SplitMaster.com:: Newsletter
Home :: Strategies :: Membership :: Past Results
Author: Mike Celeste Editor: Tony Ponzo September Circulation: 7231

Stat Sheet Week Ending September 15th 2007

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+330.0+2.5%+980.0+7.9%
S&P+30.0+2.1%+66.0+4.7%
NAS+36.0+1.4%+187.0+7.7%

Highlight of this past week: TWO-- splitters in the Basic program close out with good wins.

In this Issue--- SplitMaster Basic System---
*****************************************
We are back on track with the splitters doing what is expected of them. This week we closed out 2 at nice profits. FMC was one of our favorites because of the type of splitter it was and it paid off. There is a certain "sweet spot", as Tony likes to call it, where the combination of factors meld together to result in better than average results. That would be the ratio of the split, the announce time of the split and the earnings history and future estimates of earnings. FMC fit into that category and it will be interesting to watch it in the near future, as it wouldn't be surprising if it continued higher--keep your eye on it just out of curiosity. BCSI was the other one that closed out, and we used our signal program to do it before the normal sell date. This one was frustrating, even tho it made a nice profit. On one hand we had a bit of luck on the buy price because that day it was downgraded before the market opened and when it did open, we got a price drop of about 1 1/2 points. We like upgrades and downgrades by the "experts" because there is usually a flurry of movement in the direction of the "grade". In an upgrade, the stock makes a quick move to the upside and then settles back down. A downgrade is the reverse, with a quick move down, and then a move back up closer to the normal position of the stock. BCSI followed the pattern on the buy side and was quickly into profit. Boo-Hiss, tho, on sell date, which was Friday. We had a signal that it was a bit negative, we had a nice quick profit in it, and the pre-market prices for the indexes were down. OK, we sold it on the open and that opening price was down 70 cents from the previous close. That was a bit much, but a down opening was expected. The Dow opened solidly down and stayed down for a long time. HOWEVER, BCSI made up that 70 cent drop and more in the first 5 minutes of trading--and continued to move up the rest of the day, showing a great gain, just for the day, of 3.09. These are the types of things that drive us crazy. All the indications turned out to be correct, but the stock went the other way. And, don't forget, this stock was downgraded by an "expert" 9 points lower, just a few days before. The play was nice and quick, but our luck seemed to balance out, with a little more bad luck than good luck. Not to be greedy, however, we are thankful for the nice, quick profit. This is definitely one that we will continue to look at for another re-entry position.

We have 2 more splitters that are currently active and both are in profit positions. Yes, this is what we used to expect on a regular basis, but we have been a bit irregular up until now. On the other hand, we have been profitable every month except for March and July. We are especially excited about the upcoming months as we are entering the best months of the year for buying. September is actually the worst month of the year for performance of the general market---but to us that means it is a month of good buying opportunity, with sales coming either late in the month or into October.

 Options---
************************
We are looking for more options--plain and simple. This is the sector of our programs that we are most unhappy with up to this point of the year. While the Basic program is definitely in the plus for the year, the profit gain has not been enough to push the options into a net profit position for 2007. That means that because of the time value of the CALL, the stock gain was not enough to overcome that time value. One strategy that can be used to overcome this obstacle is one that I usually don't do, because the downside is that it limits the profits. But, there are definite advantages to it, too, in this kind of market. What we're talking about is buying the stock and writing the CALL to take advantage of large time value premiums in the option. And, we would write the CALL at a strike price higher than the current price. For instance, if the stock is 47 and the CALL strike price is 50, with a $3.00 price on it, then common sense says not to be greedy and it's a good move to write that option. That way, if the stock goes to $49.50 on sell date, we would see a $2,50 profit on the stock and also keep the $3.00 premium for writing the option, for a total gain of 5.50---and that is a nice profit, probably above the average gain for a splitter at this time. If the stock goes to $54 on sell date we are limited to a gain of $3 (47 to the strike price of 50), plus the $3 that we received for writing it--or a total gain of $6, instead of $7 if we did not write it. In this present environment of the market, with its extreme volatility both up and down, that is not bad. Also, the written amount we receive for the option is protection to the downside. Again, if we received $3 for the option and the stock was 47, we are protected to a break-even price if the stock drops to 44 (47-3=44). When the market returns to better and more normal results we would not do this, as it does mean that we miss those giant moves of some splitters where they gain 20-30 points during the split run. Time for that, for sure, but maybe a little later. This does mean, also, that more money is needed to fund this strategy--we have to buy the stock, too.

Also, we are looking to write more PUTs. Remember that I posted my personal writings on the site? Well, they are gone now, as they weren't official SplitMaster plays, but I just wanted you to see what else was possible. There were 5 written at the time, and all of them are profitable at this point, with one week to go until expiration. We realize that very few of you are into writing PUTs, but we do mention the play, as we think it is a nice form of income generation, without having to pay cash for the position. You do have to put up collateral, tying up stock or cash, to cover the position. However, if the cash or stock is there, it doesn't cost interest to get into this position.

Writing PUTs of course limits the amount of profit you can make to the premium you received for selling it, However, it also has increased odds of winning. With buying an option you can lose three ways - if the stock goes in the wrong direction, if the stock stays even or if the stock only goes in the right direction by a little amount. This is due to the dwindling time premium. But when you sell an option it has the exact opposite effect. The dwindling time premium goes in your favor. So you can win three ways - if the stock goes in your direction, if the stock stays the same or if the stock goes in the wrong direction as long as it does not go past the strike by more than the premium you initially received. It is considered a risky play by the experts and you do have to know what you are doing but the odds on this play are pretty good.

As we always say about options, they are only for experienced traders that have been approved by their brokers. This past week, by the way, we did write another PUT, the October 95 one for JCI. We received $1.10 for it. JCI is also a splitter and is at a profit currently, at a price over $111. This means the stock has to drop below $94 before we are in a losing position on the PUT. If it does somehow drop to that level, we think it would be a screaming buy. Based on chart studies, we think this is a pretty safe position--but we like it either way--keep the $1.10 or buy the stock 16 points lower than what it is now, at a Big Dipper price.

 Momentum Play - This Week---
************************************
Not much to talk about this week. It's that time of the quarter in which the announcements start to dry up and this third quarter seems to be a bit dryer than usual for some reason. There should be a number of plays coming up over the next two weeks before the announcements dry up altogether for about two weeks then come back strong in about the second week of October. Members, keep watching our alerts though as we not only will a few more plays come up but we will most likely have a couple of SPX plays as well, as we expect this week to be very volatile.

 Three Indicators---
**************************
Even tho we had some volatility in the market this past week, our indicators were quiet. The reason for this, we think, is that the volatility was caused by news that was released pre-market that day, or at some time into the day of the volatility. Our indicators are helpful when we get them the day before, so we can act on them at the close of the day.

New SPX System---
**************************
Since this system is based on the indicators, we had no plays this past week. We continue to look forward to the signals as we feel we are looking at a profitable system based on the indicators and the SPX.

 The Economy & Commentary---
***************************************
The economic news has not been that good this past week---not real bad, but not that good, either. It seems to be leaning towards a slowdown, but we at SplitMaster don't worry too much about that. We feel we can make money in an up or down market. There are always going to be companies that do well in bad times, and those companies that do well are the ones that are more likely to split. There may be fewer of them, but the quality of the company is high, and that is what we want.

Having said that, we are concerned about the market this coming week. What is the reason for this? The reason is that huge Fed meeting Tues., 9/18. We had a great week in the markets last week and most of that can be attributed to expectations that the Fed is going to lower the interest rate because of the negative news of the slowing economy. My dad had several notations about economic movements and one that could well apply here is about expectations. He used to say that prices went up on expectations more so than when the actual news came out. That applied to real estate or stock. In real estate I particularly remember when Atlantic City first received gambling approval from voters. Commercial prices went sky high on the expectations that the whole city would be rebuilt with casino related properties. Later, reality set in and it became very obvious that the whole city couldn't be rebuilt, just a small fraction. People that bought on expectations were left with losses, in many cases.

In this case, we had a really nice price rise in the markets based on the expectation of the Fed. The way we see it, there are 3 things that can happen after the Fed decision is announced. Because of the big rise last week, there could be selling on the good news, if the interest rate is cut. If it is bad news, with the Fed not doing anything, or doing less than expected, there could be a bigger sell-off. There could also be a continued rise in the stock prices if the news is very good. Our concern is based on 2 of the 3 happenings could be negative. While we remain positive, we have held off on taking some positions until after the decision is made by the Fed. Better safe than sorry, so to speak.

One comment about the housing market. Here in Southern California the news was released this week that 71% of the zip codes showed selling prices lower for August, with the number of sales at a 15 year low. That brings us back to 1992, which was in the midst of our last real estate crunch here--and was the most severe up until that time. We are not seeing price drops that low currently, but then again, we are most likely not finished seeing price drops here yet. Fortunately, the larger number of states are not seeing the types of problems facing CA, FL and Nevada. Prices in Los Angeles county did manage to rise over last years level, surprisingly. The reason for that, tho, is that the high end of the market in Beverly Hills and that type of market is making the average rise--but the number of sales is way down, and inventory is way up. I do think we haven't seen the bottom of this market that we have warned about for such a long time. On the other hand, we are convinced that it is such a big problem that the government will step in with some sort of aid, be it a bailout or whatever--but assistance. Again, in the longer run this real estate market can be a benefit for some people. Those that are looking to buy can expect to see much better prices. We will get over this and return to normalcy, that much we feel good about.

Interesting sidepoint to the housing mess--and this seems astounding to us. AP reported the following on Friday--"Even the maestro didn't see it coming. Former Federal Reserve Chairman Alan Greenspan acknowledges he failed to recognize early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy. Greenspan said he was aware of subprime lending practices where homebuyers got very low initial rates only to see them jacked up later, causing increased payment strain. But he said he didn't initially realize the harm they could do. "While I was aware a lot of these practices were going on, I had no idea of how significant they had become until very late." End quote.

This is the guy that is supposed to be the guru of money. Holy cow, give me a fraction of what they paid him, and I could do a better job than that---and I think anyone else could have, too, if they were being honest. How can you have low, low temporary interest rates, with no qualifying for a loan (stated income) and expect that you are not going to have major trouble with that policy? It sure beats me, but that is how government and the big boys play it sometimes. There was a tremendous amount of money to be made by that industry, with investors footing the bill for most of the time period. In truth, you really couldn't expect anything less than a major correction at some point

Generally speaking, then, we see the economy facing some rough spots, but with that can come some extra gains by certain companies and we like that. Timing can be a key issue here and we hope that our signal program can profitably guide us thru the maze of this exciting field that we have chosen for our occupation.

Today's Thought---
*********************
Knowledge is the eye of desire and can become the pilot of the soul.....Will Durant, philosopher and historian


Mike

Published by Splitmaster.com, LLC.
P.O. Box 960 San Dimas CA 91773
Copyright © 2006 All Rights Reserved.
Privacy Policy

To unsubscribe from our newsletter or edit you delivery address go to our Newsletter Page. To edit membership information login to the Splitmaster.com members page. For inquiries regarding this or any other Splitmaster.com Information Delivery System publication contact us at staff@splitmaster.com.