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Author: Mike Celeste Editor: Tony Ponzo July Circulation: 8032

Stat Sheet Week Ending July 24th 2010

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+327.0+3.2%-3.00.0%
S&P+34.0+3.2%-14.0-1.3%
NAS+90.0+4.1%0.00.0%

In this Issue---
Options---
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This was the first week since the July options expired and it was a very tough week to calculate. Overall we were pretty much on the button as to our Support and Resistance points, but just missed getting entry plays. One of the reasons could well be that at the beginning of options month there is a high time value placed on options, plus the fact that the Delta is very low if you go a little out of the money to get a better price on the option. That means that the Spy, for example, has to move 5 cents to get just 1 cent of movement in the option. That increases the spread between the daily price movement of the Spy before we can get a decent profit on the option. We think it is important, tho, that we did come up with some good signals that just missed entry plays--and they would have made some decent profits. This coming week should be a bit of an improvement in this area, so we continue to be positive.

To go over a lesson brought up before, while it is a bit more difficult to deal with buying options long at the beginning of the expiration month because of higher time premium, it makes it nice for selling options short. For example, let's say XYZ stock is at $38. You think the stock is going up so you would like to buy a slightly out-of-the money 40 Call. Because the time premium is higher, it is going to cost you say $2.50 to buy that Call. Since it is out-of- the money, that means the $2.50 is all time premium and subject to dwindling. So even if you are correct and the stock goes to say $42 on expiration date, the Call would only be worth $2.00 and you would lose .50. Now there are all kinds of scenarios that could change this such as, if you bought that 40 Call at the beginning of the expiration month and the stock flies up to $42 in three days, you may get a nice profit out of it as it will most likely have a good deal of time premium still in it on top of the intrinsic value of $2. But unless you have some reason why the stock is going to pop up in a few days the better play might be to buy the stock and cover it with the 40 Call. So if you are correct and the stock goes above $40 on expiration date, you will get the stock called out and you earn a $4.50 profit. You bought the stock at $38 and it was called out at $40 giving you a $2 profit plus, you wrote the 40 strike Call to cover for $2.50 and you keep that premium. ($2.00+$2.50=$4.50) You might say "but I don't want to invest $38 on the stock". Well, you could always buy the 35 Call and write the 40 Call to cover instead. This is called a spread and it is obviously only a small fraction of the investment of buying the stock and it could earn you a very good profit too. This is the leverage benefit of options. There are a number of ways to exit a spread and we'll talk more about that next week.

Momentum Plays---
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After a couple of stellar weeks in this strategy, this past week was challenging as our partner Pat likes to put it. We only were able to get off 4 plays - 2 wins and 2 losses. That's NOT what we are used to for sure. The main problem is that the earnings plays are back to trading in strange patterns - not like the typical classic pattern we have tracked historically. At this point we do not know if this action was isolated to the few earnings plays we tried to make or if it is more universal. So we will be doing some test trading on a few earnings this week to see what we get. A pattern that we noticed on the last two earnings was that the stock started off in the expected direction then petered out and may have even substantially gone in the wrong direction. Later in the morning though, they came roaring back in the expected direction and made our profit target. If that is what they are going to do, we can work with it but like I said we need a little more testing to see how we want to approach it. Hopefully we will know in the next few days. One thing you might be interested in is we may post a few stocks we are testing but internally here at SplitMaster, our staff may be testing 6 to 10 stocks so we can get a more thorough handle on it.

On the other hand, our SPY trades will continue as normal and we look forward to some decent swings out of the SPY so we can have our share of wins. Let's see what this coming week brings our way.

Indicator Play---
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While we did not have any Indicator plays this week, we do look forward to Monday, when team members can look for a new signal that we received on Friday. It is a strong signal, too, but we still remain cautious on an entry point for the play.

The Economy, The Markets & Commentary---
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The markets reversed directions--again--and had a strong up week. This--again--puts the major averages just about even for the year. The trading range that is like a roller coaster is now within shooting distance of the high end of the range. It all sounds so easy, but the people we respect in the business almost universally point out that it is one of the most difficult markets to trade. Some days fundamentals are most important and some days emotion takes over everything and stocks run up, or down, for no sound reason, other than the emotion of the moment. Our feeling continues to be that we are in a trading range, and will continue in one for a while. Earnings have been coming in extremely well, and that is very baffling. As consumers continue to struggle with uncertainty and with job worries, the earnings have been way better than estimated. This is another good time to point out the value of the "experts" that do the estimating. It is very obvious that the estimates have been set low to start with. An "expert" in the field can not be that far off the mark for so many companies and be doing the job correctly or accurately, as they are paid to do. Assuming that is the case, what reason do we have for believing them? If they were off on just a few, you could say that it could be the result of that particular company's policies, or something unexpected happened. But not with 80-85% of the S+P 500 companies beating estimates. Thinking positive is one thing, but being paid to be accurate in estimating is another. Jobs continue to be hard to get, and people that have jobs are worried about keeping them, so that they aren't spending as much as normal. Retail sales are not that good and consumers are the driving force in the economy, so how is it that companies are doing so well? I don't know, and a lot of people in the field don't know, either. Stock splits continue to be practically non-existent, and that doesn't speak well of the economy, as far as we are concerned. Some things just don't add up--but--we will take the good news, that's for sure. Just don't be fooled into thinking that we put on the rose colored glasses just yet.

There are many negatives still out there, besides the jobs situation. Housing continues to be in the doldrums. Deficits still have to be dealt with, and I'm not talking about at the federal level, which just goes on its merry way printing money and selling treasury bonds at very low rates. Companies are able to help their bottom line very well by refinancing debt that was at much higher interest rates. Deflation vs Inflation continues to be debated, and we, as consumers, are of the mind set that inflation is hitting us pretty good. All kinds of fees and taxes are being set and utility rates have increased way above normal. Now, here in our town, we just got a surcharge increase for our water, which had already seen a rate increase. They do it all the time---tell us to conserve and then, when revenue decreases because of the conserving, we get increases to cover their fixed expenses.

In the deficit area we see that a number of states are already behind in passing budgets--they have to balance a budget, even if they put one out that they know can not be met--how can you call them liars if expected revenue doesn't come thru--and prove it. No, there is going to be some serious cutting back and probably more taxes at the state and local levels, as cities are included in this deficit problem, too.

Approval ratings came out again and Congress is down to 9-11% approval rating. There is comment about the President's approval rating coming down, too--but there is no comparison between a 38-40% rating and 9-11%. This November will be very interesting, as I want to see if all this disapproval will incite the voters to throw out their own incumbents. In S. California there wasn't one incumbent defeated in the last major election. Everyone seems to want the other Congressman thrown out, but keep their own. Neither party is doing anything to install real confidence in their actions. Now the long timer, Rangel, has been caught not paying taxes. Watch and see what happens to him--our prediction is that it won't be very severe.

We have a city out here, Bell, which was exposed this week for paying almost $800,000 to its city manager, $400,000 for its police chief, and all but one of the councilmen were being paid over $100,000 for A PART TIME JOB! The Los Angeles Times exposed this, and it proves my point about how needed newspapers are--for this very type of thing. What gets me, tho, is why it took so long for anyone at all to notice that this city of just 40,000 people was paying the city manager twice as much as we pay the President of the US??? The police chief is being paid twice as much as the chief of the city of Los Angeles. How could it get to this extreme and no one pointed it out? We pay much more attention to the doings of Lindsay Lohan, Mel Gibson, Paris HIlton and other Hollywood celebrities than we do to the people we pay our taxes to. This really dumbfounds me.

We can look forward to what is upcoming this week in the market because it is near the crossroads of the resistance point in the major averages, and more earnings are still rolling in. Can the rally make it thru the trading range?

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

Today's Chuckle---
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The economy is so bad that..................
if the bank returns a check marked "Insufficient Funds"
You call and ask if they meant you or them.

Mike

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