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Author: Mike Celeste Editor: Tony Ponzo February Circulation:

Stat Sheet Week Ending February 1st 2010

ChangesWeeklyJanuaryYear to Date
IndexesPointsPercentPointsPercentPointsPercent
Dow-106.0-1.0%-361.0-3.5%-361.0-3.5%
S&P-16.0-1.5%-38.0-3.4%-38.0-3.4%
NAS-58.0-2.6%-122.0-5.4%-122.0-5.4%

Auto Trading available on all of the SplitMaster Strategies Learn More

Highlight of this past week: The Indicator Strategy gets on the move. After having a 79% win rate for 2009, it produces two wins this week and is already showing a 75% win rate. Learn More

In this Issue---
Options---
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We have hope for a fast weekend and there are 2 reasons for it. One is that we get past this one, so we are closer to Super Bowl Weekend. The other reason is that we are so excited about our new potential strategy that we want the weekend to be over so we can get a new trading day. On Friday we actually worked a play and it was profitable. Later on in the day we paper traded 3 more times and all 3 were profitable.

Now it wasn't all roses, as we saw some pitfalls and warnings, too. The good things were that we saw what we think are ways to overcome those pitfalls. All of this takes some time, and the old trial & error testing of the system. Each day we learn more, and some of it comes from intensive grilling of brokers and institutions. We ask our questions from several different sources as we want to be sure the answers are something we can go with. I don't know how many times we have had to dig and dig into specifics until they say "Hold on, let me check to be sure." Anyway, we are going to actually trade again next week and if we go a full week with good results we might be able to go into live beta testing. And if that works out the way we think it will, we will make the strategy official. More on this below.

Momentum Plays---
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We continue going back and forth on this strategy. Last week we had a good week with four plays - all wins. This week we had six plays but with only 3 wins. The market has stayed in the mode this month that makes the normal predictability of some of our plays less reliable. We saw this shift on at least three plays that we passed on. Earnings plays that come in with such good reports that it would indicate an obvious up play, suddenly turn and go down. On the plays we pass on, it is easy to see it coming. But on the couple we went into, the stocks appear to be going in the expected direction and following the normal patterns but then suddenly switch leaving us hanging. The market, as we had predicted, is in a down mode and making a correction from its highs of last month. Why the market is going through this correction mode at this time is a bit puzzling as many companies are coming in with stellar earnings reports and there has been good news in many of the economic reports. Some are not that good to be fair, but overall, normally the market would be going up under the current news and earnings reports that are coming out. So it is hard to say why now the market is going down but that is the big mystery with the market. It does what it does and you have to be ready to move with it. Perhaps this correction is due do the January effect we have been talking about. More about that below.

We know the market will soon settle down eventually and our plays will become easier to read again as it always does. But we at SplitMaster don't like to sit still and wait. When we get challenged like this we like to go to the drawing board and figure out ways to combat these situations. And sometimes this going back to the drawing board produces unexpected and amazing new insights. Momentum Strategy members know that we have started talking about a new twist on our plays that we have been testing out with amazing results. In short we have added the use of Straddles and Strangles to our Momentum plays. There are a lot of aspects to how we engineer these Straddles and Strangles with combinations of the right strikes and the right times to enter the play. And we have to take into consideration Deltas and fluctuations in volatility etc. but that is our job to do. The bottom line is, this new approach would have turned every play we lost or passed on in the last two weeks into very nice wins. Further, the timing of the going in and out of the plays is infinitely less critical than our current approach and the odds of winning are greatly improved. We can hold on to a play much longer to give it a chance to win. Why??? Because the play works if the stock goes up or down and if it shifts from one direction to the other it still will wind up being a nice winner. So we do Not have to be correct with the direction we are going in. The stock just has to move. That would be the one place the play could turn into a loss. If it doesn't move much. The other problem will be if the volatility on the option, for some reason, suddenly drops. But we will anticipate the best we can and try to enter the plays at the best point after the open. But remember, all of our Momentum strategy plays are based on stocks that have an impetus to move such as in the case of earnings plays. We have more testing to do but so far, we are pretty excited about this new approach. More in the weeks to come.

Check out this strategy at Momentum Strategy

Indicators---
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We had 2 winning plays this week, but one required excellent timing and some members missed the play, as it moved in our direction quickly. These wins bring us up to the win rate that we have come to expect. There have been 4 plays in Jan., with 3 wins, and that gets us to a 75% win rate.

We have a new Indicator play coming up on Monday, so team members pay attention to our entry point, if we get a good signal. Check the Action page on the site, and we will be sending email notices around the opening of the market on Monday. Learn More

Feedback---
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Apparently we are not the only ones excited about the new Straddle/Strangle strategy as members have been sending us emails expressing interest. Member Barney for example, emailed us that he was actually experimenting with some of our trades using straddles on his own. Like we always say, we love to hear this.

The Economy, The Markets & Commentary---
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This was an exciting week for us and other investors. While working on our promising new strategy, we took time to pay attention to what was happening in Washington as it affected both Main St. and Wall St. We had the Congressional hearing with our Secretary of the Treasury, Mr. Geithner being raked over the coals about his decisions, etc., involving AIG and the other bailout recipients. There was some testy speaking from both sides and we haven't heard the end of it yet. The question is whether there was a coverup about what actually happened and how it happened. Transparency was promised, but it is rapidly becoming evident that it is much easier to say the word than it is to deliver what it means.

President Obama gave the annual State of the Union speech, and you just have to marvel at the skill of this man in delivering a speech. I'm not saying to agree or disagree with the contents, but the delivery is seeing an artist doing his finest work when President Obama gives a speech. That is what got him into office and it is what got him to be able to even run for the office. I remember him giving a speech at the Democratic convention, shortly after he had been elected to the Illinois State Senate. He was tremendously effective even then and I said to myself that here is a man that is going somewhere. Again, not saying that what his content is about is agreeable, but just his delivery.

We heard all about the state of the country, mostly concentrating in the area of jobs. Remember back a couple of weeks when the "experts" were saying that we needn't worry too much right now about jobs because jobs always lag a recovery? All of a sudden jobs are back on the front burner and getting the most attention. We heard about what this administration inherited and what tough decisions they had to make to save the entire financial system from a complete collapse, how many jobs they saved or created, and then there was the inclusion of what the administration expects to do with new programs that don't exist at present, like a special tax credit for smaller companies that hire new people. There is to be 30 billion dollars taken out of TARP to spend on getting loans to small businesses--and on an on--raising all of our hopes for a bright future. Unfortunately, these State of the Union speeches, no matter which party is giving them, is big on creating hope, but short on detail. How do these programs get paid for, what controls are going to be in place to prevent repeats of bad things, bordering on criminal activities, really? How are loans to be made? Are they going to be made with very low restrictions on ability to pay loans back? And on and on. You can take any one topic and go into it with a fine tooth comb and come up with some questions that will be tough for them to give credible answers.

One thing that was stated was that by the time he finished speaking, more people would be losing their homes and their health insurance, and people will be receiving increases in their health insurance rates--among other things. This struck home right here at SplitMaster, and it happened to my partners, Tony and Pat Ponzo. The very same day as the State of the Union speech, they received their new health insurance bill. It was 25% higher. On top of that, they received notice that their cable bill was increasing substantially. However, nice guy that I am, I stepped right up and told them not to be concerned for our "expert" leaders, both in Washington and Wall St., keep telling us that there is no inflation. After all, they are the people we put our trust in, as we watch them on financial TV shows and we vote them into our government positions, so they must be right in what they say. And it is substantiated that we believe the government people because we keep voting them back into office. We want the representatives from other districts to be replaced, but not our rep. We must believe that our rep is the good, honest one, otherwise we would vote him out, right?

WARNING----Moving on to the area of concern to some people that have purchased bonds in the fairly recent past--since the government began giving out loans at close to zero interest rates. We warned about this then, and it has come to pass already, but it is going to get much worse. If the bond yield is 2% at time of issuance, the holder of the bond is guaranteed by the government that they will receive 2% on their investment by the time the bond expires and is paid off. The trouble is, if the investor wants to or has to sell the bond before the end of the bond term, the price of the bond will be determined by the current rate of interest paid on bonds issued currently. That means that the 2% bonds that are now yielding over 3% will be going for a price around 1/3 less than what they paid for it. If you get 2% on $10,000, you get $200. If the current bond has a 3% yield, in order to get $200 for your bond, the price would have to be lowered to $6,667. That is a loss of $3,333--if you have to sell it then. Of course, the current yield is over 3%, so the holders of the old 2% bond are losing even more than what the example shows. This is what it is with the government loaning out at less than 1%. Just imagine what is going to happen to bond prices when interest rates go up, as they have to--at some point. There is no question about that, it is just a question of when--and I have no idea when that will be, either. We just know that the rates have to rise at some point--and they can't go down below where they started, at almost zero. We just wanted you to be aware of what is going to happen to bonds at some point down the road. Don't be fooled into believing that the old bonds will hold value, other than receiving your full investment amount if you hold the entire term length of the bond. We personally have bought bonds in the past, when bonds were yielding very high returns and the most logical direction was for interest rates to go down. When the high returns did happen, our bonds that were originally at lower interest rates went up in value, to over 100% of our original investment. Again, tho, if held for the entire term of the bond, the return would be only 100% of our investment, and as the time grew closer to the end of the period, the bond price for that particular issue would drift lower until it hit the 100% mark. The best thing to do at that time was to sell the bonds when they were well over 100, for there is also the danger that the high yielding bonds will be called in and paid around the 100 level. Then new bonds would be issued that would return the lower interest rates and the issuer of the bonds would be saving a whole lot of money. There is more to buying a bond and sitting back and collecting interest than these quick points--but keep these in mind. Timing can be everything.

Finally, a continuing comment about our prediction for a decline starting at the 10th trading day of January. We had another declining week and you can easily see that we have been in a pretty good correction since Jan. 15, the 10th trading day. The Dow has fallen 6% from there, the S+P 500 has fallen 4.9% and the Nasdaq is down 7.3%. (Remember, we thought that since Nas was up more than the Dow last year, we might see it decline more than the Dow in a correction--so far that is what is happening). Remember the saying goes something like "the way January goes, so goes the rest of the year. And guess what? January is down. But ---- another saying goes, "the way the first week of January goes, so goes the rest of the Year". And the first week of January was --- Up. So what do we expect? We don't know where the year will end, but selling after the first week of January is proving to be correct again this year.

Stay tuned....these are interesting times....................

Today's Thought---
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The most terrifying words in the English language are: "I'm from the government and I'm here to help..........RR


Mike

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