Issue 276
Posted: October 19th, 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 19, 2009 Market Strategies Guide To Successful Trading
INDEX OPTION RECOMMENDATIONS
We were stopped out of our October 100 DOW put option (DIAVV) last week Monday as per last week’s instruction. The week after an up expiration week is usually down so we will try puts again. Buy the DOW November 102 Put (DIAWX). We will use Monday’s opening price for portfolio calculations. Place a stop at half the cost of the option. Take half profits at DOW: 9,800.
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 should have been bought on the 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
ANF- Abercrombie & Fitch- 37.59- has rallied from 30 to 38 in two weeks so is overbought and should pullback. Puts are thus timely. Buy the November 39 Put- ANFWP- 2.95- for a move to 34 and then possibly lower. Place a stop loss on the option when the stock closes over 40. Take half profits when the stock is at 34.
FAZ- Triple Inverse Financial ETF- 19.07 – goes up when financial stocks go down and vice versa. Appears to be forming a small base and looks ready to break out to the upside. Buy the November 18 Call- FEWKR- 2.40- for a move to 23 and then possibly higher. Place a stop loss on the option when the ETF closes below 16. Take half profits when the ETF is at 23.
CAT- Caterpillar- 54.57 – has rallied back to resistance at 55 and appears to be forming a double top. Comes out with earnings this week and we expect a negative response so puts are worth a play. Buy the November 55 Put- CATWK- 3.40- for a move to 50 and then possibly lower. Place a stop loss on the option when the stock closes over 57. Take half profits when the stock is at 50.
Option Comments
We were stopped out of the DIAVV, SLBWM, DZGKN and XJZVO put options. Four of the remaining October options expired on Friday (3 half positions and 1 full position). We used the closing prices on Friday for portfolio calculations. During the past few weeks we had profits on some of the put options that we ended up losing on. We will take profits quicker from now on. Actually, the market went somewhat higher than we anticipated. We did make nice profits on two of our call option positions.
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
RFN- 5.51- Double Inverse Financial ETF- goes up when financial stocks go down and vice versa. Financial stocks look ready to pullback so this is the best way to play that pullback. Place a stop at 5.00 and take half profits at 6.50.
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 will hold our portfolio stocks during the expected correction. We expect them to hold up reasonably well. MTBR continued moving up and got as high as 0.10 last week.
Technical Information
In last week’s letter we wrote that last week was option expiration week which usually has a bullish bias since shorts and option writers are usually squeezed and that is exactly what happened. Last week Wednesday the DOW and S&P 500 closed above the September 23 highs at 9,918 and 1080, respectively, while the QQQQ got above that high (at 43.17) on an intraday basis but closed just below that level at 43.16. We thus have a very slight negative (bearish) divergence that can be negated by the QQQQ closing above 43.17 this week. The intraday highs last week were at DOW: 10,063, S&P 500: 1097 and QQQQ: 43.29 on October 15. The short term momentum oscillator is now neutral and actually gave a sell signal on Friday. Also, it made a lower high while the DOW made a higher high showing a clear loss of upside momentum and a bearish divergence. Call option buying has picked up sharply and the put/call ratios are now at levels usually seen at tops. Some other sentiment indicators are at levels typically seen at tops. Even during the selloff on Friday, there was considerably more call option than put option buying, which is bearish. We have a short term cycle due now in mid-October (plus or minus a few days) and it looks like a high could have come in last Thursday October 15. The week after an up expiration week is usually a down week so weakness is expected this week. Initial support is at the October 13 intraday lows at DOW: 9,815, S&P 500: 1066 and QQQQ: 42.06 (October 9). Closes below these levels would confirm that a top is in. But until that happens the trend is up. 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 a more significant pullback is taking place. The cycle after the mid-October cycle is mid-November which at the moment we believe will be the final low of the correction. There is still the possibility that under performing and under invested hedge and mutual fund managers pour money into the market so not to miss out on the rally. The fiscal year for many funds ends on October 31 so the rally can keep on going until then so that they can show how clever they were. 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 is 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 1066, then 1020, then 992, then 978 and then 966-968 while resistance is at 1097 for the QQQQ: support is at 42.06, then 40.72, then 39.02, then 38.44, then 36.84-37.23 and then 34.30 while there is resistance at 43.29 and then 44.00 and for the DOW: support is at 9,815, then 9,430, then 9,253, then 9,116, then 9,000 and then 8,580-8,610 while there is resistance at 10,063.
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 was a cycle in early/mid September (plus or minus a week) and a high finally came in on Wednesday September 23. The cycle following that cycle is a cycle due now in mid October (plus or minus a few days) which will be a high that could have come in on October 15. The cycle after that one is in mid November and we believe that it will be the final low of the correction.
Market Laboratory – Weekly Changes
FUNDAMENTAL NEWS
Nine out of ten of the Dow Industry Groups closed higher last week led by Oil and Gas up 4.97%. Basic Materials were up 2.06%; followed by Both Industrials and Consumer services + 1.70%; Utilities rose 1.44%; Consumer Goods were up 1.20%; Health Care + 1.09%; Technology up 0.57%; Telecomm rose 0.12%. Financials were the lone loser falling 0.16% as Bank of America spoiled the fun with huge losses.
JPMorgan Chase (JPM: 46.06 )) reporting a hefty earnings beat, with Q3 EPS coming in at $0.82 versus the $0.51 consensus. Yet on the week it could only close with a gain of twenty one cents or + 0.05%. Citigroup ( C: $ 4.59 ) – 0.04 – 0.09% and Goldman Sachs ( GS: $ 184.57 ) – 4.93 -2.6% also bested the consensus but closed at their lows for the week.
Other top tier stocks beat estimates, but could not make further upside progress. IBM ( $ 121.64 ) and GE ( $ 16.08 ) fell despite EPS beats. IBM’s disappointment came due to relatively weak services orders, while GE’s revenue was well short of expectations ($37.8 billion versus $39.5 billion). Top side growth has been sorely missing. IBM made an inter-week high of $ 128.61, but closed lower than even last weeks’ low making an outside week down, a very bearish pattern. IBM lost $ 4.29 on the week off 3.4%. GE had a key reversal week down from the high of $ 18.87 to close down at $ 16.08 off ten cents for the week. GE’s revenue was well short of expectations ($37.8 billion versus $39.5 billion).
Google (GOOG: $ 549.85 ) up $ 33.60 or 6.5% for the week. Needless to say its chart pattern was very bullish. Google bested its consensus EPS ($5.89 versus $5.42 consensus), and seemed more upbeat about the economic outlook. Third quarter profits rose 27% while sales improved 7%.
Commodities and the dollar had an influential week on the markets. The dollar tumbled to a fresh 52-week low at 75.21, giving a lift to commodities (+5.2%). As a result, gold hit an all-time nominal high of $1070.20 per ounce, and oil surged to the highest levels in 2009 at $78.75 per barrel. Crude prices also benefited by a smaller-than-expected increase in inventory levels. In turn, energy and commodity companies outperformed, with oil & gas equipment & services stocks leading all Dow Industrial groups surging 4.97%.
Earnings season continues this week and continued great bottom line growth will be needed along with some top line improvement to keep the Dow above 10,000. So far 61 companies out of the S&P 500 have reported; 79% beat analysts’ bottom line projections and 61% bested top line.
Banks may impede upside progress as further gains might be tempered by increased credit losses.
ECONOMIC NEWS
Most of the economic reports were very favorably received but took a back seat to earnings.
September Retail sales were better than expected at -1.5 vs -2.1%% expected. Retail Ex-Auto improved to + 0.5% vs just 0.2% anticipated by most. Business Inventories declined 1.5% more than the consensus -1.0% but much due to the “ cash for clunkers” ending, the recession and better inventory management. Inventories will pick up when sales improve. Unemployment Claims were lower than expected ( 514K ve 520K ) and Continuing Claims better ( 5992K vs 6000K ). Capacity utilization was the best surprise and helped stem the downward slide of equities last Friday.
Beyond manufacturing, which rose 0.9% in September, mining production increased 0.7% while utility production declined 0.7%.
Capacity Utilization for September increased 0.6 percentage points to 70.5% beating the consensus ( 69.8% ) and August was revised higher to show an increase of 1.2% vs the original estimate of 0.8%. Manufacturing capacity utilization increased to 67.5% from 66.8%, mining utilization rose to 83.6% from 82.9%, and utility utilization fell to 78.1% from 78.7%.
October Michigan Sentiment was the most disappointing report at 69.4 vs 73.3 expected. Consumers seem to be giving more weight to the idea that the economic recovery is not occurring fast enough, while the data is showing the economy is getting better.
THIS WEEKS ECONOMIC NUMBERS AND MEDIA DATA
Hypothetical Trading Results showed a loss last week of $474.00 per single unit to reduce the net gain to $ 3,104.00
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