Wiser Trader Stocks and Options Newsletter

Issue No. 12 – February 7, 2005

http://www.WiserTrader.com

Systems@WiserTrader.com

James A. Andrews

 

1.0           Options and Filters

1.1 Off to a Great Start

 

      Newsletter subscribers who were able to take advantage of last week’s free option email alerts have gotten off to a great start.  Since last week’s offer of free alerts through March, there have been three alerts.  One expired without becoming a trade and two were acted upon resulting in 21% and 26% profits over a two day period.  Average annualized profits for the two trades were in excess of 4,200%.  While this is not typical, profits should remain in excess of 100% for the first 12 months.  It finally dawned on me that the easiest way for everyone to see what the service has to offer is to include trade entry alerts in the newsletter through March.  Exit alerts will be sent by email when they are potentially sensitive to timing. 

 

      Let me explain how the service works.  The purpose of the service is to provide detailed information on option trades before they are made for the portfolio.   Trade entry email alerts are sent the evening before markets open.  At least two alerts will be sent every month.  Often there will be more as I dislike being out of the markets for more than a few days at a time.  Three were sent in the past week. Trades are based on the TTC-A trading template created by Dr. Stephen Cooper.  Alerts are conditional in that a trade is entered only when required conditions are met.  This usually means that the major averages and the underlying stock must be moving in the intended direction of trade after the first hour of trading on the following morning. When possible, trade alerts are provided in pairs, one for an up market and one for a down market. If conditions for a trade are not met within 10 days after a trigger signal is received, the alert expires without the trade being entered.  Alerts include a theoretical fair value for each option based on the Nobel Prize winning Black-Scholes formula.  The recommended maximum price one should pay for an option is also included. 

 

      Trade exit email alerts can be sent at any time.  I try to limit these to after market close to give traders the opportunity to consider them and have time to act.  In some cases exit alerts can be sent during open market hours.  Submitting an email address where you can be alerted during the day is a good idea.  Historical alert information is posted in a secure area of the Forum up to a week prior to its normal Sunday evening posting on the open web site's Portfolio page.  Registration for the Forum is quite simple. 

 

 

 

 

1.2 Alerts for the Past Week

 

Alert No. 1 - 01/30/05            Trade lasted 2 days - Profit was 26%

Stock:                                                     Beazer Homes
Stock Symbol:                                       BZH
Stock Closing Price:                             $146.43

Option:                                                   Aug $150.00 Call
Option Symbol:                                    BZH HJ
Option Closing Price:                          $13.30
Option Bid:                                            $13.20
Option Ask:                                          $13.90
Fair Market Value:                                $14.69

Maximum entry price:                          $14.60
Conditions for Trade:                          DOW and BZH up 1 hour after market opens
Expected Trade Duration:                   2 to 4 weeks
Suggested Money Management:      Use no more than 10% of risk capital
Use Trailing Stop:                                -35% from highest value reached after entry.

 

Alert No. 2 - 01/30/05            Trade lasted 2 days - Profit was 21%

Stock:                                                     KB Homes
Stock Symbol:                                       KBH
Stock Closing Price:                             $107.69

Option:                                                   Aug $110.00 Call
Option Symbol:                                    KBH GU
Option Closing Price:                          $8.20
Option Bid:                                            $9.10
Option Ask:                                          $9.30
Fair Market Value:                                $8.38

Maximum entry price:                          $9.40
Conditions for Trade:                          DOW and BZH up 1 hour after market opens
Expected Trade Duration:                   4 to 8 weeks
Suggested Money Management:      Use no more than 10% of risk capital
Use Trailing Stop:                                -35% from highest value reached after entry.

 

Alert No. 3 - 01/30/05            No trade – Alert expired –

                                                Market conditions unmet 10 days after trigger

Stock:                                                     Kinetic Concepts
Stock Symbol:                                       KCI
Stock Closing Price:                             $64.75

Option:                                                   Sep $65.00 PUT
Option Symbol:                                    KCI UM
Option Closing Price:                          $6.60
Option Bid:                                            $6.90
Option Ask:                                          $7.70
Fair Market Value:                                $6.94

Maximum entry price:                          $7.10
Conditions for Trade:                          DOW and BZH DOWN 1 hour after market opens
Expected Trade Duration:                   2 to 4 weeks
Suggested Money Management:      Use no more than 10% of risk capital
Use Trailing Stop:                                -35% from highest value reached after entry.

 

1.3 This Week’s Option Alert

 

 

Alert No. 4 -

Stock:                                                     Kaufman & Broad Home Corp
Stock Symbol:                                       KBH
Stock Closing Price:                             $116.22

Option:                                                   July  $115.00 CALL
Option Symbol:                                    KBH GC
Option Closing Price:                          $10.50
Option Bid:                                            $11.10
Option Ask:                                          $11.30
Fair Market Value:                                $ 9.38
Maximum entry price:                          $11.10
Conditions for Trade:                          Major averages and the stock are UP after the 1^st hour of market open

                                                                If stock drops below $112.00 support, avoid the trade.

Expected Trade Duration:                   1 to 4 weeks
Suggested Money Management:      Use no more than 10% of risk capital
Use Trailing Stop:                                -35% from highest value reached after entry.

 

 

Alert No. 5 -

Stock:                                                     eBay, Inc
Stock Symbol:                                       EBAY
Stock Closing Price:                             $75.88

Option:                                                   July 75.00 PUT
Option Symbol:                                    XBA SO
Option Closing Price:                          $6.80
Option Bid:                                            $6.60
Option Ask:                                          $6.80
Fair Market Value:                                $14.16  ß Wow !!
Maximum entry price:                          $7.00
Conditions for Trade:                          Major averages and the stock are DOWN after the 1^st hour of market open

Expected Trade Duration:                   1 to 4 weeks
Suggested Money Management:      Use no more than 10% of risk capital
Use Trailing Stop:                                -35% from highest value reached after entry.

 

 

1.4 Placing Orders for Options Alert

 

      Traders who eventually feel comfortable with free option alerts can have them continued into April at a discounted rate when their order is received by the end of March.   There is a need to keep the membership fairly small when trading options to enable everyone to obtain similar results.  This free trial allows you to try it out and have time to join before a membership cut off takes effect.  Prices below will be posted on the open web site some time in March.  After March 31^st, the basic ordering price is $20 a month.

 

 

 

Option Alert Pricing for the Life of Membership

 

      To place an order by PayPal or credit card for the period beginning in April, click here.  Annual orders are manually renewable.  The PayPal software is set up to automatically renew monthly and quarterly electronic orders until you direct that they be discontinued by pressing a button, sending an email or placing a phone call to me.  Manual electronic monthly and quarterly renewals can be added, if anyone requests it.  Manual renewals for monthly and quarterly orders can also be handled by mail, if you prefer.  An order form is available for ordering by mail.

 

1.5 Filter Development

 

      In last week’s newsletter, stocks screened by the 1^st down-market filter described in Table 1a had a greater tendency to decline in price for the type of market decline we had in the first 3 weeks of January.  However, these stocks had a surprising tendency to rise on the occasional up market day to an extent that would drive one to cover a short position immediately.  This undesirable feature led to a 2^nd down-market filter that has greater mirror symmetry with the original stock candidate filters.  Instead of screening for stocks having temporary problems, the 2^nd down-market filter is designed to screen stocks having longer term chronic problems. 

 

      To recap the purpose of this exercise, it was thought that prices for the high performing stocks screened by the stock candidate filters would not have the same tendency to fall in declining and sideways markets as they have to climb in rising markets.  So a goal was established to use the stock candidate filter to buy call options in rising and sideways markets, a use for which they seem entirely suited.  Then we would develop a new down-market filter to buy put options in declining and sideways markets. 

 

Table 1a

Criteria for Four Filters

 

 

      The relative average filter performance for the four groups of screened stocks is compared with proxies for the major averages in Table 1b.  In preliminary studies last week, it was not entirely surprising that higher priced group 1 stocks out performed groups 2 and 3.  The study illustrated a potential hazard in trading options without taking a company’s earnings calendar into account.  The new filter design for group 4 resulted in stocks that underperformed all other groups and furthermore, seems to match the performance of QQQQ.

 

Table 1b

Monthly and Weekly Average Percentage Price Performance as of 02/05/05

 

 

 

      The hypothesis that the Stock Candidate Filter 1 produces stocks that are less likely to decline in a falling market is holding up.  We also learned (the hard way) to avoid earnings reports unless we have specific reasons to expect them to be extraordinarily positive or negative.  The new down-market filter appears to screen stocks that decline more consistently when major averages decline.  The experiment will proceed replacing the 1^st down-market filter with the new (2^nd) down-market filter.

 

 

From a former 17-year exchange member, floor trader and brokerage company owner.

 

THE ALCHEMIST               by AL THOMAS
 PAMPLONA

     You remember (they show it on TV every year)

the running of the wild bulls in Pamplona,
Spain. Some of the nuttier people get out their
capes and stand in their path as they come
roaring down the street.

     Our would-be matadors wave their home made
cloaks at the bulls hoping the bulls will charge
at it and not at them. The list of casualties at
the end of the day is sometimes quite large,
but, fortunately, not too many are killed.

     These two participants, the bull and the
make-believe matador remind me of the those
same participants in the stock market. The bull
is Mr. Market and the matador is the
make-believe investor.

     Why do I call him a “make-believe investor”.
Because as a former 17-year exchange member,
floor trader and brokerage company owner I have   

had many clients who thought they were
“investors”. As a professional I would watch
many of the dumb things (like standing in front
of a charging bull with a rag in their hand)
that clients would do with their money. Many
times I could talk them out of it, but others
they would insist on being gored.

     The professional trader learns very quickly
that you cannot stand in front of a charging
bull who happens to have the shape of a stock
market that is going full speed either up or
down. Investors love those upward moves, but 

a   few will say I have a nice profit now so I’ll
cash in and take the money only to see their
stock, mutual fund or ETF (Exchange Traded 

Fund) continue its skyward journey.

     The problem was they were guessing that their
price was at or near the top of the move. Is
there any way to know what is the highest price?
Actually ‘NO’, but there is a way to catch a
very large percentage of the price advance and
have Mr. Market tell you when to sell. How? Let
me show you the time-honored secret of the
long-term professional traders.

     Stocks do not make an orderly procession to a
top and then turn down in an orderly fashion.
They move in stair steps up sometime 2 steps up
and one step back or 3 steps up and one step
back. Many times they will rest for long periods
and consolidate. What you can do is place a stop
loss order that should be moved up as your
equity advances.

     Suppose you bought AT&T at $50 several years
ago and had followed it up with a 10% or 15%
stop loss order. It went over $100 and then
started down to below $15. If you had been
following with your stop you would have sold out
about $85 or $95. The charging bull when it
changed direction would not have gored you.

     There is nothing to fear as long as you are
protecting your investment with stop loss
orders. The bull is your friend as long as you
have protection when his direction changes.

 Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.  Copyright 2005.

 

 

2.0 Market Analysis

 

      S&P500 earnings are on target for 18% growth for the 4^th quarter 2004.  Markets were up for the second week in a row.  However, the number of earnings misses is beginning to exceed the norm.  Forecasts are for earnings growth of 7% in the first quarter of 2005.  The market remains unsettled.   Changes in sentiment indicators are mixed.  The 5 day RSI for the DOW is “very” overbought.  For the S&P500 it is overbought.  For the NASDAQ it is neutral.   The 5 week RSI is neutral for all 3 major indices. 

 

 

Table 2a

Sentiment Indicators 02/05/05

 

 

 

      The industry leaders list contains the top 10 industries for four periods consisting of 1 week, 1 month, 2 months and 3 months.  Results are ranked highest to lowest based on the average percentage gain per week within any period times the number of appearances of an industry in any of the four top 10 lists. 

 

 

 Market Summary

 Week ending 02/05/05:

 Indices for the Week:

 Dow Jones     +2.8%

 NASDAQ        +2.5%

 S&P500 Index  +2.7%

 Russell 2000  +4.0%

 Industry Leaders:

 Home Construction

 Toys

 Coal

 Heavy Construction

 Tobacco

 Oil & Gas

 Pipelines

 Health Care Providers

 Oil & Gas Producers

 Tires

 Distillers and Vintners

 RE Holding and Develop

 General Mining

 Steel

 Marine Transportation

 Exploration & Production

 Personal Products

 Oil Equipment & Services

 Hotels

 Containers & Packaging

 Leisure Goods

 Integrated Oil & Gas

 Gold for past 30 days:

 USD    -2.89%

 CAD    -0.28%

 CHF    +1.87%

 GBP    -1.69%

 EUR    +0.98%

 JPY    -1.21%

3.0 Procedure

 

      The following stock screens were generated with tools from AAII.  The short term trading filter used for Table 3a looks for optionable stocks whose percentage relative strength over the past 6 months is greater than 90%, EPS Growth over the past 12 months is greater than 80% and are within 5% of their 52 week  high  with  a  minimum  price  of  $50.   When a trigger has been

 

 

 

 

 

Table 3a

Short Term Options (Original Stock Candidate Filter) as of   02/05/05

 

 

 

received, call or put options are supplied depending on the direction of trend as reflected by the respective positive or negative slope of the 30 day SMA.  AET is due to report on February 10^th.  BG reports on February 8^th.  KBH reports on March 21^st.  The remaining companies for which options are listed have already recently reported.

 

Key

 

      Stocks from a REVISED experimental down-market filter are listed in Table 3b.  This filter looks for stocks having the potential to decline in a down market.  They are optionable stocks priced above $30 having less than 20% year over year EPS growth, a 26 week %Rank Relative Strength of less than 20% and within 5% of their 52 week lows.  GM’s next report is 10/17/05.

 

Table 3b

Revised Experimental Down Market Candidate Filter as of   02/05/05

 

 

 

 

      The stock filter resulting in Table 3c is for the potential to write covered call options.  The only difference between screens for Tables 3a and 3c is that in 3c the maximum stock price is $20.  CREAF, TIBX and VIRL were removed from the list due to their past monthly declines of 10% or more plus the fact that put options are not being bought or written for these stocks.  

 

 

Table 3c

Short Term Covered Call Writing Screen as of   02/05/05

 

 

 

 

      EPAY and SGR have recently reported.  MXT, PNK and SIGM were temporarily unlisted from Table 3c because of their new negative trends.  They could reappear later.

 

      For the screen in Table 3d, the number of selections is reduced by eliminating stocks having P/E’s greater than 30.  Two new stocks, PTRY and SSD, filtered through the screen this week.  The others that are highlighted passed this week’s screen and are repeats from previous weeks.

 

 

 

 

 

Table 3d

Growth Momentum (Intermediate Term) Screen as of   02/05/05

 

 

 

      For the Peter Lynch screen in Table 3e, again the number of selections for this screen is reduced by eliminating stocks having P/E’s greater than 30.   New stocks that filtered through the screen this week are SKM and MKTAY.

 

 

Table 3e

Peter Lynch Value  (Intermediate Term) Screen as of   02/05/05

 

 

      The filter for Warren Buffet style stock picking in Table 3f is for the intermediate to long term.  Two requirements were added.  One was to include only optionable stocks in order to find LEAPS opportunities.  The other requirement was to include only those stocks having a PE of 17 or less.   New stocks passing the filter this week are ABFS, DSPG and STLD.

 

Table 3f

Warren Buffett Value (Long Term) Screen as of   02/05/05

 

 

 

      The filter for Benjamin Graham’s style of utility investing is in Table 3g.  One new pick filtered through the screen this week, WPS.  For the second week in a row, all of those from the previous weeks filtered through this week, except PNW.  A requirement was added to include only those stocks having a PE of 17 or less.  

 

 

Table 3g

Benjamin Graham Value (Long Term) Screen as of   02/05/05

 

4.0 Results

 

      After much consideration, the stock portion of the portfolio was removed.  It was concluded that stock trades are a distraction from the main interest of options.  The amount of capital in my account is modest and stocks require more capital to realize a given amount of profit compared with options.  Of course penny stocks could be pursued but that is a completely different area of trading.  Penny stocks, as an asset class, have not really been addressed by any of the watch lists. This section will focus on trading options for now. 

 

      SFI in Table 4 was the only trade based on the 1^st down-market filter.  The trade did not work out while major indices turned upward this past week.  US Steel (X) was opened based on China’s continuing consumption of raw materials but the stock seems sluggish.  May open more trades, such as BHP, based on this premise.  KBH and BZH were option alert candidates mentioned earlier. CCJ and MON are TTC-A trades.

 

 

 

Table 4

Option Portfolio as of 02/05/05

 

5.0 Conclusion

     

      The average option portfolio profit is 11.4% assuming equal amounts traded for each option.

 

      Optimism and complacency in the markets is decreasing.  Slopes of the 30 day simple moving averages for the DOW, NASDAQ, S&P500 and Russell 2000 remain slightly negative while appearing to flatten out. Major averages all rose convincingly this past week.   I expect, but can not predict, that markets will track sideways in a narrow band for the next couple of months. 

 

      The new Down-Market Candidate Filter is an improvement over the first version and has shown promise against the original Stock Candidate Filter for its ability to construct a watch list of falling stocks in falling and sideways markets.   

 

      Have a great week.

Appendix

Investment Conference Schedule

     Some of the finest investment ideas can be introduced and catch fire at conferences.  Below are links to conference registration sites where you can sign up.  

• 02-08-05 Cape Town, South Africa  - Africa's most important mining event and the world's leading gathering of global policy makers and international finance, the Mining INDABA has raised billions of dollars and introduced the international investment community to mining interests throughout Africa. More than 350 leading companies and 35 African governments have sponsored the Mining INDABA. "Investing in African Mining Conference"
• 02-09-05 Las Vegas, NV "Premier Forum on Tranche B/Second Lien & Junior Debt Financing"
• 02-10-05 Pasadena, CA "Reflections and Insights: Provocative Thinking on Investment Management"
• 02-21-05 Phoenix, AZ "Profits at The Peak Traders Conference"
• 02-24-05 Miami, FL "Pensions&Investments Defined Contribution/401(k) East Coast Conference (13th Annual)"
• 03-09-05 Delray Beach, FL "Investment University"
• 03-17-05 San Jose , CA "INSEAD Presents Growth Ventures in Emerging Markets: Seizing the Opportunity"
• 03-20-05 San Jose , CA "6th Annual Mid-Market March Madness - M&A & Buyouts"
• 04-10-05 Calgary, Alberta "Calgary Resource Investment Conference"
• 04-10-05 Calgary, Alberta "Calgary Resource Investment Conference"
• 05-02-05 Chicago, IL "2005 Healthcare M&A & Corporate Development"
• 05-03-05 Acapulco, Mexico "SRI Conference on Foreign Investment Opportunities in Mexico's New Consumer and Small Business Lending Industry "
• 05-04-05 Atlanta, GA "Global Debt Collection Summit"
• 05-11-05 Minneapolis , MN "Medtech Investing Conference (4th Annual)"
• 05-11-05 New York, NY " IIR's Inaugural Forum on IP Rights Protection in Financial Services - Strategies for Building Patent Portfolios and Managing IP Risk "
• 05-17-05 London, United Kingdom "Corporate Venturing & Spinouts Conference "
• 05-17-05 New York, NY "Hedge Funds Regulation and Compliance 2005 - Gain Advanced Operational, Legal and Accounting Strategies to Achieve full Compliance in Today's Regulatory Environment "
• 05-23-05 New York, NY -Both professional and sophisticated private investors meet with the world's leaders in gold, silver, precious metals, copper and oil and gas exploration and production "New York Institutional Gold Conference"
• 06-01-05 San Francisco, CA "Venture Capital Investing Conference"
• 06-12-05 Vancouver, BC - Resource Investment Conferences featuring small cap opportunities in gold, diamonds, oil & gas, industrial and emerging growth situations are being presented in Canada. Pre-registration is complimentary to: investors who are clients of sponsoring firms which include discount and full service brokerage houses; subscribers of participating newsletters, sponsoring media and sponsoring internet investment services; shareholders of participating exhibitors; accredited investment advisors and investors who take an interest in managing their own personal portfolios. "World Gold, PGM & Diamond Investment Conference"
• 09-07-05 Las Vegas, Nevada "Gold and Precious Metals Investment Conference"
• 09-29-05 Las Vegas, Nevada - Trade Station World Conference and Expo, the premier conference for TradeStation users, is coming to the Venetian Hotel in Las Vegas, September 29 - October 2, 2005. Here's where you learn about how to design your personal trading strategies, and to test those strategies against historical data. "Tradestation World Users Conference"
• 10-02-05 Toronto, Ontario "Toronto Resource Investment Conference"
• 10-30-05 New Orleans, LA "New Orleans Investment Conference"
• 11-10-05 Millbrae, CA - Continuing advances in genomics, proteomics and enabling technologies makes the Biotech sector a favorite among private equity investors and venture capitalists. The Biotech Investing Conference is an industry gathering of the leading private equity investors, venture capitalists, biotech companies, pharmaceutical companies, corporate investors and institutional investors.  "Biotech Investing Conference"
• 11-27-05 San Francisco, CA "Gold and Precious Metals Conference"
  

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