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Author: Mike Celeste Editor: Tony Ponzo February Circulation: 6820


In this Issue---
SplitMaster Basic System---
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Although we have held out additional plays, we got hit hard in JASO, but it has great earnings coming up, and we are adjusting our sell date to allow for a recovery in this very volatile market that is rising and falling in large gulps by the week. The others are holding their own pretty good, considering what is happening to general stocks.

 Big Dipper System---
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We see a great recovery one week and then a fallback and a partial recovery in our two plays. Again, good stocks should eventually go to their growth levels, so we will wait longer. We now have one step ahead and one step back, while we want to see 2 steps ahead and 1 step back, with the net move ahead being greater than the backward step.

Momentum Plays---
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The struggle to get relatively quick and profitable plays goes on. We did manage to get four plays in - two were winners but two lost. Momentum Past Plays So our perfect record has come to an end for this year. And we continue to see it harder to work the SPX options as our expected buy and sell prices are not being easily taken. The bottom line is, it is taken much bigger moves in the S&P to get our expect targets. And with the market trading in such a roller coaster fashion, profits seem to be getting thinner. This is a temporary situation of course and eventually things will go back to normal but the question is --- when.

There is no definitive answer on that but we'll become more cautious on future plays, study the complexion of the market each day and patiently wait for more stabilized times. More on the SPX plays below.

Three Indicators---
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The 3 Indicators seem to have one standout, the W Indicator. Again, when we had all 3 indicators pointing up, we saw an up move. The W, tho, seems to be the most consistent, so keep your eye on that one, team members---the Big Dipper page, in the top section.

New SPX System---
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This past week, as referred to above, saw the market maker at his most stubborn point. The strategy behind the SPX play is to decide when the direction of the SPX is going to reverse. There is a history of how much the cost of the option is, in relation to the SPX level. This past week we were right on with the direction and it moved big, while the market maker refused to move more than about 1/2 of what it should have been--and he cut the spread between bid and ask, making it even more difficult. However, at some point, there is a return to normalcy. An alternative strategy is to alter the plan to adjust for such happenings. That could be one of several considerations. We can just wait it out; we can lower our sell price once we enter the play, going for a lower profit as it moves in our direction;; we can also buy an option opposite the one we have (buying a call if we are in a put); or we can buy more options, waiting for the price to catch up. We can also make quick adjustments to our buy or sell order if the SPX starts moving quickly. This past week we took some good hits in our program without doing some of these things. The markets are very volatile, as we all know. There are a number of rises and fallbacks during each day. That's one of the reasons we don't usually like to make an SPX play late in the day. We want to have enough time for recovery if it temporarily goes against us. In my own personal trading account I tested these points by buying some more (not exactly double--less than the original) and then waiting for the next move in our direction. It worked to the point where I wiped out the potential loss and ended up with a small profit. The profit was not as great as our traditional goal, but it was a profit during a period when that market maker was totally out of whack with the norm.

We mention these things so that team members are aware of what is going on internally in this specific area. By pointing them out, we hope to continue to be as educational as possible, and for you to understand our thinking.

 The Economy, The Markets & Commentary---
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Two weeks ago we were reporting that the markets, for the week, had their biggest rise in 5 years--in spite of more negative news than positive news. This past week we saw almost the exact reverse--the Dow showed the most weekly drop since 5 years ago. Negative news again outweighed the positive news. Remember, there was positive news, but there seemed to be more negative news. We believe in not trying to fight the "tape" or momentum, but sooner or later, good news will result in prices moving higher, and bad news will result in stock prices moving lower.

There is more and more belief that we are either going into a recession or are already in it. Inflation in many areas continues to grow. Commodities made a record high this past week. An airline announced there was going to be a surcharge for a 2nd piece of luggage--on top of over 10 price increases since last Labor Day, a period when business usually slows down after vacation traveling is added to business travel. Labor is being cut back, income is edging lower and the combination of higher prices and lower income is a double edged sword. The local grocery store told us that they have tried to hold prices down (and they are always lower than the majors), but coming up is a price rise for just about everything in the store---all due to that combination of commodity price increases and even more related to the energy cost of delivering the products. Oil inventories went up and then we saw a jump of over $3/barrel in oil prices. Go figure.

The major indexes are all still lower than they were on Dec. 31, 2006, well over 1 year ago. During these times good stocks get taken down with the overpriced ones. We keep pointing out that there always will be companies that will benefit from trying times. This past week we saw direct evidence of that. CTSH, one of our recent splitters that has been taken down with the rest, announced their quarterly earnings and on Friday, right after that, the stock jumped almost 17% that one day. So, what business are they in that caused this? I hate to say it, but it is a fact and we can not ignore facts. They are in the outsourcing business, operating mostly from India. The economic news pointed out that with a slowing economy in the US, we could well see more outsourcing---and thus a nice move to CTSH. This is a stock that I liked and I wrote puts on it that were eventually put to me, and so it was pleasant to see that 17% jump in the stock. That confirmed my faith in the strategy---and there are plenty more like that. As said, the good stocks get taken down too, but in the end, good earnings will sometime in the future usually result in a higher stock price, all else being equal--we believe.

The economy as a whole continues to roil--some retail companies did very well, and some, like WalMart, missed their target. Credit continues to be a major consideration. We pointed out long ago that we thought the worst was not over and that some financial institutions were going to have to make more write-offs, after having said they believed that was the bottom. No, it wasn't the bottom--and we haven't seen that bottom yet. Thus housing is still looking for the light at the end of a long, long tunnel. The stimulus program has yet to pay out any money, so we have to wait and see what the result will be. It was interesting to read that WalMart reported that the majority of gift cards were being used to buy food and not ipods and such. It's getting to crunch time for the consumer, and he is showing that he is about at the end of his rope re energy, etc. A person can cut only so much and there is no more to cut. We hope we aren't at that stage yet, but with cold weather being expected, heating oil took another big jump in price--just on the expectation. Sadly, we will again read in the paper that some poor person, age no matter, will die from having their utility shut off because they couldn't afford these extremely high prices---I have already read about one instance.

The primaries continue to be exciting, with the list of candidates dwindling down. Our LA Times had a great section showing all the issues and then what each candidate stood for in each one. That made it quite easy to go thru and narrow down our list. It seems to us that this election we will be able to have 2 candidates with distinctly different platforms, which we think will make it easier to make a voting decision. Actually, I kind of feel sorry for whoever gets into office, as the economy and other issues are going to bring a lot of intense pressure to our governing bodies--and the gray hair will probably pop out a bit sooner that normal.

Today's Thought---
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The best of us must sometimes eat our words...........From "Harry Potter & the Chamber of Secrets".....J.K. Rowling, British author


Mike

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