4.1%-250.0-2.4%
S&P-43.0-3.8%-22.0-2.0%
NAS-85.0-3.7%-64.0-2.8%
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Highlight of this past week: The Momentum Strategy is back in action this week with 4 Wins and no losses. Check it out. Momentum Strategy

In this Issue---
Options---
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We have often talked about selling options, or writing them. Timing can be very important when doing this and in view of the recent market action, we thought it would be of interest to go over this aspect. Simply put, it depends on the belief an investor has in the direction of the market over a fairly short span of 2-3 weeks. For instance, if you believe the market is going down, it might be a good move to write Covered Calls--not naked for the Calls. This could be especially true if you have a nice profit in a stock--or you could sell the stock outright. If you think the stock or the market is going up, you could consider writing naked Puts. However, there is also the consideration of which strike price to write, for both Calls and Puts. If you keep the stock and you are writing Calls, you would think of a strike price that is at a level you would like to get a better profit than the current price. For example, if the stock is 43 and you would like to get 45 if you sell, you could write the next month 45 Calls. Of course, you could go out further in time and write another month that is down the road. The further out you go, the higher the premium on the Call, and that would go to you. If the stock doesn't go up over 45, you get to keep that premium and still hold the stock--and you can write another Call for another time and premium. If the stock does go up over 45, you get the stock called away from you and you are happy to get the 45--PLUS--the premium for the Call that you wrote. True, if the stock goes considerably over 45, plus the premium--say $2.00 for the premium--you are limited to the upside that you can receive, or $47 max. But, you were satisfied to get 45, so that should be fine with you.

For the written Puts, you would pick a strike price and month, usually the next month, and that strike price would be at a price you would like to buy the stock for if it goes down. If the stock does not go down below the strike price, you get to keep the premium. If it gets put to you it means you buy the stock at a discount from the current price that is higher at the time you write the Put. These are sort of like extra "dividends", as we like to call it.

There are many creative things you can do with writing options. For example, if you have XYZ stock and it is at 43 you can write the next month's 45 Call for say 2 to cover, as we stated above. Now let's say you get to expiration date and the stock is now 46 which is 1 over the strike of the Call. That would mean your XYZ stock gets called out ---- but not necesarily. If you do not want your stock to get called out after all, you can buy back the covered Call to close it out. Yes, it will cost you money to do that but guess what you can do? You can sell the next month's 45 Call to cover again and collect more income. You can even go up and sell the next strike (50) Call meaning now you would not be called out until the stock hits over 50. So you can see that using a little creativity you can really take advantage and earn income through the use of options.

As usual, writing options is for experienced option traders and you have to be approved by your broker to do this.

Momentum Plays---
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After the very low action during the holidays and first two weeks of this year, we finally see things kick in and we made 4 trades and all 4 were wins this week. And we could have had at least two more wins but missed the entry points. So it feels good to get that familiar winning streak started and we look forward to it continuing this coming week.

The market has been difficult however. Companies are coming out with great earnings reports yet their stock goes down. This scenario has happened on quite a few stocks and that is the reason we missed a few. We are getting curves thrown to us. On trades such as IBM, we went with the momentum and made a profitable play even though the momentum went opposite of what the earnings report strongly suggested --- UP. As some of the reporters on CNBC have said, we are in a period in which earnings announcements become "buying on the rumor then selling on the news". Will this theme continue? That's hard to say. We'll just have to watch each play closely to see how they react. One other thing that we notice in this scenario is, so far it is tagged to higher profile stocks such as IBM. The lower profile stocks, are traveling in the obvious momentum after their announcement - up on a good report, down on a disappointing report. So if we can get a lot of lower profile earnings announcement plays, that's good. And we are now in the thick of earnings season.

The market also has finally decided to go into correction mode as we are down over 5% (at its lowest point) this week alone. We all knew that sooner or later this would happen, we just didn't know when. CNBC keeps talking about an 5% to 10% correction. Well, we are half way there. Will it continue this week or will we have some up. Our guess is we have more down to go but not as drastically as it did this week. In other words we do not think we will continue seeing triple digit down days. But you never know. Let's hope not.

But one thing is for sure, whether the market goes up or down, we at SplitMaster will be taking advantage of the moves and expect to make profitable trades.

Learn More

Indicators---
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This week we had one Indicator play, and it was a winner, albeit slightly less than our normal 10% goal. On Friday, in a down market, we went for the SPY Call and caught it in a retraction move to the upside. With a slightly lower profit, we saw that we got the high of that move, maybe the high of the day after our entry point. Then the market headed south and finally broke big to the downside. This shows what we mean when we say we can make money in both an up and a down market. That same day we had a winner on a down play in the earnings category, as shown in our Momentum section.

The Economy, The Markets & Commentary---
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For the last 2 weeks we have been talking about our annual warning of what to do in January. Dad had this belief, based on years of dealing in the market, that you should sell starting with the 10th of January. The 10th trading day of January was Friday, Jan. 15th. The Dow promptly dropped 101 points. That was the start of 5 straight trading days of triple digit moves on the part of the Dow. Four of the five days resulted in triple digit down moves in the Dow. Somewhere up "there" I'll bet ol' Dad is smiling down that he was right, again. We gave you the opportunity to get out of the market at considerably higher prices--and hope you took advantage of that. Since we told you about this in earlier newsletters you had plenty of time to make the move--and if you believed in it and wanted to hold the stock anyway, it was a great opportunity to write those covered Calls we talked about, above. If you did not want to hold them to expiration, you could buy them back at much lower prices, and pocket the extra "dividend" from the Call premium you received. One side note about the recent and future market activity---earnings are being ignored as talked about above, resulting in selling on good news. If the market does continue down, we might look for Nasdaq to see a larger percentage drop than the Dow, because Nas was up a lot more than the Dow last year. Right now, the market is losing for the year (see stats), as the early Jan. gains have been wiped out--another monthly showing of gain in the first half of the month, followed by a drop in the 2nd half of the month. So much for those "experts" who were touting the continuing upside in the market, only last week. Now, doom and gloom is their cry. Some of "them" have also said that a 5-10% correction is a good thing. Look how loosely they throw out figures. There is a huge difference between 5 and 10%. 10% is double, or twice the amount of 5%. In the Dow, a 5% move on 10,000 is 500 points. If there is a 10% move, that is 1,000 points. I don't know about you, but that is a big, big difference--yet the "experts" say 5-10% in combination, like they are closely calculated. That's like saying your job pays $50,000 per year or $100,000 a year, something like that, as tho those 2 rates are in a close range. I think you would find that the range like that is vast, not close.

CNBC was asking, after the market had 3 days of triple digit moves, when was the last time it did that. And of course the week ended with 5 straight days of triple digits. We can tell you that is was last done for 3 days on Oct. 28, 29, and 30, 2009. The last time it did it 5 straight days was Dec. 2008.

It might be beneficial to note what happens when we have these three days in a row of triple digit moves. With 5 days like this, we note that volatility increases greatly and the VIX, which is the volatility indicator jumped from 17.33 to 27.75 in 3 days. That, my friends, is a big move. And what comes with volatility--potentially profitable trading days, especially if there is up and down moves within the same day. We are anxious to see what develops from here, as it pertains to our day trading strategies.

For us, we can tell you that the volatility leads to an Indicator play signaled for Monday, Jan. 25th. All 3 of our Indicator signals are pointing to a play. Now we have to determine if we can get a good entry time on Monday.

Washington continues to make Wall St. dance. It is interesting to note that with the Republican Scott Brown winning that 1 senate seat that was held by Ted Kennedy, we saw the super-power majority taken away from the Democrats. Immediately it was stated that the universal health plan was dead if it could not be passed in about the next 2 weeks, before Brown is sworn in. The criticism would be severe if that happened, so it means that both parties will now have to get together and see if they can get a compromise worked out--which could be better or worse, depending on which side you sit.

At about the same time President Obama came on TV, saying he was going to go to war with the banks. He wants to prevent the banks from being involved in too much control of the financial markets. That goes back to the 1933 Glass Steagall Act, which was passed to control the banks' actions which were felt to be a cause of the bringing on of the Depression. Long time team member, Stan, pointed out that In 1999, President Clinton signed legislation, that repealed it (ah, those politicians--doesn't matter which party or which office, President or Congress), and the dam broke loose. To me, it was a classic showing of why that act was passed in the first place. After repeal, banks bought everything in sight that dealt with finance, including insurance companies. That is felt to be a conflict of interest and led to the belief that some of the banks became too big to fail, and thus a bailout was needed to save the complete system. Now, it looks like the president wants to restore the act, or at least a good part of it. The market immediately, as he was speaking, started to drop. He did use the term, "going to war", and that's what is going to happen. That was on top of his earlier statement that he wants to propose a tax on big banks to repay the TARP money, whether they paid their own loans back, including interest. I'm old enough to remember what happened in 1962, when President Kennedy forced US Steel to roll back steel price increases. The markets collapsed, and this was before they were computerized. Trades were hours behind in reporting and panic set in. Now President Obama's point is that they were saved from extinction, so they can afford to pay. It is interesting to note that when it is stated that only a small amount of the budgeted TARP money was given out to the banks, we hear no mention of the hundreds of billions of dollars that was needed to rescue Fannie Mae, Freddy Mac and AIG. What is almost laughable is to hear Barney Frank state, as Chairman of the House Financial Services committee, that it would be better to do away with Fanny Mae and Freddie Mac and institute a new system to deal with the same goals. You can look him up on YouTube and see him saying from the past, that not only was there nothing wrong with Fannie Mae and Freddie Mac, but that more loans like that should be made to get people into their own homes---that was at the height of the greedy mortgage schemes allowed, where 100% loans were given to people that didn't have to prove income. That was when we at Splitmaster were screaming that such action was doomed to complete failure--and we aren't the smartest people in the world, that's for sure. Politicians are so quick to be able to switch what they support---and we allow them to do it. We all want to throw them out, but always in other districts, not our own. We repeat--in S. California in the last major election, every single incumbent that ran for re-election won. And if there is any state that needs to elect all new representatives, its California. That's a fact, and that's all that needs to be said when it comes to electing our reps.

Another issue out of Washington is a swelling of opposition to the re-appointment of Bernanke. That can have some drastic changes in direction of finances. Keep your eye on this topic.

Washington also entered the picture in a big way, but from another aspect--the Judicial end. The Supreme Court ruled that corporations and the like would be able to donate to political campaigns, which has not been allowed, after passage of legislation long ago that banned it. It is felt that this decision favors the Republicans. We feel that the campaign donations still came in, but through different means. Now it can be done up front and not hidden by other methods. Watch the amounts of donations skyrocket---and we all know that money does have results that favor the donors, no matter how many times our elected officials say that donations don't affect their votes on issues. What a joke! The normal voter still has his right to vote, but this Court decision is significant in how campaigns are conducted and financed. It it interesting to note that the Court had a 5-4 vote on this, so it seems it was highly contested by our highest court.

Stay tuned.........these are interesting times.............and getting more so.....................

Today's Thought---
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The economy is so bad that.................CEO's are playing miniature golf.

Mike

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