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Author: Mike Celeste Editor: Tony Ponzo February Circulation:

Stat Sheet Week Ending February 13th 2010

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+87.0+0.9%0.0-3.2%
S&P+9.0+0.8%-40.0-3.6%
NAS+43.0+2.0%-85.0-3.7%

Highlight of this past week: It was kind of a quiet week of trading but our Straddle/Strangle test keeps producing great winning results.

In this Issue---
Options---
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We would like to point out another lesson learned the hard way. On Friday the market had a sharp down opening. The pre-market had shown that this was going to happen One of the team members had carried over a play from Thursday and the opening was going in the direction desired. It appeared that it would be a nice profit move, but it was unknown exactly where the market makers would place an opening price. The last time there was an attempt to play the opening price when there was a sharp change from the previous day's close, we had a report that an attempt was made to place a market order. That time it was for a buy and the result was that the market maker charged 10 cents more than what the opening price indicated. A call to the broker received the answer that there are several exchanges that deal in the options and at that particular one, the opening was the price shown---10 cents higher than the other exchanges. Now, our day trades often have goals of a 10 cent profit, so right away, the 10 cents had to be changed to 20 cents because we were already 10 cents in the hole. OK, no more of that market order stuff before open.

Along comes Friday, and this would be a sell, with a Put on the line, meaning that the price for the Put should be considerably higher than the close of the day before. The Option Calculator was used and it was estimated what the market might open at, based on the late pre-market prices shown for the Dow. The estimated sell price was 1.31, up from the buy price of 1.00 To be on the safe side, the price entered before the market opened was 1.28. The reasoning was that if the market opened higher, it would automatically get the open price, as they aren't supposed to open until they balance off the buy/sell orders that are sitting there. The option pleasantly opened at 1.35 (good estimate from the Option Calculator) and when the team member looked at the price received, there was an unpleasant surprise---it was sold at the 1.28 price. A nice profit, but again, a big difference from what it should have been. Another call to the broker came back with the explanation that the highest bid price was 1.28, and the ask price was 1.35. Therefore, the bid was used to give the seller, and the market maker did it again. You just can't seem to get a fair deal. The lesson from all this is that no matter what, you probably should have an order ready, with just the price missing, and wait until you see the opening price, then put your price in and place the order quickly.

There is one example in which a market order may be the way to go. Let's say you entered into a play and are looking for a quick .40 profit. You are watching the trade and have not placed your sell order yet. Suddenly, the trade starts to move in your direction and fast. Before you know it, you not only have .40 into the play but it blows right past that and you are looking at a .60 exit. This might be the time to place a market order. Why ---? Because when a trade moves in your direction that fast, it could well reverse at some point and move against you just as fast and you do not want to miss your profit. If you put a market order in and the stock is still fast on the move in your direction, you'll get even a better price as by the time the order is in, even the bid has moved up. And if it is turning on you and blows by a limit order you might place, you have to cancel your order and place a new one at a lower price. By that time, you might be all the way down to a loss. At least with the market order, you are guaranteed to get executed. It might not be what you were hoping for but it is better than wasting time only to wind up with a loss.

Momentum Plays---
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The action in our regular one directional plays has been very light this week. This is unusual for this strategy, especially this time of year. But for a number of reasons the trades have been slow in coming. One reason is the big snow storm they had in the East kept a good portion of traders home, thus the action has been slow. A couple of days the market had big gaps but did not move a lot from the opening price. And on other days the market closed near even. This kind of situation does not provide this particular momentum strategy with many signals, so we had a light week.

We did however, keep testing our Straddle/Strangle strategy on stocks that naturally have a large trading range each day and a couple of earnings announcements with great results. Out of about 8 actual trades we at SplitMaster made this week, we made a nice profit on 5 plays, (.30 or more), and made a small profit on 2 plays and lost .25 on 1 play. So these are some very exciting results and we plan to keep testing and slowly get our members involved. There are a couple of real advantages we have been talking about and we experienced these advantages this week on our trades. On the play that we lost, we stayed in that play all day giving it a chance to make a move that would give us profit. We finally sold in the last half hour of the market and got our loss. But the point is, the trade never showed a big loss that day, it hung around at a .10 to .25 loss to a .10 profit at times. Therefore our nerves never got rattled and that is a real advantage. We have mentioned before, the worse thing on this play is if the stock stays within a short trading range and for whatever reason, that is what this stock did that day. But at some point in the day, had it taken either a quick dip or a quick up move, it may have produced a profit. So this improves the odds. The second benefit is this. We had a couple of earnings plays that we did not post as regular one directional plays for the members because these stock have a history of changing directions right in the middle of the play. That is the worse thing that can happen in our one directional plays. However, with a Straddle or Strangle it does not matter. So now earnings plays that we would not normally play, come into the picture. This means more potential plays. Here is an example:

On Friday, we had an earnings play for CMG. The company announced Thursday night and had a fairly good announcement but did not guide higher for 2010. As a result, traders took the stock down by nearly $4 in the after market and the pre-market on Friday. That makes for a dangerous trade as you know the stock should not be going down that much with the announcement they had. On Friday morning, to make things more complicated the company received two upgrades but the stock was still going to gap down a couple of dollars. Had we gone with just a Put expecting it to be a down play, we would have lost. A little while after the open, the stock reversed and went up over $3 to the good. However, in trading a straddle on it we did not care what it did as long as it moved --- which it did. We wound up with a nice profit and had we stayed in, we could have made over $1.50 on it. But that's OK. We hit our target profit and are happy.

So there is a great example of the power of the Straddle/Strangle play.

Indicators---
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We didn't have any Indicator plays for this past week, but we have an Indicator that is very close to our signal criteria and it will be interesting to see what happens on our first trading day of next week, which is Tuesday. Team members can look at the Indicator page on our web site and see what we are talking about---look at the W Indicator signal.

Feedback---
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We have talked about the possibility of two ways to play some of our day trades. One is a Basic play, more on the conservative side, and the other is to be Aggressive, taking more chances with a lower stop loss and a higher goal for a profit point than what we show for the Basic play. We had two reports this week from different team members that they held when the Basic play met the stop loss point. They later saw that the stop loss was right around the low of that move, and the option then recovered to a point higher than the buy price and a nice profit was obtained. Now, we absolutely want to point out that the result could have been much worse, with a stop loss point being a good thing that might have happened. There are times when we hit the stop loss, the play is ended, and the option price keeps going down a whole lot more--and we saved much bigger losses. Enough times, tho, are showing that the stop loss point might be a good time to buy more, and some Aggressive players buy their original amount, and keep a reserve to buy more at lower prices. Or--they just hold on and wait. In these two instances, it paid off handsomely to buy more, or hold on, with the final sell price turning from a loss to a decent profit. A trader needs to know their comfort level for the emotion involved---and realize they are taking chances of seeing even worse prices coming up. The extreme that we have heard from feedback was that an original number of contracts started with 20 contracts and the investor kept doubling up as the option dropped. He ended up with over 600 contracts---WAY, WAY past my comfort level, that's for sure---but he did come out with a profit of a few hundred dollars after the market finally turned his way. This is definitely the way we say NOT to do it---and especially if a person expects their heart to keep functioning.

The Economy, The Markets & Commentary---
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This week we saw the headlines again return to the health care issue. Anthem/Blue Cross announced that there would be health policy price increases up to 39%--and that's not all. They also stated that another possible change was in the works. They said that there would be reviews for price changes sooner than once a year. That means that they might raise prices before yearly anniversaries. This was on top of a steep price increase in 2009. Well, that bit of news really hit the fan and spread all over and very quickly. The administration immediately pointed out that this was just what they had predicted and was all the more reason for a universal health plan, so this type of cost increase could be avoided. Oh, wait a minute, I forgot to mention something else. Anthem had shortly before announced an 8 fold increase in profits. No matter how much it seemed to contradict the facts, the company defended its pricing increase policy by saying that there have been huge cost increases in the medical sector. Pretty hard to balance an 8 fold increase in profits, tho, with the expectation that huge cost increases to them should logically mean that they would raise prices that would give them the same rate of return as before. Others screamed about all this and government agencies are demanding hearings into the matter. It is felt that the health industry is positioning itself to cover possible future rules that might restrict their profits. There was also the suggestion that maybe it was time for non-profit health plans to take over, short of the entity that runs it being the government itself. Companies that are for-profit have managed to take the spotlight off the obscene bonuses that the financial sector is paying itself. Whatever the sector that seems out of line, it always seems that the rich get richer and the consumer, the hard working middle class, takes it on the chin. More coming up on this subject--but don't expect miracles.

Moving to the mortgage sector -we see some news that the US government is looking for ways to get out of the mortgage insurance business. It is estimated that 9 out of 10 new mortgages are backed by the government. Knowing what happened years prior, it is felt that it is not the place of the government to be so highly involved. Recently we pointed out that we still have dangerous mortgage policies out there, with 97% loans, and when combined with the tax credit program, many people are getting into a house with no down payment. To be fair, there is a difference from the last time we had 100% loans. Back then, we didn't require proof of income to qualify the buyer as being able to repay the mortgage. Now, theoretically, we do have that provision in place---the buyer does have to qualify. It is still a dangerous position, as the buyer gets in with no down, and can make the payments based on his current income. But, what if conditions change, and maybe a job is lost, or hours cut back, or health costs for a medical problem rise so drastically that the disposable income is gone, and the mortgage payment can't be met. The government knows this is a possibility and doesn't want to be on the hook for 90% of mortgages. The real trick here is to be able to cut back on the involvement on the government's part--without crushing the economy by making it almost impossible to get a mortgage in the first place. There has been so much connection of Washington and Main Street in the way of support by special programs, and no one knows where it can stop without pulling the ladder out from the person on the top step of the ladder, which causes the person on the ladder to fall to earth with a real crash, and real dire results.

Here in California, we continue to do battle with the economy and also with a judge that says a small fish must be protected from extinction. The decision is to protect this fish and allow a tremendously large amount of farm land to be left unproductive because the water supply has been cut off. The reasoning is hard to accept---a fish that is finger sized and not essential to our needs is given preference over our hard working farmers who have to have the water or they will be bankrupt. If you drive through central California, you can see big signs that frustrated farmers have put up that say "Government created dust bowl". Do we seem to have our priorities mixed here? There are species that become extinct every week, and there are new species that are discovered every week. That seems to be the way that mother nature works. We don't have dinosaurs anymore, they went extinct, and we seem to be able to get along without them. Maybe it's just an incredible lack of communication by the judge or his supporters, where there is a good reason, but it just isn't presented. If it comes down to a small insignificant fish or the almost life/death economical situation for a large group of farmers---it seems like a no-brainer of a decision. How many of you out there have ever done farm work? It is my experienced decision that farmers are one of the hardest working groups in the world, let alone our country. In my former neck of the woods, New York State, there is a very large group of dairy farmers. They deal with animals that need to be cared for, fed, etc., 24 hours of every day. Farmers can't shut down cows for 2 weeks to take vacations, and they can't be shut down for a day or two when illness hits. Farmers fight the elements of weather, where a whole year's work can be wiped out in a heartbeat. Just see how much effort and physical exhaustion goes into getting hay in when a storm is brewing---hay rots when it is wet. The list goes on and on, way beyond my short experience with helping a farmer one summer. No, my hat goes off when a farmer goes by, for I know how hard they work for the amount that they receive for keeping the country and the world supplied with food. For kicks, some time you might want to see what portion of a final food price goes to the farmer---it is as obscene as the bonuses that go to the Wall St. big boys---only the wrong way. And, this fish gets more protection than the people who allow us to eat our daily food. Something doesn't seem right, here--no, not by a long shot. This story isn't over, as the judge's decision is being appealed. In the meantime, the land stays unproductive.

Stay tuned...............these are interesting times.

Today's Thought---
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When you combine and balance the right ingredients -- Communication, Attitude, Knowledge and Experience --
life is a piece of C.A.K.E...........Peter Bennett. (Editor, LaVerne Online.com newspaper)

Mike

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