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Author: Mike Celeste Editor: Tony Ponzo July Circulation: 6735

Stat Sheet Week Ending July 18th 2009

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+597.0+7.3%-32.0-0.4%
S&P+60.0+6.8%+37.0+4.1%
NAS+131.0+7.5%+310.0+19.7%

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In this Issue---
Options---
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We want to go over something that should be repeated every once in a while. That is a warning to make sure you take the time to enter your orders correctly, especially when dealing with options. There are many variables involved and that is a main reason brokers require experience in trading them before they allow people to trade. Specific example---I have been trading options since before there was a CBOE and you had to put out a notice that you were interested in buying or selling an exact option. That was a long time ago. So, what did I do? Thursday, CNBC talked about a spread in IBM, one of my favorite stocks. That would be writing one option and selling another---that is, writing the July 110 Call and buying the August 110 Call. That was on Thursday, and IBM was releasing their earnings after the close. The earnings were expected to be up, and I agreed. So--with the play in writing in front of me, I entered the order to write the July 110 Calls and buy the August 115 Calls, (not the August 110) equal amounts of each. The earnings came out and were good--the stock jumped--but--the option prices changed drastically, as they should have, what with a $5 difference in strike price. When I entered the spread play, it was an almost even exchange. The next day, Friday, when the stock jumped, the 110 went up a lot more than the 115. I was "fortunate" to exit the play with a $1.00 difference; a loss per each option. I say fortunate because the spread went from my $1 exit debit, to over $1.65. Ah, but what happened to the correct play, writing the July 110 Call and buying the August 110 Call? It broke even as of the time I exited the play, instead of the $100 loss per option--and then I had a 15 cent ($15 per option) debit when I entered the play, so that added to the loss. All because I was in a hurry, out of my normal element (away from the office, using the laptop), and didn't take the time to double check my order. You can bet (heavily) that I won't make that mistake again. And---I don't want any of you to make a similar mistake, so benefit from my error and don't let it happen to you.

Momentum Plays---
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This strategy continues to be very slow with only one play that we actually got into this week. For some reason it is difficult to find plays to behave in the way we expect them to. So we did a quick study of the prior years in this system and found that during the summer months, it is typically very slow. For example, last year 2008, we only had two plays in June and it was a losing month. July only had 5 plays and a small win. August was better but it was still slow. In 2007 we see that while June and July were OK, August was a bad month. This year seems to be holding to this summer pattern and we think it has to do mostly with the fact that many traders are on vacation this time of year and stocks are at the control of a smaller group of traders which means the normal patterns in our day trading are not so normal. Earnings plays should be increasing now so we will be going into them with watching the volume spikes or lack there of, a lot closer.

Indicators---
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With the huge move the markets made this past week, we expected to see a number of Indicator situations--and we got them. On the plus side, it was good that we noticed that the markets were reacting to a fundamental change in investor thinking. We called off 2 plays and both of them would have been at a loss. Then we had a winning play and on Friday, the play won, but we were late in getting an order off, so we missed it--but the good point is that we had the right idea. I believe some members were able to get a profitable play done, as we gave the expectations to look for, and those expectations came to be. We have 3 signals that we use, and when one of them gives us the signal to activate a play, we try to get it off. However, there are decisions to be made, even with the signal. One signal is based on the Nas and as an example, we noticed that the Nas was up earlier in the week, but not by much--so a reverse direction was suspect and we called off the play--2 days in a row. Both times the markets continued upward and we saved ourselves a loss. The one we missed was due to the market moving so fast in our direction that by the time we could put out an official notice, the price had moved too far away from us. In addition, Friday was expiration day, and the market maker was making a 5 cent spread between bid and ask---when normally it is 1 cent. So, we had a winning play, at least, and we saved 2 losses from happening, and couldn't get off another play, which would have won easily. We lived to play another day.

The Economy, The Markets & Commentary---
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What a difference a week makes !!! Last week was all doom and gloom about the economy. This week the recession was declared over and we are on the road to recovery. We had a HUGE move up this week !!! It has been years since the Nas, for instance, has been up so many days in a row. In fact, it made it 8 straight days and that ties our record. In fact, we think that the record of 8 straight Nas days was in a down direction, and 7 was the up record, so this streak is a new up record for as long as we have been checking. Goldman Sachs started earnings off with a good report and the market started taking off. Later reports were definitely to the positive side. BUT--before we get carried away with total euphoria, let us pause and analyze the situation a little bit. Many earnings benefitted from cost cutting, which can't be repeated--at least enough to make much difference. That fat is gone, and if lean meat gets cut, we lose protein and that means we lose dollars. You can only cut so much. It's early in the earnings game, too, for this quarter. 85% of the S&P 500 have yet to report. That leaves a lot of room for questions about the economy. In reality, in our area, we continue to see slowdowns. It appears that once again the expression "Not as bad as earlier" has found lots of believers. Then we look to the "experts" or those that are supposed to be able to analyze and tell us what to expect in earnings. The estimates are being easily beaten by many companies. What does that mean? Number one, it means that the "experts" that make the estimates aren't doing a good job at all, as many estimates aren't even close. IBM, for example, had the biggest spread from estimate to actual that they ever had, as reported on CNBC. Personally, I feel that these earnings estimate misses were intentional. That way the economy is shown to be stronger than expected, and thus expecting the markets to react to the upside. Large buyers of stocks at earlier low prices have been able to make millions on this change. There was a big run up earlier, and when it started to fall in reverse, new earnings that beat estimates came out. This still doesn't convince me that we are out of the woods. Again, the economy took such a hit, worse than since the Great Depression, and it is expected to be on recovery in such a short time? I am not convinced. There is no arguing that the markets have been exceptionally strong---but as usual, it is based on expectations. I repeat my dear ol' dad's comment on this---most up moves are made on expectations, not on present facts.

Oil, another favorite topic seems to have recovered from its recent fall. It fell well over 10%, before the recovery, but did we get a corresponding fall in gas prices? No, and even tho we have been rolling along with 10 year highs in oil inventory, and demand still falling.

Having said the above, I want to suggest something that was brought up by our Tech manager, Richard. Now I have written to our reps in government and usually receive a reply (if I even get a reply) that is obviously a form letter, and not really related to the points in my letter. That is discouraging and often stops me from writing more often. Richard said I was wrong to stop. His point is that even though we get a lot of gobbly-gook back from these politicians, it does draw their attention if a lot of letters on the same subject keep coming in. In thinking that over, it makes very good sense to let them know what we are thinking. Thanks, Richard, for that logical explanation. We should all continue to write to the politicians, even including those that are not representing our district. It is very easy to do by email, too, and their addresses are easily available on the internet. We did a good job last year re gasoline prices, and we shouldn't let up. Let's make it a high priority to write at least twice a week--just a short note will do--and there are so many choices of pols to write to.

Our government at work--We heard a report that the website for us taxpayers to go to when we want to see how the bail-out money is being spent is going to be updated. A contract was awarded to update this site. Take a guess as to how much that contract was worth???????? $18 MILLION DOLLARS, that's how much. I don't know about you, but it seems to be a tad too high---like millions too high.

Talking about the bail-out, we saw another report that said it could be expected that 10% of government program money would involve fraud. Ten percent doesn't sound like a terrible amount, but when you are talking about trillions, every trillion means 100 BILLION goes to fraud. That IS a lot of money. We have made efforts to cut back on fraud with our special software programs that our partner, Tony C, has developed. It has been demonstrated to various agencies and they all agree that they have seen nothing like it, but they can't make a decision to use the software.

They tell us that the decision makers would want to know why it wasn't developed in-house. The decision maker also worries about what happens if it doesn't work--they might lose their job. The workers that see the programs are totally enthusiastic and understand the potential. As usual, the decision maker is not the person that understands it like the field employees. We even offered it with no payment unless it works and then only after they recover or save "x" amount would they pay a small percentage of that. We have talked to other very large companies in the field and they all say the same thing---they leave the government office after a demo and slam their heads on their car steering wheel as they drive away.

Is the recession really over and is our government on the right path? Definitely stay tuned.....................

Today's Thought---
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If your car could travel at the speed of light, would your headlights work?..........Stephen Wright


Mike

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