Issue 275
Posted: October 12th, 2009 | Author: WMS
Market Strategies
Covering Investing Success Strategies For
Stocks – Bonds – Interest Rates – Natural Resources – Currencies – Venture Capital – Gold
A Publication of Princeton Research, Inc. (www.PrincetonResearch.com)
Contributing Staff: Michael King and Dr. Jan Vandersande
October 12, 2009 Market Strategies Guide To Successful Trading
INDEX OPTION RECOMMENDATIONS
We closed out the remaining half of our October 100 DOW put option (DIAVV) at the open on Monday at 5.20 as per last week’s instruction. We made a nice profit on that trade. On Wednesday we bought this option again at 3.10 and posted the trade on our website. We are holding this option at a loss. Risk half the cost of the option which is 1.55. It expires on Friday and we will hold until expiration unless it is stopped out.
For investors it has continually been recommended that some puts are held to protect one’s portfolio (portfolio insurance) against sharp market sell-offs. New and/or additional positions can be bought on the expected rally into mid-October. For those who have no put options to protect your portfolio we recommended the following options, especially on any rally: the DOW November 100 puts (diawv) or the November 98 puts (davwt) and the QQQQ November 42 puts (qqqwp) or November 44 puts (qqqwr).
For those of you who do not buy puts to protect your portfolio, there is an ETF that is the inverse of the DOW. The symbol is DOG and goes up when the DOW goes down and down when the DOW goes up.
Stock Option Recommendations
New Recommendations
AFFX- Affymetrix- 9.69- has rallied from 8 to 10 in a week so is overbought and should pullback. Puts are thus timely. Buy the November 10 Put- FIQWB- 1.05- for a move to 8.50 and then possibly lower. Place a stop loss on the option when the stock closes over 11. Take half profits when the stock is at 8.50.
SLB- Schlumberger- 62.89 – has rallied from 56 to resistance at 63 in a week so is overbought and should pullback. Buy the November 65 Put- SLBWM- 4.50- for a move to 58 and then possibly lower. Place a stop loss on the option when the stock closes over 65. Take half profits when the stock is at 58.
DOW- DOW Chemical- 26.15 – has rallied back to resistance at 26-27 and is overbought after rallying from 20 to 27 in a month hence should now pullback. Buy the November 27 Put- NZAWA- 2.35- for a move to 23 and then possibly lower. Place a stop loss on the option when the stock closes over 28. Take half profits when the stock is at 23.
Option Comments
We closed out our CKOVI put option and our remaining half of the DIAVV put option at the open last Monday. We made a nice profit on both these options. We will were stopped out of our EDUVP put option. We had a profit on this position only two weeks ago and we should have taken it. We were also stopped out of the QJRWG put option. Six of our options expire on Friday (3 half positions and 3 full positions). We will hold these positions until expiration and will use the closing prices for portfolio calculations.
Previous Week’s Recommendations
- All options count for 5% each for model portfolio calculations.
- When the option has doubled sell half the position.
- Stop Loss protection is offered with each trade.
- The cost of the option is the asking price (or the price between the bid and ask, whichever is more realistic)
- at the close the previous Friday or at the open on Monday.
- The options will be followed until closed out.
Note: Previous closed out option positions can be found in the August 24, July 20, June 29, April 20, February 23, 2009, January 19, 2009, September 15, 2008 and November 24, 2008 newsletters.
New Stock Recommendations
No new recommendation this week. We will wait for a pullback.
Model STOCK PORTFOLIO
- Each stock is allocated a 5% share of the portfolio (unless otherwise indicated).
- We recommend a 10% position in ENZ and MTBR.
Note: Previous closed out positions can be found in the April 20, 2009 letter.
Model Portfolio Comments/Changes
We were stopped out of our DZZ position for a small (6%) loss. We will hold our portfolio stocks during the expected correction. We expect them to hold up reasonably well. MTBR is finally starting to move and got as high as 0.06 last week Friday.
Technical Information
In last week’s letter we wrote that the short term momentum oscillator was very oversold and that the put/call ratios were at levels usually associated with short term bottoms (lots of put option buying) hence a multiple day (possibly 1-2 week) rally should start early last week. That is exactly what happened with the market rallying sharply last week. On Friday the DOW and S&P 500 rallied to just above the September 29 highs at DOW: 9,835 and S&P 500:1070, getting to DOW: 9,865 and S&P 500: 1072, but the QQQQ got to only 42.62 compared to the September 29 high at 42.66 (so just missed). We thus have a very slight negative (bearish) divergence that can be negated by the QQQQ rallying above 42.66 this week. The rally last week has been on lower volume than the decline the week before and on Friday the rally started looking tired. There are thus some red flags. We have been looking for a market top in our intermediate cycle that was due in late August to mid-September and it now looks like the high finally came in on September 23 at the intraday highs at DOW: 9,918, S&P 500: 1080 and QQQQ: 43.17 (we were close but not perfect but remember we give these cycles weeks if not months in advance). The short term momentum oscillator is now neutral and call option buying has picked up sharply but the ratios are not yet at levels usually seen at tops, so the market can go either way (that is not a lot of help but that is what the indicators say). This week is option expiration week which usually has a bullish bias since shorts and option writers are usually squeezed. Our next cycle is now in mid-October (plus or minus a few days) and it can either end up being a top or bottom. Closes above the September 23 highs would confirm that the next leg up was in progress into our cycle top due now in mid-October (plus or minus a few days). Important support is at the October 2 intraday lows at DOW: 9,430, S&P 500: 1020 and QQQQ: 40.72. The support below those levels is at the September 2/3 lows at DOW: 9,253, S&P 500: 992 and QQQQ: 39.02. A close below the October 2 lows would indicate that the rally is very likely over. The cycle after the mid-October cycle is mid-November which at the moment we believe will be the final low of the correction. Any larger pullback could test the intraday lows made on Wednesday July 8 at: DOW: 8,087, S&P 500: 869 and QQQQ: 34.30. The parameters to watch are thus very clear and let the support and resistance levels govern your trading and your stops.
We are in a secular bear market that appears to be far from over and we expect lower prices later this year or next year. However, every bear market has several good rallies that can last from a few weeks to many months and are definitely worth playing. We are in one of those rallies (which could even be called a cyclical bull market in a secular bear market) now.
The support and resistance levels to watch now are: S&P 500: support is at 1020, then 992, then 978, then 966-968 and then 927-932 while resistance is at 1080 for the QQQQ: support is at 40.98, then 39.02, then 38.44, then 36.84-37.23 and then 34.30 while there is resistance at 43.17 and then 44.00 and for the DOW: support is at 9,430, then 9,253, then 9,116, then 9,000, then 8,580-8,610 and then 8,087 while there is resistance at 9,918.
CYCLES
An intermediate cycle was due in early/mid July and the low came in on July 8. Next there was a short term cycle due in late July and a high came in on August 7. The cycle after the late July cycle is an intermediate cycle due now in late August/early September (plus or minus a week) will be a high, which we originally thought came in on August 28 but now definitely looks like it came in on Wednesday September 23. The cycle following this cycle is a cycle in mid October (plus or minus a few days) which at the moment looks like it could be either a high or low, although it is more like it will be a high. The cycle after that one is in mid November and could be the final low of the correction.
Market Laboratory – Weekly Changes
FUNDAMENTAL NEWS
An avalanche of buyers brought markets up every day last week as a challenge to yearly highs clearly exists for the coming option expiration week. Earnings season is here again and analysts have raised expectations on 641 companies while lowering for 383 bringing the positive-to negative differential to 258 companies, or 17.2% of the S&P 1500. According to Barrons, that’s the most bullish in two years. Companies beating revenue forecasts so far with just 168 having reported those with a top line upside surprise had stock improvements of 2.7%, while those missing surrendered just 1.6%. In a sharp contrast, those reporting with no sales increase but bottom line improvement rose just 2.4%, while for the ones that missed, their stocks plummeted 4.5%.
Everyone will be looking for improvement at the top line ( Sales ) as it is well known that income has been buoyed by slashing costs, increasing productivity and laying off millions of workers. Top line growth will be necessary this earnings season to keep the bull fed and contented.
The Bank of Australia certainly thinks recovery is here as they boldly raised their key lending rate 25 basis points to 325%, which is an interpretation that a global recovery is happening.
ECONOMIC NEWS
The September ISM Non-Manufacturing Report at 50.9% not only beat the consensus forecast of 50% but jumped well above August’s 48.4%. During this recession, the service index suffered 11 straight months of contraction. The low point of the index was 37.4%, November 2008. Since then it has moved steadily forward as the financial services sector is more stable and less cyclical than the manufacturing sector. Also, the number of service related firms posting positive vs negative growth is increasing. Since service firms represent 66% of total personal consumption the ISM numbers suggest strong consumption gains in the near future. However, a lingering negative mitigating factor is in inventories, which remains huge. Contraction of inventory has slowed which will hinder further improvement in both manufacturing and service firms.
Wholesale Inventories fell 1.3% in August after dropping 1.6% in July. The consensus expected a decline of just 1.0%. Wholesale Durable Goods inventories fell 1.6%, auto stocks falling 2.3%, while non-durable goods fell 0.9%. The inventory-to-sales ratio fell 0.3 percentage points to 1.20% and is at its lowest point in a year. A large portion of the decline in durable goods inventories was due to the “Cash for Clunkers” stimulus package.
Economists have been expecting the inventory restocking cycle to jump-start a higher GDP growth, which was expected to happen to the third quarter, and will most likely occur in the fourth quarter. Buyers have been waiting for signals the consumer is back, but have not gotten many and are slow to make purchases. The slight improvement in ISM numbers suggests guarded optimism.
Initial unemployment claims dropped to 521K. Businesses have trimmed costs and have learned to do much more with less workers. There is no significant change shown by any of the labor surveys that would suggest anything other than a sideways path in continued unemployment. If Congress passes the four-week extension to the jobless currently collecting unemployment benefits, the modest downward momentum in unemployment claims would be stalled.
THIS WEEKS ECONOMIC NUMBERS AND MEDIA DATA
Hypothetical Trading Results showed a loss last week of $249.00 per single unit to reduce the net gain to $ 3,618.00
Legal DISCLOSURE
Rule 17B requires disclosure of payment for investor relations
Princeton Research has received about $ 2,500 per month from MTBR with asterisk. MTBR is reviewing a contract which would pay $ 2,500 per month plus some restricted shares. The main principal of Princeton Research has obtained his own shares amounting to 2,500,000 shares.
Princeton Research has received 550,000 restricted shares from BCLE in exchange for investor relations services.
CONTACT
Please Direct All Inquires To:
Mike King
Princeton Research
3887 Pacific Street
Las Vegas, Nevada 89121
Phone: (702) 650-3000
Fax: (702) 697-8944