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

Stat Sheet Week Ending July 21st 2007

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow-56.0-0.4%+1.0+11.6%
S&P-19.0-1.2%+135.0+9.5%
NAS-19.0-0.7%+292.0+12.1%
Highlight of this past week: EME in the Basic closes out with a $4.52 gain per share. PLUS, the Momentum Strategy has a 100% win rate for July to date. Momentum Past Results

In this Issue---
SplitMaster Basic System---
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Even tho we are having a severe drought out here in CA, and it appears we are running dry on splitters as well, neither one is indicative of what is going on. We had a good winter where it counts in CA and the groundwater supplies in our area are adequate to get us into the wet season.

Split announcements are starting to pop up and we are lying in wait to ambush them at the proper time. So, while it looks like there aren't any splitters under consideration, looks can be deceiving. (That's gotten a lot of people into trouble, when they put all their emphasis on looks when making a judgment about someone else). We are watching a number of splitters that have announced, and instead of a buy date being announced that fits all of them (say "x" days before split date), we are looking for individual signals as entry levels. Our new program is expected to help us greatly to do this. We intend to avoid getting in at tops, where the stock has run up well in advance of the split announcement, and then sells off on the good news of the split coming up. For instance, FTI announced the split on 7/18, but it has run up from a low of 75.03 on 6/27 to a high of 94.04 today. It was already in a buy mode before it announced, so we wait for a fresh signal indicating it topped and most likely will move down some--then another signal that it is again moving up. A number of other splitters are in this same position, so we are tracking them closely. We will be applying the same technique that we use for our Momentum day trading plays, which are doing very well, but with different timing criteria (we are not looking for a trade in 5 minutes in the Basic system, but want moves over some days.)

 Big Dipper System---
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In the same vein as the Basic, we sent out notices to team members that we are changing our method of entering a Big Dipper position. Before, we took all the potential plays and made a general entry level, below the Basic buy price. Now, with our new program, we are taking the individual stocks, watching them and looking for price drops, and then, when given the buy signal, that will be the entry point. Right now we see FCSX, DIOD and HCSG, for example, in down moves. The buy signal has not come yet, but when it does, we will send out alerts to all team members. We have high hopes that this will make for more plays in the Big Dipper and more importantly, more accurate plays. Keep your eye on the stocks listed above and watch them for direction. We are lonely for Dipper company at present, but we are also patient.

 Momentum Day Trading Plays - 100% so far in July!---
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We always look at what we have done and ask ourselves, how can we do better. For example, on the Momentum Plays, we may have three potential plays on a certain day and then notice that we missed a play because we were concentrating on the plays we were in. So our question becomes, how could we have set up our morning to notice that other play. As we were asking these questions to ourselves this week we realized that for the month of July, we have won on every play. That is a 100% win rate so far this month! Now, because the earnings announcements just started back in this quarter, we have only been back in the Momentum plays since Monday and we are not naive enough to think we can continue with a 100% win rate but the fact remains that up to now, 100% is our record for July. Take a look by clicking on this link ---Momentum Past Results

Last week we discussed the advantage of option expiration week due to the fact that time premiums dwindle. This makes plays that are close to a certain option strike very advantageous as this is a time that you pay the least amount for the option and have the highest Delta. If a Delta is 95 for example and the stock goes up $1 the option theoretically will go up 95 cents which is great leverage. We were going to look for earnings plays on Wednesday and Thursday to see if we could find such a situation to do a possible straddle the night before. Unfortunately, we could not find one this week but we will look for this situation again during the August expiration week.

However, here is a very interesting straddle that we did paper trade that will knock your socks off! We told you about ISRG having a history of gapping really big on earnings date. We also said it would not be worth the risk on the Momentum play, because the time premium with one day to go was still ridiculously high. But just for fun we paper traded a way out of the money straddle on ISRG to see what would happen. On Thursday, the stock was trading at about 150.00 at the end of the market. So we bought a 165 CALL (15 points out of the money) for $1.65 and a 135 PUT for $1.20. That is a total of a $2.55 investment times the number of contracts. We said 10 contracts each so that would be an investment of $2,550. Getting right to the point, the stock gapped up over $25 to $175.58 making the call option worth over $10 at the open and within 10 minutes the stock went up another $10 making the option worth at least $20. Quick math shows that you would have made at least a $17 profit times 10 contracts or $17,000 overnight. Very exciting! By the end of the day, ISRG was up over $48.00. Unbelievable! Too bad it was only on paper.

Now, no one knew it would announce that well and go up that much. What we did know is it has a history of gapping big each announcement. Would it have been worth the risk considering the high premiums with one day to go. Apparently, we did not think so otherwise we would have traded it for real. But it was sure fun to watch. Maybe next time we'll give it a real shot.

Chart Indicator---
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We hope this doesn't get too repetitive, but we keep saying how important this indicator is becoming to all of us. The alert reader out there can make hay while the sun shines or while it rains--or--if the market goes up or if it goes down. Those index options or even stock plays can possibly be times to get in or out, depending on the signal. This past week we had two instances, not just one, of the indicators being right on. There were two days when the Dow had triple digit moves, both to the downside. Yes, on Wed., the market did recover to end down "only" 53 points, and on Friday the low showed the Dow down 197 points before it leveled out showing "only" a 149 point loss. A good trader would have been able to profit from those big moves. I know we at SplitMaster did, making good profits on our Momentum plays, for instance. Team members know that they can check daily to see how our 3 indicators are looking--on the top of the Big Dipper page. Last week's newsletter warned about a possible downturn based on them, which we provide to everyone on the weekly basis. One of the three indicators is still in overbought position, so we will see if that is enough to see more downside moves this coming week.

The Economy & Commentary---
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We have had our first week of earnings' results for this last quarter and, as usual, there were expectations met, expectations not met and expectations exceeded. All of those meant that we had action in our Momentum System, as Tony covers. We, along with about everyone else, can not predict before the announcement as to what will happen after the announcement is made. There are times when good news and expectations beaten result in drops in a stock price due to whatever; most likely profit taking. Other times, bad earnings see a stock go up, as it might mean that the worst is over, or the stock was down so low, it was bargain time. At any rate, it is fun to watch what happens when those earnings come out. MTG was an example of one that caused us to scratch our heads. A part of their business is in the mortgage lending area and sub-prime. We all know how bad that sector is. On Thursday the company reported earnings far less than expected and for a time the stock went up that day, almost $1 at 56.78. We were playing a PUT, so we wanted and expected the stock to go down. Well, it did finally move lower and we took our profit. However, one day later, on Friday, the stock hit a low of 52.34, making that PUT worth 7.66 and it was 4.50 when we bought it. So, it went up, against what was expected, then common sense came in, and the stock had a fairly dramatic loss. Longer term option players could have benefited, but emotion is hard to overcome. Friday saw earnings from some major companies like Google and Caterpillar that investors did not like. When the overbought condition of the market was added in to that, we saw a pretty steep decline in the indexes. We think that next week will see more of the power of earnings controlling the moves in the market. High Interest rates or dividend returns for those that like those type of investments are seeing some attractive price levels. PHK, for example, has dropped down and is paying a current yield of 10.6%--IF--they are able to keep paying at current levels. The economy is in the middle of the summer action and this time of year has traditionally seen lower volume due to vacations and other distractions. We don't expect that to change this year, either.

Real estate "experts" have had to continually revise their estimates of the market for housing, and always to the downside. We at SplitMaster have been saying for a very long time that this sector was in bad shape and it was going to get worse, Now "they" are saying it won't bottom out until late in 2008 and a recovery won't come until 2009. We will hold back on our predictions about real estate until we feel the picture is clearer. It is important to point out, however, that there are always contrary sections of the country that go against the common trend. We see that the high level income areas here in Southern California are still very healthy, and in fact, are continuing to show price increases. The explanation is that the rich can afford to go after and pay for what they want, while the middle class gets squeezed in times like these. And so owners of multimillion dollar homes can keep their prices at top dollar and get their prices in posh areas where there is a limited supply of properties. If you are lucky enough to be in that category, good for you, and take advantage of it if you can. For the rest of us, I'm afraid it is a waiting game, as mentioned earlier.

Energy prices are starting to move back up, based on inventory and sales, but they did drop, so we are not anywhere near the high levels of a few weeks ago. Give those people time, tho, and who knows what havoc they can wreak on us consumers. We don't need to have gas money compete with our other every day expenses. They are high enough--and many of them are caused by the need for companies and farmers to raise prices because of the high energy costs--either for production or delivery to market.

As long as consumers are able to absorb the rising costs, we should be ok, but that can't continue ad infinitum. Let's hope we have leaders that can guide us thru these times and into a prosperous economy, for that is good for all of us---producers and consumers.

Today's Thought---
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We learn by doing..........Aristotle (so simple, yet so very true.....Mike)

Mike

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