Archive for October, 2008

I was returning from a business trip recently and found myself walking on one of those moving walkways at the airport and as I was walking on the belt, I felt the sensation of gliding effortlessly along.  I glanced over to my right and observed several people who were trudging along with bags in tow as I breezed past them.  When I got to the end and anticipated stepping of the moving belt, I noticed children on my left playing on the walkway that was moving in the opposite direction.  They were running against the flow of the belt almost giving the impression that they were running in place.          

It occurred to me that there are times when we put forth a smaller effort yet make greater strides.  There are also times in life when we seem to max out and go nowhere.  So it is with trading.  One of the primary themes we have at www.marketamer.com is that our trading methodology emphasizes stock ownership and the consistent reduction of the cost basis of those stocks through the use of options.  So with that said, stock selection is critical to what we do.  I understand that many of you have not yet built your portfolios to the size that will allow a diversified portfolio of stocks.  That’s fine because we have strategies to help you build your portfolio without stocks, so stay tuned and you will learn. 

OK, so it’s about stock selection.  We must find stocks that are insulated to a great degree from economic downturns.  We find those stocks through fundamental analysis.  When normalcy returns to the market, those stocks we have selected have the ability to rebound nicely.  Sectors, Industries and Stocks come in and out of favor.  The approach is to choose only the best.  Back to my airport walkway analogy; having holdings in a Sector, industry and Stock that is currently out of favor is similar  to running in place against the moving walkway.  In fact you could even go backwards.  Trading those types of stocks makes it a battle.  As I said before, you may be putting forth a maximum effort and going nowhere.

So here’s the plan for stock selection.  We employ ”Top Down” analysis:

·        We start with the total market to determine what it is doing.  Is it up, down or sideways?  Is the volatility high or low?  Immediately, you can determine if it is a market that you want to participate in.  Lately, this market has been ideal for those that feel comfortable shorting.  If that’s not you, then maybe it is best to stand aside until the dust settles.  We’ll assume for the sake of today’s discussion that you don’t wish to short the market and are waiting for more bullish conditions.

·        Let’s assume that the market conditions are now neutral to bullish and you feel that it’s time to get back in.  We begin to look for the sectors that are performing the best.  Let us say that after your due diligence you determine that the Petroleum Sector is alive and well.

·        The next step is to find the Industries within the Petroleum Sector that are doing well.  After your analysis, you feel that the Refineries are the place to be.

·        Our final step is to find the Stocks within the Refinery Industry that are the strongest.

You have now given yourself the highest probability that you are “walking with the movement of the stock market walkway.”  You are gliding along as others are struggling.  Google “stock market research” and you will find a wealth of information to help you with your due diligence.

Do not forget the importance of diversification.  It would be wise to select several Sectors, Industries and Stocks that are in favor, even though some may not be as “hot” as others.  With this method, you are deselecting those Sectors, Industries and Stocks that are definitely out of favor.  What you may lose by not placing all of your capital in one Sector, even though it appears to be the best, is more than made up through prudent diversification.

I hope you enjoy the blog. Let me hear from you with your comments.  BTW, take a look at www.marketamer.com if you want more information regarding our trading methodology.  Best, Robin

ECONOMIC REPORTS

MONDAY 10/20

Leading Indicators

TUESDAY 10/21

None

WEDNESDAY 10/22

Crude Inventories

THURSDAY 10/23

Initial Claims

FRIDAY 10/24

Existing Home Sales

 

 

EARNINGS OF NOTE

MONDAY 10/20

AXP, HAL, HAS, LMT, LOGI, NFLX, EDU, NVS, SNDK, TXN

TUESDAY 10/21

MMM, AKS, AMLN, AAPL, BIIB, BLK, BSX, EAT, BRCM, CAT, CERN, COH, CREE, DD, ETFC, FITB, FCX, KEY, MAN, NCC, PNRA, PFE, QLGC, RJF, SGP, TLAB, UAUA, YHOO

WEDNESDAY 10/22

ACL, ATI, AMZN,AMGN, T, BIDU, BHI, CMG, COP, EMC, GD, GENZ, GSK, KMB, MCD, MRK, NE, NOC, NWA, NTRI, OMTR, OSIP, PFCB, PM, PHM, STX, SKX, ALL, BA, TRV, WB, WLP, WYE

THURSDAY 10/23

AII, ALK, MO, BDK, BMY, BUCY, BG, BNI, CELG, CB, CS, DAI, DECK, DV, DO, LLY, ETH, FLIR, BEN, GR, JNS, JBLU, JCI, JNPR, FSTR, LVLT, MSFT, TUNE, NOV, NCR, RHD, RSH, RMBS, RTN, RGC, SNA, SPAR, HOT, TRA, CAKE, DOW, UNP, UPS, LCC, GRA, XEL, XRX, ZMH

FRIDAY 10/24

FO, GCI, IR, ITT, TROW

 

I believe it’s time to get back in the game.  I feel the DOW made a bottom Friday (10/10/2008), at 7882.  However, I feel that we will retest that bottom.  It looks like in the near term we are moving into a channel.  The trading range on the DOW will be 7900-9500.  I know that is a wide range, but as volatility comes out of the market, we should see a narrower range.  It should begin to settle into an 800 to 1000 point range.

This type of a market will bode well for strategies like Vertical Credit Spreads, Iron Condors, ATM and ITM Covered Calls, and Calendar Spreads.  Initially, the volatility will remain relatively high, so those strategies that take advantage of high implied volatility should be considered.   Going forward, I don’t see stock movement necessarily as beneficial as non-directional, premium collection strategies.  If you do play directional strategies you may want to make sure that they are hedged.  For the longer term, I believe stock ownership at these bargain levels will make you a happy camper when you open your account statement in 24 to 36 months.  In the meantime, you can reduce the cost basis of your stock holdings by selling calls against your stock.

A somewhat more aggressive approach if we get a cyclical bear market rally in the greater secular bear market, would encompass buying deep in the money leap calls on a broad market ETF at a delta of at least .80 and selling front month calls against those positions on pull backs.

I want to remind you that these are not specific recommendations, but only strategies that are merely presented to you from an educational perspective so that you may better learn to trade the stock market.  Any strategy must align with your risk tolerance and only be considered after you apply your own in depth due diligence.  If you want to learn more about some of these aforementioned strategies, stop by www.marketamer.com.  Best, Robin

 

Monday looked like a repeat performance of Monday prior which shed 778 points.  However, the market clawed its way back from 800 points down to close “only” 369 south.  The retracement seemed significant at the time because the market rejected much lower price levels which some interpreted as  a capitulation day.  The systematic nature of this decline is being felt globally.  Tuesday showcased another beating in the market with the DOW closing down 508 points.  The Fed stepped up with a plan to buy unsecured asset backed paper and Bernanke alluded to a possible rate cut but to no avail as earnings reports added continued pessimism to the market fall.  Wednesday saw the DOW continue its dive with a 189 point loss in the face of a coordinated global rate cut.  AA generally kicks off the earnings season and it did so in dismal fashion missing its estimate by .21.  Thursday was a blood bath as the DOW plunged another 678 points primarily due to concerns about the global economy.  Volatility was at an all time high with the VIX north of 65.  The short selling ban was lifted but no reinstatement of the uptick rule yet.  Friday had to be the most volatile day that I have ever seen.  The DOW opened and immediately traded down 686 points to establish a low of 7882.  The index came off of those lows to turn green for a brief moment to the cheers of those on the floor.  The market again faded to spend the day gyrating between 200 and 500 points down until the final ½ hour.  Once again, the DOW charged up to register a triple digit gain just before the bell, only to retreat and close down 128 points.  The VIX posted a high of 77.  The DOW was down week over week by 1874 points with the SPX and the COMPQ  shedding 200 and 298 points respectively.  This was a historic week.  The DOW is down 40% from its high in October 2007.

This is obviously a news driven market and the best we can do in these situations is to identify support and resistance as well as confluence levels and watch how the market reacts at those levels.  I look for candlestick patterns that indicate either a continuation or reversal at those key levels.  I also look for volume to confirm the validity of the move.  Until the market returns to more normalcy, we need to either remain in cash or be hedged in our positions.  As I have said in previous posts, I am looking for a short term bounce as the credit markets begin to loosen and confidence returns.  For the longer term, IMHO the markets will continue to move sideways to down until some of the existing fundamental issues are resolved.

See INDU comments.

The NASDAQ and the RUT (The Russell 2000) have held up better than the DOW and the SPX.  We ended the week with a piercing line candlestick pattern which is a bullish indicator.  My feeling is that the small caps and the technology stocks will be leaders on an impending bear market rally.

One day as a teenager I saw an advertisement that read, “Challenge a chess grandmaster”. 

A Russian chess grandmaster who was visiting my city had claimed that he could play 20 people simultaneously and beat them all.  I signed up for the challenge.  While I had never played

seriously and had developed no particular playing strategy or system, I was quite familiar with the uses of the individual playing pieces and felt I knew how to exploit the strengths of each.  I had been playing regularly with friends for the previous six months and felt that my skills were pretty well honed and that while I would not match the Russian, I could at least compete.  To my surprise, within 30 minutes of the challenge starting, the chess grandmaster had already won multiple quick victories.  His history of studying chess strategy and specific offensive and defensive systems easily defeated our collective labored efforts.  To each of our moves, he had a predetermined counter move which he employed, seemingly without thought.  He always seemed to know ahead of time what he would do in each circumstance.  While we each grew frustrated, he enjoyed the confidence that came from playing with a well-mastered strategy.

As a stock and options trader, I have come to realize a trading system can be just as valuable in ensuring consistent profits in the market as the chess grandmaster’s strategy had been in enabling him to easily and effortlessly defeat me and others at the chess match.   The challenge in trading, as in chess, is to understand how to integrate the knowledge we have into a trading strategy.  It is relatively easy to understand the separate components.  As in chess where you can master the movements of the pawns, rooks, knights, and other pieces quite easily, developing a strategy that optimizes those moves and applies them appropriately in each situation, is the key to ensuring a consistently winning game.

One chess book I glanced through recently was hundreds of pages in length, but only a small fraction of those pages was spent outlining the concept of the game and the movement of the individual pieces.  Similarly, learning trading instruments that will afford you the opportunity to profit in bullish, bearish, and stagnant markets is relatively straightforward and can be learned quite quickly and easily.  The challenge is in learning to combine those instruments into an overall strategy that will provide consistently winning trades. 

There are many investment training books and courses that explain how to use trading instruments and even when to use them.  Few, however, take the next critical step of integrating the various disparate components into an investment system and strategy that works consistently.  That is why so many investors continue to trade unprofitably, even after taking training courses.  Conversely, the training program at Stock and Options Training provides the knowledge and tools to be able to react effortlessly to any market condition.  So when I purchase a stock only to see it move in the wrong direction, I’m able to employ a predetermined strategy and turn that potential loss into a winning trade.

I’m now able to profit in every market condition – up, down, sideways, volatile, flat – you name it.  I know when to enter and when to exit the market. And if a stock moves against expectations, I’m able to adjust my strategy to minimize loss or maintain profit.  No longer a challenger, reacting to the market, I’m now prepared for any event like the grandmaster.  The grandmaster ended up winning 19 of his 20 matches that day.  Just think of the profit potential with a 95% winning record!

THIS ARTICLE WAS PROVIDED WITH PERMISSION FROM MY BUSINESS PARTNER AND FELLOW TRADER.

ECONOMIC REPORTS

MONDAY 10/13

Treasury Budget

TUESDAY 10/14

None

WEDNESDAY 10/15

Core PPI, Retail Sales, Retail Sales ex autos, Business Inventories, Crude Inventories, Fed Beige Book

THURSDAY 10/16

Core CPI, CPI, Initial Claims, Net Foreign Purchases, Capacity Utilization, Industrial Production, Philadelphia Fed

FRIDAY 10/17

Building Permits, Housing Starts, Michigan Sentiment-Prelim

 

 

EARNINGS OF NOTE

MONDAY 10/13

FAST

TUESDAY 10/14

ALTR, DPZ, DNA, INTC, JNJ, PEP, USNA

WEDNESDAY 10/15

ABT, DAL, EBAY, JPM, KMP, NVLS, PJC, STLD, KO, VMI, WFC 

THURSDAY 10/16

AMD, BK, BGG, BBW, COF, CIT, C, CAL, CY, ESLR, GILD, GOOG, GOG, HWAY, IBM, ISRG, LEG, MER, NOK, RS, LUV, SYK, HSY, UTX, WGO

FRIDAY 10/17

HON, SLB