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Author: Mike Celeste Editor: Tony Ponzo May Circulation:

Stat Sheet Week Ending May 8th 2010

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow-629.0-5.7%-48.0-0.5%
S&P-76.0-6.4%-4.0-0.4%
NAS-195.0-7.9%-3.0-0.1%

Highlight of this past week: The Momentum Strategy continues this week with all wins. The plays traded this week produce a 54% profit rate. Detail Results

In this Issue---
Options---
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The other day, after one of the big drops in the market, one of the contributors to "Fast Money" on CNBC suggested that this might be a time to buy some of the depressed stocks and then write Calls on them, due to the high time value put on the options during this time. Let's take a look at that suggestion. We are in favor of written options--but--at the proper time. What was failed to be mentioned was what can happen as a worst case situation. We always like to look at the best and the worst case possibilities. Let's say that you buy at a lower price of $40 and get $3 to write the 40 strike Call. If the stock goes up or stays above $37 ($40-$3 for the written Call) by expiration date, the writer of the Call will make a profit. However, if the stock drops below $37 by expiration date, it can be a loss for that period of time. You could write another Call for the next month, but at the end of the first expiration time, and at a lower price. Of course there are all kinds of creative things you can do to repair this kind of play if it is not doing what you expected. For example, if you see your $40 stock dropping to $37 and you think it is going down further due to market conditions or whatever reason, you can always buy back the Call you wrote to close it out. At that point it should be a lot cheap to buy back than you wrote (Sold) it for so on that transaction you would make a profit. Then you could write the 40 strike a month further out which will be worth more and you collect more premium. Plus, if you really think the slide is going to continue, you could take the premium you received for selling the Call and buy a protective Put. This can even get more creative than that but we'll discuss that another time. But many traders use these techniques and actually wind up making tons of profits even though the stock is going down. Staying on top of you play and taking action is the key to correcting a trade that is not doing what you thought it was going to do.

Momentum Plays---
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We may not be back to the number of plays we usually do for a week but of the trades we have made, all have been profitable. We made three trades this week with two being significant wins for a 10 minute trade and one was a smaller profit but a big percentage. That plays was SYMC. It only made a $170 profit on 10 contracts but, the total investment using 10 contracts was only $380 so we wind up with a 44% profit on that trade alone. With the extra pre-market tools we have be using, we have been able to pick the right stocks to trade and the stocks to pass on and it has worked out very well obviously.

We have change the method of posting on how to get into the play each morning as most of our plays have had an entry point right after the open. But we are giving Benchmarks just before the open and it is working out well. We are now trying to bring auto trading into the new process and have been discussing the issue with the auto trading brokers. We should know soon as to when this will occur. Check out this week's action at Detail Results

Indicators---
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Because of the very unusual market conditions this past week, and the strangeness of how they happened, with no satisfying explanations for the incredible swings, we have put the Indicator on hold. It has paid off so far by avoiding some losses.

The Economy, The Markets & Commentary---
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Although the extreme market swings on Thursday are being blamed on a huge order glitch, even the "experts" seem to be unsure of what really happened. Apparently some institution intended to put in an order to sell for millions of shares and inadvertently put the order in for billions. That of course moved the market and triggered automatic sell programs all over the place which caused the almost 1,000 point crash. Then when traders found out what had happened, there was panic buying which brought the DOW up 600+ point from the bottom. Most of the swing took place in a period of time of just minutes--sudden down and sudden up. One stock was around 41, dropped to 3 and back to 41. Can you imagine what happened to someone that put in a market sell order on these stocks? Of course, it remains to be seen if an average investor was able to get an execution on a market buy order at these extremely low prices. The question we have is how can the system allow such a think? Even in our little company account, if we make a big error like that, (in extremely smaller numbers of course) our on-line broker automatically questions the trade. Don't these big institutions have some sort of protection like that?? It makes one's confidence in the system a little shaky to say the least. One thing that I was unaware of, but was explained on CNBC, was that orders can go to different markets. If the New York Exchange or Nasdaq temporarily suspends trading, orders can be diverted to other markets that do not have liquidity, have not temporarily put a hold on trading and the result is what we saw-- the extreme price swings. Now we have to worry about something else--making sure our orders only go to certain places. I knew there were a number of places for option orders, but was unaware of the possibility that stock orders could be diverted. There is another area that definitely needs some reform on regulations.

That being said about that extreme drop and recovery, it appeared confirmed early on during the week that we had broken the momentum swing to the upside. The weekly results, as you can see above, have not only shown a big loss for the week, but all the gains for the year 2010 have been wiped out and we are slightly in a negative position for the year. Down moves are always faster than up moves. Remember that the up market was a long steady move--but the down was swift. Keep in mind that old saying "Sell in May and go away". At this point we are sure that most people wish they had done exactly that---and are we done with the drop, or not? If you sold at the end of April you could pick up some stocks that are solid stocks--at much lower prices--but, again, are we done or can they go lower as May moves on?

You heard more about the Volatility Index lately. When it is high, the market could be facing a down correction. When it is low, the market has buying possibilities to the upside. We have seen this index go from 17 to 41 at the close of business on Friday--and this has taken place over a period of just 2 weeks, with the major part of it coming just this past week. We haven't seen it over 41 since April 9, 2009.

The investing situation has changed, with global occurrences dominating the financial markets. There was an excellent explanation of what happens---One problem area--Greece, for example. One major bank has a problem, and It spreads to other Greek banks. Then it is a national problem for Greece. But because of the links to other areas, it becomes a problem for Europe, since the Euro countries are trying to bail out Greece, and the fact that countries do business with each other. Then the Euro is questioned and now we have a global problem. The currencies of all developed countries are tested and examined for potential fall out. Back in the ancient old days, we did not have global economies to any major degree. Many complained about the development of global connections, but it was inevitable and it has happened.

Now, all the countries are examining their positions and it seems all countries have some major potential problems. Debt, and unfunded liabilities, etc., have been looked at---and it is not a pretty picture. It is unfortunate that it is coming at this exact time because the earnings reports of the majority of companies have been very good, relatively speaking. We are seeing definite improvement in earnings. On Friday, the big, lagging sector, Employment, seemed to be showing improvement, even tho there were some figures that missed estimates. Personally, I believe we are still way far away from seeing any meaningful improvement in employment increases. One report stated that companies have become accustomed to high productivity with less employees, and they want to keep it that way until the demand forces them to increase the number of employees.

The public still seems to be unhappy with the compensation paid to high level executives, too. Goldman Sachs still states it did nothing illegal, but there are rumors that settlement talks may be in the works. Look, whenever you have a banking division and an investment division, since they became legal within one institution, you have problems with one division doing something that conflicts with the other. The Glass-Siegle Act was set up for good reasons. It did not allow banks to get involved in investing. In 1999 it was repealed. That is a big reason for today's problems--and when added to the greed of allowing 100% mortgage loans to people that didn't have to prove income, the resulting situation was a sure thing for failure, as we started pointing out years ago---and the scale of the failure has reverberated around the world. That was all caused by greed, and billions, even trillions of dollars were involved. The piper has to be paid at some point. The domino effect might also be brought up. On collapse leads to another and so on.

Now that we have wiped out all yearly gains in the major averages, the next question to ask is if we are going to see a double dip to a highly negative position, like we had earlier????? Can the financial beings save it? That includes the nations and their loan and borrowing capabilities (already severely tested). We can be in a very serious situation, and some astute investors that we know have lightened up on their positions, going into cash---and far more than a 60% equities, 40% cash position. instead of 80% equities, 20% cash, as suggested by one of the "experts". There are some very good "experts" that do come on CNBC, but they are few and far between. Remember our old saying---Not losing is good !!

Stay tuned, these are interesting times, very interesting..........................

Today's Thought---
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When we get piled upon one another in large cities, as in Europe, we shall become as corrupt as Europe........Thomas Jefferson (Add-Or vice versa)


Mike

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