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Author: Mike Celeste Editor: Tony Ponzo June Circulation:

Stat Sheet Week Ending June 5th 2010

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow-204.0-2.0%-496.0-4.8%
S&P-25.0-2.3%-51.0-4.6%
NAS-38.0-1.7%-50.0-2.2%
In this Issue---
Big Dipper System---
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With all this high volatility, we have adjusted our target buy prices to reflect that. At this point we haven't seen the dippers drop to the buy level, so that shows they are stronger than the rest of the market, even tho they may be down from the Basic entry price.

Options---
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A short time ago we suggested that team members might consider buying some Puts for insurance. We ourselves did, getting the Sept. 80 Puts for 95 cents. They have been up and down, but with the steep decline in the market on Friday, we saw that they hit a high of 1.32.

There has been quite a bit of discussion on CNBC about trying to protect yourself and they advise against buying just Puts. They suggested getting Put positions on spreads. We see the benefit of both, but we liked the pure insurance reason for buying Puts. The Insurance theory is a good principle as long as you don't go overboard. In 2008 and 2009 going overboard would have paid off big. But we think, at this time at least, it is best to have a balance. You have to think of it as paying a premium just in case the worse happens. If the worse does not happen that's good as we do not want the worse. You may lose some on your protection (Put in this case) but that was the price you paid for protection. If the worse does happen then you get some reimbursement for having that protection or insurance. With the Spread, you could sell a lower strike Put against the Put you bought for protection. That way you get some premium back for the selling (writing of the Put) and that limits your loss in case the market does not drop much more. If the worse happens and the market really drops, you would then make a profit on the play although it would be limited to your spread. But it is a cheaper or safer way of buying protection that will help if the bigger drop in the market happens. An example would be to use the SPY - an ETF that represents the S&P 500 but can be bought at a fraction of the price. So it follows the market. The SPY is currently trading at about 107. If you are afraid the market is going to take a further tumble, to protect yourself, you might buy the July 105 Put which is currently trading for about 3.65. If you are wrong, you could lose 3.65 a share or 365.00 per contract. However, if you are correct, you could make a lot of profit depending on how far the market tumbles. With the Spread, you could buy the July 105 Put for 3.65 then sell (write) say the July 103 Put for 3.05 for a total cost of .60. What happens then? If you are correct and the market drops, you would make profit but it would be limited to $2.00 minus your .60 investment because that is your spread (105 Put-long/ 103 Put - short). If you are wrong and the market goes up the max you could lose is .60 because that is all you had invested and both options in this scenario would expire worthless. And since the SPY has options with strikes at every dollar you have all kinds of ways to engineer the play. In otherwords be creative, use your calculator and think out the math on each Spread idea you come up with. Lastly, the above is just an idea on what a trader can do and is not a recommendation for an investment. Traders should be familiar with the nature of options and the risks in using option before entering a position.

Momentum Plays---
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There is not much to discuss for this strategy this week as we continue to struggle getting off a play. But as we always say, passing on plays is better than going in and losing. We did have one small play on Friday on a SPY Put that is discussed in the section below. Other than that there were no other plays as this market continues to be wild and unpredictable. Just as you think you know the market is going down, it turns and has a huge up day and visa versa. So we continue to watch and wait for a time of more stability and predictability. With the world news that is currently out there, it may be awhile before we have those conditions again. We'll keep monitoring each day.

Indicator Play---
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At the close on Thursday we had a signal for a down play on Friday. The one problem we had in deciding whether to go in or not was that the pre-market was already down about 200 Dow points. We waited for the open and shortly after decided to make an entry play. We bought the June 104 Put for 1.17 and then saw it drop down to a point just above our stop loss as the markets recovered somewhat. Fortunately we had it pegged pretty well, as it turned around and the markets declined again and the Put went up in value. For conservative players we took a small profit and advised Aggressive players that they might look for higher prices and to act at their own comfort level. They were well rewarded with a huge gain in that the Put went as high at 2.10 before closing at 1.83 ask.

The Economy, The Markets & Commentary---
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Don't be fooled by this market. The "experts" continue to go as the wind blows daily. On Wednesday the Dow went up 226 points and these people were euphoric, claiming AGAIN that the worst was over, and the recent bottom had held. So, on Friday, with a Dow drop of 323 points we saw another down week for the markets and still down for the year. Our overall feel for the market has been pretty good this year. Our 10th day of Jan. drop forecast came in just as expected. Then, with the market rally that followed, we kept saying the momentum was up, the pendulum was still swinging to the upside. It was an incredible move to the upside; incredible in that it was a slow but steady climb with not much volatility at all. When the VIX (volatility) is low, the market can move up, and it did. Then we waited and finally confirmed that we did see a turn in the momentum and that it was going to the downside. Our old saying that has been picked up lately by the TV people--Sell in May and go away.--was very prophetic, with this past May being one of the worst in many, many years. So, the "expert" opinion of Wed. that was so giddy turned into doom and gloom on Friday. Even the experienced floor traders admit that it is very difficult to play this market. If there is any group that we listen to, it is the floor traders. Forget the mutual fund people---by the way they talk you would think they are making 100% profits about every month. They hardly ever answer directly any questions that are asked of them. They remind me of politicians, who have honed double-speak to a fine art.

We remain negative as to market action. Good news is being ignored, but the problem is that the good news has dwindled and the bad news has grown. The frosting on the cake this week was the jobs report, which came in far lower than expected. Non-government payrolls came in with a gain of about only 41,000. Census work created most of the government jobs and will be terminated shortly. That news crushed the market, with a feeble rally attempt coming early and then fading so that we closed with a Dow loss of 323 points. One of the problems when thinking of good news is that earnings have clearly been the big part of the good news. Now that the 2nd quarter is in its last month, June, the expectations are changing for the 3rd quarter. There is worry that the lack of improvement in certain areas like jobs will result in lowered expectations to the bottom line. That is a major shift in thought.

The VIX jumped 6 points on Friday and remains high at 35.90. Yes, it has been over 40, but it also went from over 40 down to under 30. That volatility makes it very difficult to make intelligent decisions. One of the floor traders noted that hardly anyone is investing long term any more. In fact, he says hardly anyone is "investing", they are looking for quick in and outs in short term trading. That is what makes charting so important, along with breaking news. Charting, using just charts and not considering anything for value is not investing, it is like being in a casino--trying to go with the odds. In this case it would be support and resistance points, along with other pure charting calculations.

The BP oil problem is still raging and it is heartbreaking to see all the birds covered in oil, with relatively few of them being cleaned so they can live. What a major tragedy this is and it probably will kill any thought of expanding off shore drilling. There is even talk about the possibility of a conspiracy to intentionally destroy that rig. It was rather coincidental that it happened so close to the time that expansion of off shore drilling was being considered. Now oil is hitting the shore and tourism is going to be affected, whether it hits a popular beach or not. People won't know if it is on their favorite beach or not, so they might well go somewhere else, or stay home.

Warren Buffett was ordered to testify at a government hearing this week. I say "ordered" because he said he would not go voluntarily. Now I don't want to be one to call Mr. Buffett a liar, but one thing jumped out at me when I read what he had to say. I point out that I did not see him speak directly, only read about what he said. He is a major holder of Moody's rating service--one of those that rated mortgages AAA as they were being sold around the world. His statement that I read said that he was unaware of the depth of the mortgage situation, like so many others. That is the part that I find hard to believe. It could be that the question was not asked properly, so that his answer was just applicable to the question. My question would be the same as I have been saying for years---How can you allow 100% mortgages with no proof of income?" A very simple question. I've been around a long, long time, and never saw that happen before. Banks and lenders always required an appropriate down payment, and you always had to show proof that you could afford to make the payment. In fact, the popular long time quip was that loans were made only to those that didn't need them, because you had to show so much income, etc. Mr. Buffett would know that, there is no question in my mind about that. For him to support the decision of Moody's to give a triple A rating on those mortgages defies even the lowest level of logic. It actually stunned me to read that story about his testimony. In fairness, I often times (in fact, most of the time) listen to the dribble of the committee members reading questions that in fact, show their ignorance of the subject. When you combine no follow up to questions that are not answered, it appears that they don't even listen to the answer--they just want to get on to read their next question.

Neither party seems able to come up with a workable solution to our problems, which makes it even more difficult to expect that we are going to make positive headway with our economic problems. Financially, we are still critical, worldwide, which adds to the situation. Long ago we predicted that it would be over 10 years before we got back to the same levels we were at before the economy started falling apart. That is based on past history. The last one that took 10 years to get even was from 1989 to 1999, and wasn't close to being as severe as it is now.

That one referred to the housing bubble that we had especially here in California. All bubbles break at some point, and boy, this current one blew itself up so big that it had a tremendous POP when it finally broke. I believe all parties involved were the cause and the reason was greed, and forget about any altruistic statement that it was done to try to help people get into a house. It was done for the billions in profits that were generated. Now we are seeing frantic efforts to come up with something that is going to appeal to the public come election time. It will be almost all political from here to election time. Of course, it won't be presented as political, it will be presented as a cure all for the benefit of all of us common folk. What a fix we are in--with even more increased taxes facing us and adding to the "no inflation" costs that have already been steadily climbing. Another joke--no inflation.

Oh well, stay tuned.....these continue to be very interesting times...............

Today's Thought---
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If we threw all our problems in a pile and saw everyone else's, we'd grab ours back.


Mike

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