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

Learn more about The Momentum Strategy and The Indicators

In this Issue---
Big Dipper System---
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This is a notice for longer term members. We have ALXN in our Big Dipper System, and it is within 15 cents of our target sell price. We feel that orders should be put in to sell this stock at any price near $43.25 (closed at $43.10 regular closing time and $43.20 in a short after-market trade) and take our profits. This rally may go further: we give up trying to estimate when it will end, but there is a good profit and no reason it shouldn't be taken. It should also be pointed out that the stock is also in the Basic System, but purchased at a higher price. By selling in the Big Dipper we achieve the goal the BD system was set up for---We look to make a profit in the BD to make up for any loss in the Basic--and often times we see the stock rally, so that both the BD and the Basic end up with profits. Go ALXN !!!

Options---
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With this market activity being so abnormal, it might be time to remind each other that it is time to play safer. We're talking again about writing options to bring in some extra "dividend" money, as we like to call it. The plan is to write the option using a strike price that is quite a ways from the current price, and really not expected to be reached. If it is reached it could be at a price that is a very good sell price, for a written Call, or a very good buy price for a written Put. We have done it consistently with stocks we have held for quite a while, outside of our stock splits, etc. Sometimes the strike price gets reached, and for Calls, for example, if we like the stock we just buy back the Call at a higher price. We recognize, also, that even tho we buy it back for a higher price, the stock has risen to a level that has increased our value. That price increase is most times more than the difference between our written option price and the buy-back option price. In other words, if we write an option for $1 and have to buy it back at $1.30, we lose 30 cents on that deal, but the stock price has gone up 3 points, so we have increased our value by $3.00, more than enough to cover the option. Also, we have the new choice of writing another Call at a higher strike price and looking for the same situation to possibly repeat---making an extra "dividend" or increasing our stock value.

Remember, these plays are not recommendations. We tell you about them only for educational purposes. If you do plan to make these kinds of trades, make sure you understand thoroughly the risks involved and talk to your financial advisor first.

Momentum Plays---
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With the market in one direction -- up -- for so many days in a row, it has been throwing off our plays. Naturally, when the market is going in one direction, we eventually get signals that tell us it is time to play the opposite direction. Occasionally, the signal will be off by one day. But in this market it has been off day after day as the market just keeps climbing and broke a record in terms of number of days up in a row. One member wrote and said that it looks like the system does best in a flat market. We would change that statement a little and say that our system does best in normal markets. In fact, our system does well even if the market is trading a little abnormal. But when it goes into record breaking territory like it has been, it does become tough to read.

Consequently, we had only three plays this week - One moderate loss, one small win and one break even. We had another member say that break even plays are not truly break even because there is the commission to consider. This is true and we would not argue that point. That is why we post on the past results page that the trades do not reflect commissions. Everyone has a different commission structure and there would be no way to accurately reflect that, so commissions are not factored in.

At any rate, like we always say, the market is like life. It goes in cycles and this cycle will change back to our typical winning patterns as it always does.

Indicators---
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This past week we paid the price for trying to fight a flood strength market that Is determined to go up. We had 1 win and 2 losses and called off 2 other plays for the Indicator. When the market reacts like it has for the past 2 weeks, it is better to step aside than to stand in front of momentum that seemingly can't be stopped--at least for now. When you are making historical moves with percent and dollars, previous trends do not hold up. They will--but not when history is being made. The Indicator play remains a favorite and when more normal trading returns, we will go back to it, hopefully soon.

The Economy, The Markets & Commentary---
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There is no doubt in our minds that one of the main reasons for this incredible 2 week rally in the markets is because investors are buying into the earnings reports as they are being given. By that I mean that the main emphasis on earnings, by far, is how the earnings do compared to the estimates. We have long felt that the "experts" are purposely keeping estimates low in an effort to push up stock prices when the earnings beat the estimates--by a good deal in many cases. It's either that, or the "experts" are not real experts, if they miss by that much. What good are they if they are not consistently accurate within a reasonable small range? When you see what has happened the last 2 weeks, when earnings reports started, there doesn't seem to be much more to explain. Fitting right in there is the theory of "Not being as bad as before", or "Not worse than before". The belief that a small increase in home sales, for example, is a sign that the recession is over, completely ignores the fact that we are still at very low levels of home sales, both new and resale homes. True, not getting worse is better than getting worse, but we still have a lot of people really hurting in this economy. Even government officials are saying that it will be a long time before we recover to a level that spurs the economy. In the meantime, the momentum is like the tide coming in. The water is going to rise, no matter what. We paid particular attention to any selling periods during the day, and it was evident that when the decline was very small, it wasn't going to make a correction. We have no idea when normal conditions will return, but we are happy that our long term holdings, left over from a different time period, are increasing in price.

We think it interesting to note that summer is not a good time for the market under normal conditions. Investors and traders are more interested in vacations and other activities at this time. This year, however, the complete opposite is happening---not only are the markets going up, they are going up in a big way.

The Nas finished off a run of 12 straight up days, and just missed #13 when a rally near the end of the day on Friday couldn't quite pull Nas into a plus closing. That is a record for us since we started 10 years ago---it turns out that it is the first time since 1992, 17 years ago, that this has occurred. Our previous record for straight up days was 7, and that's how much it beat our record. It almost doubled. Our record for straight down days is 8, and we don't really want to see that challenged.

You have to be impressed with this rally even more, when it is noticed that it hasn't occurred since 1992. This means that it didn't even happen during the heady days of the tech bubble---and that was some time, let me tell you. I remember making $25,000 profit on just 4 Calls--in a very short time, too. Those were good times, and bring a smile to my face when thinking about it. We had a small neighborhood group then, and when any one of us made $25,000 total profit (not just on one company's options) for the month, that person took all the others out to a nice dinner. We had one member that did it twice in the same month---made over $50,000 profit on options. That also leads us to comment that we believe in historical records and that if it happened then it can happen again.

Stay tuned.......................

Today's Thought---
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There is a time to let things happen and a time to make things happen.............Hugh Prather, author, minister and counselor
(And it applies to the market--let things happen when the momentum is real strong, like right now.)

Mike

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