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Author: Mike Celeste Editor: Tony Ponzo July Circulation: 7252

Stat Sheet Week Ending July 14th 2007

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+295.0+2.2%+1.0+11.6%
S&P+23.0+1.5%+135.0+9.5%
NAS+40.0+1.5%+292.0+12.1%

In this Issue--- SplitMaster Basic System---
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At this midpoint of the year, we are looking forward to seeing splitters resume normal patterns. This first 6 months was definitely not normal for the split world. There were some outstanding moves, but they were overshadowed by others that made most of their run before the split was even announced. We've made some changes to catch the runs, but now we need some more announcements to see how well we have done on our software adjustments. We following few splits that have announced but their split dates are out in the future. However we have them in our new software and when we see the right signals, we will take advantage. Like we mentioned before, we may go in and out of these plays a number of times before the actual split occurs if that is what our signals show.

 Big Dipper System---
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We ask the question, "When is the turnaround". SPAR is another of the splitters, albeit a 3-2 splitter that has not performed according to past patterns. We do not carry 3-2 splitters in the Basic plan, and there is a reason for that. Over the course of time, the 3-2's didn't perform much.They make a profit, overall, but nothing to hang your hat on. This one, however, is in a league all by itself. It has continued to go down, and we can't seem to find a bottom. But, with our new program, we are watching it very closely and when it gets a buy signal on this new setting, we will let team members know. Even tho we close it out shortly, we will continue to monitor the stock, as it is bound to give an up signal, and we want to be on top of it when it does.

 Options---
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In the last 2 weeks before option expiration it is interesting to not the time values that are put on the options. With 2 weeks left, it is always surprising to me to see options with absolutely no time value built into the option. That is, there is none when looking at the bid price. The last week of option trading before expiration often sees a discount when looking at the bid prices that those market makers put out. It seems that they want to buy an option only if it is already at a discount to the stock price, so they can turn around and make a quick profit. Another thought is to wonder if the market maker isn't putting a decent time value out because he can see the orders sitting there and it might appear that the stock is not going anywhere in the immediate term. It seems to us that it works out that way a pretty fair amount of the time. Something to watch, as this coming week is expiration week for the July options. This can be a very profitable time to buy options in stocks that gain quick momentum from special earnings releases, or upgrades and downgrades, etc. Any news that gives a sudden push to a stock in either direction, up or down, can be the push we need to make some very nice plays in our Momentum System. We don't want time value then, and it is nice when you are on the right end of a move, to see the option going dollar for dollar with the stock, and you are using all that leverage to show gains as tho you had the stock and paid much, much more to enter the position.

Momentum Play - Strategy Ideas---
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We had no plays this week as was expected. We did try to slip one in, but it did not perform the way we needed in order to get a buy signal. This coming week should see the action pick up with plenty of plays coming in the weeks ahead.

As Mike mentioned above, Monday starts expiration week. The Time Premium in many options are almost gone during expiration week. This means options can be bought very inexpensively and the Delta's will be high. This gives us a great advantage. Let me explain why. If a stock is trading at 50.25, we might find that a 50 strike CALL, may be selling at .35 and have a 90 Delta. Because it is the week of expiration, the Time premium is almost gone. And since the option is .25 in the money, it means that the option is going to move 90% to the stock. If the stock goes up $1.00 the option will go up .90. And actually as the stock moves up, the Delta will get even better until it is almost 100%. Do you see the advantage? The stock doesn't have to move as much for us to get our target profit. It's almost like buying the stock only at a fraction of the price. That gives us a great leverage. Plus, when the stock goes the wrong way, it is getting further away from the strike price, and the further away it gets, the lower the Delta and slower moving the option becomes. So, while nothing is full proof, there are some fantastic advantages that are possible during expiration week. With the Momentum play, the idea is to get out, win or lose in the same day. So the worry of an option expiring on you should not be a factor.

With this in mind, if we can find the right situation, we may take advantage of playing a Long Strangle or Long Straddle. These are plays in which we expect a big gap on a stock in either direction. A Long Strangle is buying a CALL and a PUT at different Strike prices on the same stock and a Straddle is buying a CALL and a PUT at the same Strike price. Using a Strangle or a Straddle would just depend on examining the price of the stock in relation to the various Strike prices and determining the most advantages scenario. But the idea is, if the stock gaps way up, the CALL should easily overcome the PUT and produce a nice profit and visa versa if the stock gaps way down. Do you get the idea?

Now, here is why expiration week adds an advantage. In the weeks ahead of expiration, Time Premiums are so high, that even if a stock gaps big, the one option has a hard time overcoming the other. And often we see, the changes in the options not moving as they should for whatever reason, making the play hard to profit. But during expiration week if we can find an earnings announcement stock with a history of gapping big and if that stock is very close to a certain strike, here is what can happen. Both the CALL and the PUT could cost only about .30 or so and have a high Delta. So for example, if a stock gaps up $3.50, the CALL is going become worth close to $3.50. If the PUT cost you .40, it becomes easily absorbed by the movement of the CALL and gives you a nice $3 profit or more.

With these plays, we would actually go into the positions the night before earnings announcement and sell them shortly after the open the next day. This is a nice play with good winning odds but, a couple of things as mentioned above do have to line up. If we find such a situation this week, we'll let the members know.

 Chart Indicator---
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Last week we warned about the overbought condition that the CI was showing, along with our other 2 indicators. We said it might take a couple of days, but it definitely looked like a drop was in the cards. Tuesday brought the warning home with a real bang, when the markets had very large losses. We hope that some of you were able to take advantage of this situation, maybe by buying the calls on the indexes, etc. Of course, the market reversed itself and had a huge gain on Thursday (I think it was the largest move in 4 years on the Dow), after a decent comeback on Wed. Friday saw another up move, so we ended the week with a large gain.

The weekly results put us right back where we were at the newsletter's last writing. The CI has a spread that is way out of line to the upside, the Nas has gone up 3 straight days, and our W signal has 2 days at 99 and 100, when anything over 90 indicates overbought. So, we have a repeat warning--be careful in the next couple of trading days. There could be a swift correction, even if it is one day only.

The Economy & Commentary---
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This past week saw more indications of how strong emotion is in the market, especially at this time. The retail report came out and it was not good, overall. The Consumer Spending report came out and it was not good at all. Inventories are rising, also. So what did the market do after those reports came out? (These reports had their affect after the large drop on Tuesday.) They staged a huge rally starting on Wed., thru the end of the week, almost defying logic. There was one comment that blew my mind. The buildup of inventories was stated to be a good thing, as it was interpreted that it was because more goods meant more production from the wholesale end. I don't know about you, but I was always taught that when the consumers have a big slowdown in their spending, that means there are more goods left on the shelf and that is how inventory increases. The retailers are not selling as many products as they would like to. I can't argue that the majority of stock investors didn't agree with the writer of the comment that it was a good thing. They blew the markets wide open. This was even in the face of an increase in gas prices (the consumer spending slowdown was attributed in part to high gas prices keeping consumers off the road and away from the stores). Emotion is still controlling the markets, over logical reasoning, in my opinion. I'm not saying it is good or bad, as this time the emotion is driving the markets up, and the large majority of investors like to see an up market, including us here at SplitMaster. When that pendulum swings the opposite way and the downside emotion rules, it will be a different story, but we will enjoy this positive reaction to just about any news, while it lasts.

 Today's Thought---
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There are no secrets to success. It is the result of preparation, hard work, learning from failure.....Colin Powell.....(and some luck......Mike)


Mike

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