Jan 7, 2008 - Issue #092
Well, I did say to expect a lot of volatility which usually translates into falling
markets, did I not?
An unexpected drop in the Dec Employment Report was the catalyst that provided large
windfall profits for those who trade from the 'short' side of the market.
Rather than trade stock, as a 'serial opportunist' on the alert for opportunities to
exploit, a favored tactic is to utilize 'contingent' orders to 'trigger' the purchase of
nearby front month options which are two strikes in-the-money.
The advantage of doing so takes advantage of the leverage, as well as limited risk,
afforded by short-term options at the most opportune time.
The use of short-term in-the-money options reduces the 'time value' paid thereby creating
a high 'delta' trading vehicle that closely correlates to the underlying stock.
The 'contingent' order acts similar to the 'stop' order except that an option is traded
rather than the underlying stock.
'Contingent' orders can be used to exit the markets as well. You would be wise to become
skilled in their use.
An excellent book on the subject, Swing Trading by Oliver L. Velez, can be
purchased at my book store (see Hot Stuff).
On another subject, this is also the time of year that followers of Michael B. O'Higgins
method outlined in his excellent book, Beating the Dow with Bonds (also available)
make their annual portfolio adjustments.
According to O'Higgins' formula, the 'earnings yield' on the S&P 500 index is currently
higher than the yield on AAA corporate bonds. Therefore, stocks are more attractive than
bonds for 2008. He, therefore, advocates buying the 'Dogs of the Dow' and go play golf
for the rest of the year.
The only problem is that, these days, not all of the best 'Dow' candidates are high
dividend payers (as was the case when the theory was first developed in Oct 1990).
Therefore, in your search for suitable stock candidates, you may want to sort the 30 Dow
stocks according to relative strength vs. the S&P 500 index 1 yr ago. Buy the 5 or 10
worst performers on the theory that last year's worst performers will be this year's
Dow score card for the week ending 1/4/08.
DJ-30: 12800.18 -565.69 -4.23%. The Real World DJ-30: 52.52 -2.29 -4.18%.
UP: 0, Down: 30.
Trends (weekly charts): This is the subjective part.
Rising (Generally Higher Highs/Higher Lows) 0 (-6) 0%:
Consolidating (Generally Lower Highs/Higher Lows) 9 (-10) 30%:
AA, AIG, BA, DD, -*HON, -*MSFT, -*T, UTX, -*XOM.
Declining (Generally Lower Highs/Lower Lows) 21 (-16) 70%:
-*AXP, C, -*CAT, -*DIS, -*GE, GM, -*HD, -*HPQ, -*IBM, -*INTC, JNJ, JPM, -*KO, -*MCD,
-*MMM, -*MO, -*MRK, PFE, -*PG, -*VZ, -*WMT.
+/- denotes change of direction.
* denotes change of category.
Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!