The Discipline

Text Box: Wiser Trader Stocks and Options Newsletter

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Issue No. 16 – March 7, 2005 Prescott, Arizona Systems@WiserTrader.com

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“Buying is taught widely. How one sells can make or break a trade.”

1.0 Trading

Less than 4 weeks left to save 40% on Option Alerts. The free period ends March 31^st. Also keep in mind that the newsletter watch lists are more up to date than web site watch lists.

1.1 Southwestern Energy

Southwestern Energy (NYSE: SWN) is an integrated energy company focused on natural gas. It is engaged in natural gas and oil exploration. It produces, markets and distributes natural gas. Exploration and production activities are concentrated in Arkansas, Texas, Louisiana, New Mexico and Oklahoma. The gas distribution segment operates in northern Arkansas and can obtain greater than 50% of its gas supply from one of the Company's exploration and production subsidiaries. Customers consist of residential, commercial and industrial users of natural gas.

The company reported on 2/28/05. For the fiscal year ended 12/31/04, revenues rose 46% to $477.1 million. Net income was up 112% totaling $103.6 million as compared with $48.9 million. Revenues reflect increased volumes of production and higher realized gas and oil prices. Net income reflects lower interest expense and higher margins. A six month chart is in Figure 1.

FIGURE 1

© 2005 WiserTrader.com, LLC. Members of wisertrader.com are neither licensed brokers nor licensed advisors. Trades discussed represent trades made by the editor for the wisertrader.com portfolio. The newsletter and web site are for information only and should not be considered as personal advice. While it is believed that the posted information is factual, mistakes can be made in transcription. Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser

Southwestern Energy’s stock price has increased 159% over the past 52 weeks. Its price to sales is 4.57, a little on the high side, but its 5 year price to earnings growth, PEG, is 1.25. The trailing PE is 21.7 while its forward PE is 17.5. The stock is a little pricey, except for being an energy stock. SWN is suitable for medium to long term stock investment or as an option trade, as long as, the price of oil stays above $51 a barrel.

1.2 The Discipline

Below are rules that have as much to do with the psychology of trading as the actual mechanics. Some were learned in formal classes while others were learned the hard way. They should be treated merely as guidelines, like the suggestions provided with option alert bulletins. A few have become indispensable reflexes that I follow automatically in areas where I lack sufficient emotional control.

1.2.1 First Hour of Trading

Dr. C. refers to the first hour of trading as amateur hour. During this time of day, the markets have yet to establish a direction. The peaks and valleys that occur in the first hour are fun to watch but can be rather nerve racking when one is about to enter a trade. Professionals do most of their trading toward market close and characteristically trade against novices who trade early in the day. If it has already been decided the previous evening to trade at a specific price, the early hours of trading sometimes offer unusual, but brief, opportunities to sell at a good price. Of course, the opposite can be true as well. One can tell which way the market is likely to break at the initial opening by watching pre-market activity of the S&P and DOW futures relative to their fair values. An up opening does not guarantee an up day. Generally, the morning hours are most erratic and should be avoided.

1.2.2 After Market Close

As a position trader, Dr. C. analyzes the markets after closing using less than half an hour of his time each day. Decisions on buy and sell prices are made every evening. Sometimes there just aren’t any trades to be made. Sometimes there are more than one can shake a stick at, requiring a careful process of elimination and identifying possible contingencies for each potential trade. The next morning, after the first hour, Dr. C makes his trade and walks away from his computer until after the markets close.

I don’t know about anyone else, but I’m a nervous type when it comes to market events. I have a tendency to put my response on the table at once, maybe too early and maybe in the name of some kind of macho decisiveness, to get it over with. When I delay while prices are moving, a very uncomfortable form of oscillatory indecision sets in. Hating that feeling so much makes me want to flip a coin, again to get it over with, and ultimately suffer the consequences. To avoid all that, it is best for me to make as few decisions as possible during trading hours. So I prefer the approach of making decisions after the markets close because it eliminates many mistakes influenced by the excitement of continuously changing prices during the trading day. It reduces stress immensely.

1.2.3 Closing Prices

Implied in the above approach is basing decisions on closing prices. Dr. C says it’s alright to use either intraday or closing prices in decision making. It depends on the temperament of the trader. My reactions to intraday price movement are probably successful up to 50% of the time but with a noticeably higher stress level. Reacting to intraday prices causes me, more often than not, to exit an otherwise profitable trade too early, often at a loss.

Old habits die hard in that I still find myself watching the display during the day like a blinking light junkie. I can’t help it. It’s all I can do to restrain myself from making a knee jerk reaction to erratic price movements. At the end of the day, when able to restrain myself, I give thanks to Dr. C’s approach. That is, I do most of the time.

I had this nagging feeling about a situation that presented itself this past week with the VLO September 70.00 call option that was purchased at $7.00. On 2/28, in early morning trading, the option soared from about $10.50 to around $12.10. The price of oil dipped later that morning sending energy stocks lower. The option bottomed out at around $7.00 and recovered to close at about $10.10. On 3/1 oil dipped again and the option closed at $8.00. Admittedly, I was not monitoring oil prices during the day. The stock closed at an intraday support level of $68. I firmly believe in using trailing stops, in this case a value of -25% was recommended. Those who used the 2/28 intraday high of $12.10 were stopped out on 2/28 at $9.10 for a gain of 30%. Those who used the 2/25 closing high of 10.70 and a closing price of $8.00 on 3/1 had their stop triggered at $8.10. The following morning, the VLO option rose to a high of $8.90 and I was able to exit at $8.70 for a final profit of 24.2%. But it still bothered me that at one point the intraday profit was up by as much as 72.9%.

It was not really a price gap up. A price gap would have called into play the charting principle that, “A price gap in the direction of a trend may signal the end of a trend or the beginning of a new trend”. Looking back, I can find no chart configuration that would have warned me to get out earlier, other than the hunch that a sudden price rise is unlikely to be sustained. “Prices tend to revert to the mean.” This is the basis for using oscillating indicators. Beyond that, there was nothing concrete. Yet I had this nagging feeling that I had stayed in the trade too long by applying the closing price principle, daring not to exit a winning trade too early with the possibility that the stock could turn around and resume its climb. Discipline, in this case did not maximize my gain.

But then that is not its purpose. Discipline is there to protect one from emotional reactions. On further reflection, had I allowed my reactions to take over, I would have sat there like a deer in the headlights until the price stopped falling. Then I would have sold the option when it bottomed at $7.00 for a net gain of zero. Instead, by waiting to make decisions based on closing prices, I ended up with 24.2% profit. So the discipline of basing decisions on closing prices does count for something. “Sometimes you have to consider your potential reaction as an unknown”.

1.2.4 Planning

Position traders, as opposed to day traders, give thoughtful planning to where they want to be when various scenarios take place. When events occur that one has not thought about the previous evening, it gives one something to be more mindful of in future planning sessions. The actual planning session has several components. The first, as you know, is to have a strong watch list of candidate stocks. As a group that uses the wisertrader.com web site, we are well grounded in this area. The lists are reviewed and swept as clean as possible each week.

The second component involves chart analysis, scanning through a 6 month chart of each stock candidate, checking the character of each chart and looking for potential trade entry points based on systematic criteria. This component has been discussed at length and forms a large part of Dr. C’s classes and ongoing help sessions. This task should be performed daily.

The third component also involves using chart analysis, this time to determine when to sell an open position in such a way as to retain current profits, not limit further profits and to minimize losses. This decision is based on support, resistance and other charting configurations. Chart analysis is a critical ingredient of a trading system. It is a subject so vast that it can only be addressed in tiny parts in this newsletter. Chart analysis is based on group behavior. While it is nearly impossible to predict what an individual will do, group behavior is very primitive and highly predictable. The only way to learn chart analysis well is to look at a lot of charts. A point of clarification is in order regarding last week’s comments about support and resistance. Dr C. reminded me in an email on 2/28/05 that:

“Support is defined in my book, "Windows to Wealth" as the point at which price ceases it's decent, repeatedly. Resistance is the point at which price ceases it's accent, repeatedly. These support and resistance lines may be level, up-sloping, or down-sloping. A great current example of support and resistance is seen by drawing a horizontal trend line at 1184 on the S&P. Starting on 11/12/04, the S&P has encountered this line intra-day, either as support or resistance, 16 times.

“Here is one additional point to consider. A support level once broken becomes resistance. A resistance level once broken then becomes support. As you look at the SPX chart you'll see what I mean . . .”

1.2.5 Selling

The fourth component of planning involves money management. This is an ongoing topic that has been discussed at great length, involving both position sizing, profit goal setting and trailing stops. Here is a developing view from the perspective of the profit-loss model of precision money management. The thinking goes like this. It is possible to model and predict profits for any consistent trading system whose performance is defined in terms of statistical averages, such as the one used here. The average fractional gain per winning trade F_G, currently at 25%, is treated as an expected profit value. Whenever profits exceed this level, it can only improve progress toward one’s profit goal by increasing the average fractional profit per trade F_P and reducing the N, the number of trades needed to earn the average traded amount. This line of thinking concludes that profits should be taken whenever they significantly exceed the expected value of F_G. To see what should be considered significant, refer to Figure 2. Just as a reminder:

F_P is the average fractional gain taking all wins and losses into account.

F_C is the fraction of times the correct direction of trade was chosen

F_G is the average fractional gain for winning trades

F_L is the average fractional loss for losing trades.

N is the number of trades needed to earn the average traded amount.

FIGURE 2

Effect of consistently increasing F_G

Figure 2 shows how F_P and N are changed when F_G is doubled from its expected value of 25% to a value of 50%. F_P increases by a factor of 2.78 and N is reduced by the same factor. Reducing the number of trades needed to meet one’s profit goals by nearly a factor of three appears to be significant. One can use the chart to decide for himself what is significant.

Getting back to the recent VLO option trade, it would have also been wise to take profits on 2/25 when they were a factor of two higher than the expected gain. The objective is profit predictability. If goals can be met sooner than expected by taking higher than expected profits, it is all the better.

Sure, one may leave some potential profits on the table. But there is no reason to risk giving back what is already in hand. When emotions are under control, there is no reason to follow rules blindly. Nor should one be a victim of greed by staying in a trade too long. In summary, a very modest trading system profit expectation of 25% has been established based on historical trading system data. Profits should be taken once the expected trading system profit is exceeded by a significant amount. As a study in contrast, Dr. C states that a profit target of 100% is feasible with his trading system. This target is achievable with a longer holding period allowed by a wider stop loss setting. Additional experience and charting knowledge also help.

1.2.6 Discipline Summary

“Avoid the first hour of trading, as a rule.”

“Perform analysis after the market closes.”

“Basing decisions on closing prices can reduce your stress level.”

“One can not always buy at the market bottom nor sell at the market top.”

“Use strict money management.”

“Take your losses early and let your profits run.”

“Take profits when they rapidly exceed expectations by a sizeable margin.”

“No one ever went broke by taking profits.”

2.0 Market Analysis

Energy and Basic Materials remain the leading sectors. Industry leadership in Table 1 below continues to take a short term view. Leading industries are ranked from highest to lowest.

Table 1

Market Summary

 Week ending 03/05/05:

Bond interest rates continue a slow steady climb along with crude oil and, noticeably now, the price of gold as measured in foreign currencies. In spite of this the major indices erased their early week deficits and ended the week up. This was due to positive employment figures that increased at a 2.4% annual rate that is expected to be sufficient to keep up the strong momentum in consumer spending, and thus maintain expectations of 3 1/2% to 4% real GDP growth in the first half of 2005. Hourly wages were unchanged preventing an otherwise normal deterioration of the bond market with employment gains.

Disappointing forecasts by large retailers were offset by indications of large cash flows as major acquisitions, stock buy backs and dividend increases continue to be announced. The strength this week was once again focused in energy, materials, and consumer staples sectors. Technology stocks are not participating in the rally, and the NASDAQ is still down 5% on the year while the Dow and S&P500 are up. Financials continue to lag due to concerns of higher interest rates, and health care has not caught fire either.

Next week is very light on the economic calendar, with the usually ignored trade balance data on Friday the highlight. The biggest scheduled event is Intel's mid-quarter update due Thursday after the close. The Texas Instruments mid-quarter update on Monday might also move the markets. There is little doubt that the economy is growing very rapidly and that corporate cash flow is very strong. The tone remains upbeat, but key sectors such as financials and technology have yet to get on board the rally. Oil prices and the risk of inflation are also hanging over the market. How these conflicting forces play out, and which garners attention on a particular day, will drive the market. The 5 day and 5 week RSI for the DOW, S&P500 and the NASDAQ are all neutral. Other sentiment indicators are given in Table 2.

Table 2

Sentiment Indicators 03/05/05

Sentiment Indicator	Value	Last Week	2 Weeks Ago	Complacent	Cautious
VIX	11.94	11.49	11.18	< 20	> 50
VXN	18.13	17.34	17.87	< 30	> 70
Put/Call Ratio	0.608	0.573	0.594	< 0.6	> 0.7
%Bulls - %Bears	32.6	32.7	35.4	> 29%	< 25%

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. One exception is BHP, added just recently, that does not really fit the filter but is a promising basic materials play. When a trigger, price gap up or unusually high up volume occurs, call options are supplied. ATW was removed because no options were found for it. KMRT was removed due to weak relative strength.

Key

Open Trade

Passed Recent Filter

"0" = No discernable trend

"GAP" = Price gap

"V" = Higher than average volume

"+T" = Positive trend

"-T" = Negative trend

"TT" = Trigger received

"TTC" = Confirmation received

Table 3a

Short Term Options (Original Stock Candidate Filter) as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	OPTION	Key
AAPL	01/10/05	24.2%	Apple Computer, Inc.	Technology	Computer Hardware	QAA GT JUL 100.00 CALL	+TT
AEOS	02/07/05	7.0%	American Eagle Outfitters	Services	Retail (Apparel)	-	+T
AET	01/03/05	25.3%	Aetna Inc.	Financial	Insurance (Accident & Health)	-	+T
BHP	02/24/05	3.9%	BHP Billiton Limited (ADR)	Basic Materials	Metal Mining	BHP HF AUG 30.00 CALL	+TV
BRY	03/01/05	4.8%	Berry Petroleum Company	Energy	Oil & Gas Operations	-	+T
BTU	11/22/04	25.3%	Peabody Energy Corporation	Energy	Coal	-	+T
BYD	02/21/05	-0.2%	Boyd Gaming Corporation	Services	Casinos & Gaming	-	+T
CDIS	03/01/05	2.4%	Cal Dive International, Inc.	Energy	Oil Well Services & Equipment	KPQ FK JUN 55.00 CALL	+TV
CLF	12/20/04	68.3%	Cleveland-Cliffs Inc.	Basic Materials	Metal Mining	CLF GN JUL 70.00 CALL	+TV
CME	02/14/05	-6.7%	Chicago Mercantile Exchange Holdings	Financial	Investment Services	-	0
CRS	02/14/05	9.5%	Carpenter Technology Corp	Basic Materials	Iron & Steel	-	+T
DO	03/04/05	0.0%	Diamond Offshore Drilling Inc.	Energy	Oil Well Services & Equipment	-	+T
FFIV	02/14/05	2.9%	F5 Networks Inc.	Technology	Computer Networks	-	+T
GGC	02/21/05	9.8%	Georgia Gulf Corporation	Basic Materials	Chemicals - Plastics and Rubbers	-	+T
GMR	02/25/05	-5.5%	General Maritime Corp.	Transportation	Water Transportation	GMR HK AUG 55.00 CALL	+TT
MDC	02/14/05	3.8%	M.D.C. Holdings, Inc.	Capital Goods	Construction Services	-	+T
MGG	12/27/04	8.3%	MGM MIRAGE	Services	Casinos & Gaming	-	0
MON	12/20/04	17.4%	Monsanto Company	Basic Materials	Chemical Manufacturing	MON JM OCT 65.00 CALL	+TV
PCO	02/14/05	9.2%	Premcor Inc.	Energy	Oil & Gas Operations	PCO IL SEP 60.00 CALL	+TTC
POT	12/20/04	7.8%	Potash Corp./Saskatchewan (USA)	Basic Materials	Non-Metallic Mining	-	+T
SIE	02/14/05	11.0%	Sierra Health Services, Inc.	Financial	Insurance (Accident & Health)	-	+T
SUN	03/04/05	0.0%	Sunoco, Inc.	Energy	Oil & Gas Operations	SUN HA AUG 105.00 CALL	+TV
SWN	11/22/04	21.2%	Southwestern Energy Company	Energy	Oil & Gas Operations	SWN IL SEP 60.00 CALL	+TTC
TS	01/10/05	40.0%	Tenaris S.A. (ADR)	Capital Goods	Construction - Supplies and Fixtures	-	+T
TXI	12/20/04	10.1%	Texas Industries, Inc.	Capital Goods	Construction - Raw Materials	-	+T
TXU	11/22/04	23.8%	TXU Corporation	Utilities	Electric Utilities	TXU GP JUL 80.00 CALL	+TV
VLO	02/07/05	26.6%	Valero Energy Corp.	Energy	Oil & Gas Operations	YGY AP JAN 80.00 CALL	+TV
X	12/20/04	18.2%	United States Steel Corp.	Basic Materials	Iron & Steel	X JM OCT 65.00 CALL	+TV

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Stocks selected by the 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 are within 5% of their 52 week lows. ETM and TECH were removed because they rose significantly above their 52 week lows. Refer to Section 4.3.

Table 3b

Experimental Down-Market Filter as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	OPTION	Key
BUD	02/21/05	0.0%	Anheuser-Busch Companies, Inc.	Consumer Non-Cyclical	Beverages (Alcoholic)	-	-T
CPS	03/04/05	0.0%	ChoicePoint Inc.	Services	Business Services	-	-TV
DJ	02/24/05	1.1%	Dow Jones & Co.	Services	Printing & Publishing	-	-T
FITB	02/21/05	0.4%	Fifth Third Bancorp	Financial	Regional Banks	-	0
GM	02/07/05	-7.9%	General Motors Corporation	Consumer Cyclical	Auto & Truck Manufacturers	-	-TV
IP	02/21/05	3.2%	International Paper Company	Basic Materials	Paper & Paper Products	-	0
MIL	02/07/05	0.7%	Millipore Corporation	Technology	Scientific & Technical Instruments	MIL SI JUL 45.00 PUT	-TTC
MTG	02/21/05	-0.4%	MGIC Investment Corp.	Financial	Insurance (Property & Casualty)	-	-T
NBIX	02/21/05	-1.0%	Neurocrine Biosciences, Inc.	Health Care	Biotechnology & Drugs	-	-T
NYT	02/21/05	-1.6%	The New York Times Company	Services	Printing & Publishing	NYT SH JUL 40.00 PUT	-TV
SSP	02/07/05	-0.3%	The E.W. Scripps Company	Services	Printing & Publishing	-	-T
WL	02/24/05	3.9%	Wilmington Trust Corp.	Financial	Regional Banks	-	0

The stock filter resulting in Table 3c is for the potential to write covered call options. The only difference between filters for Tables 3a and 3c is that in 3c the maximum stock price is $20. SPN and WITS were removed due to weak EPS growth and relative strength, respectively.

Table 3c

Short Term Covered Call Writing Screen as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	Covered Calls	Key
AES	02/24/05	6.3%	The AES Corporation	Utilities	Electric Utilities	AES DD APR 20.00 CALL	+TV
AKS	12/20/04	14.7%	AK Steel Holding Corporation	Basic Materials	Iron & Steel	AKS DD APR 20.00 CALL	+TV
BEV	02/14/05	0.7%	Beverly Enterprises	Health Care	Healthcare Facilities	-	+T
GLBL	02/24/05	1.0%	Global Industries, Ltd.	Energy	Oil Well Services & Equipment	GQO DV APR 12.50 CALL	+TV
MDRX	02/07/05	14.5%	Allscripts Healthcare Solutions, Inc.	Technology	Software & Programming	-	+T
MXT	12/20/04	-2.0%	Metris Companies Inc.	Financial	Consumer Financial Services	MXT DC APR 15.00 CALL	+TTCV
OS	12/20/04	42.7%	Oregon Steel Mills, Inc.	Basic Materials	Iron & Steel	OS DG APR 35.00 CALL	+TV
RETK	03/04/05	0.0%	Retek Inc.	Technology	Software & Programming	QRD DB APR 10.00 CALL	+GAPV
SGR	02/07/05	26.8%	The Shaw Group Inc.	Basic Materials	Misc. Fabricated Products	SGR DE APR 25.00 CALL	+TV
SID	12/20/04	42.2%	Companhia Siderurgica Nacional (ADR)	Basic Materials	Iron & Steel	SID DF APR 30.00 CALL	+TV
SIGM	02/14/05	-0.8%	Sigma Designs, Inc.	Technology	Computer Peripherals	-	+T
TIWI	02/14/05	0.9%	Telesystem International Wireless (USA)	Services	Communications Services	TAU DW APR 17.50 CALL	+TV
WFR	03/04/05	0.0%	MEMC Electronic Materials	Technology	Semiconductors	-	+T
XXIA	01/02/05	11.5%	Ixia	Technology	Electronic Instruments & Controls	-	+T

For the screen in Table 3d, the number of selections is reduced by eliminating stocks having P/E’s greater than 30. BSTE, ODFL, PHM were removed due to weak relative strength. VIVO fell too far below its 52 week high and was removed.

Table 3d

Growth Momentum (Intermediate Term) Screen as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
ELBO	12/13/04	5.0%	Electronics Boutique Holdings Corp.	Services	Retail (Technology)	-
ELK	02/24/05	2.5%	ElkCorp	Capital Goods	Construction - Supplies and Fixtures	-
KBH	01/10/05	22.1%	KB Home	Capital Goods	Construction Services	OHK AX JAN07 130.00 CALL
MT	02/24/05	7.9%	Mittal Steel Company N.V. (ADR)	Basic Materials	Iron & Steel	-
MTH	12/13/04	40.7%	Meritage Homes Corporation	Capital Goods	Construction Services	-
PTRY	02/07/05	4.7%	The Pantry, Inc.	Services	Retail (Grocery)	-
SPF	02/14/05	8.9%	Standard Pacific Corp.	Capital Goods	Construction Services	-
SYT	03/04/05	0.0%	Syngenta AG (ADR)	Basic Materials	Chemical Manufacturing	-
USNA	02/21/05	-0.6%	USANA Health Sciences, Inc.	Consumer Non-Cyclical	Personal & Household Products	-

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. GGB’s EPS growth was difficult to verify and was removed.

Table 3e

Peter Lynch Value (Intermediate Term) Screen as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
BLSC	12/13/04	4.5%	Bio-Logic Systems Corp.	Health Care	Medical Equipment & Supplies	-
CAJ	01/31/05	1.8%	Canon Inc. (ADR)	Technology	Computer Peripherals	-
CSLMF	12/13/04	-2.1%	Consolidated Mercantile (USA)	Basic Materials	Containters & Packaging	-
IMY	02/21/05	-4.0%	Grupo IMSA S.A. de C.V. (ADR)	Basic Materials	Iron & Steel	-
KEP	12/13/04	5.4%	Korea Electric Power Corporation (ADR)	Utilities	Electric Utilities	-
MBT	01/10/05	12.2%	Mobile TeleSystems OJSC (ADR)	Services	Communications Services	OVD AI JAN07 45.00 CALL
MKTAY	02/07/05	7.1%	Makita Corporation (ADR)	Consumer Cyclical	Appliances & Tools	-
NOLD	12/13/04	14.3%	Noland Company	Capital Goods	Misc. Capital Goods	-
PCU	12/13/04	40.6%	Southern Peru Copper Corp (USA)	Basic Materials	Metal Mining	-
SHI	12/13/04	21.5%	Sinopec Shanghai Petrochemical Co. (ADR)	Energy	Oil & Gas Operations	-
SKM	02/07/05	4.2%	SK Telecom Co., Ltd. (ADR)	Services	Communications Services	-
GMK	03/04/05	0.0%	Gruma S.A. de C.V. (ADR)	Consumer Non-Cyclical	Food Processing	-
TKS	03/04/05	0.0%	Tomkins plc (ADR)	Conglomerates	Conglomerates	-
TM	12/13/04	5.0%	Toyota Motor Corporation (ADR)	Consumer Cyclical	Auto & Truck Manufacturers	-
TMIC	02/21/05	4.2%	Trend Micro Incorporated (ADR)	Technology	Software & Programming	-
UGP	12/13/04	-12.9%	Ultrapar Participacoes SA (ADR)	Energy	Oil & Gas Operations	-
VLCCF	12/13/04	8.9%	Knightsbridge Tankers Limited	Transportation	Water Transportation	-

The stocks from Benjamin Graham’s style of utility investing are listed in Table 3f. A requirement was added to include only those stocks having a PE of 17 or less. BKH, DTE, NFG and PNM have negative EPS growth and were removed. Although PGN’s EPS growth year over year was better than 100%, it missed its earnings target and was down graded.

Table 3f

Benjamin Graham Value (Long Term) Screen as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
KEP	01/10/05	13.7%	Korea Electric Power Corporation (ADR)	Utilities	Electric Utilities	-
PGN	01/10/05	-2.3%	Progress Energy, Inc.	Utilities	Electric Utilities	OPM AJ JAN07 50.00 CALL
PNW	01/10/05	-0.4%	Pinnacle West Capital	Utilities	Electric Utilities	-
SRE	01/10/05	13.0%	Sempra Energy	Utilities	Natural Gas Utilities	-
WPS	02/07/05	4.9%	WPS Resources Corp	Utilities	Electric Utilities	-

The filter for Warren Buffet style stock picking in Table 3g 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. NUE and SU were removed due to low EPS growth.

Table 3g

Warren Buffett Value (Long Term) Screen as of 03/06/05

Stock	Reference	% Chg	Company	Sector	Industry	Leaps
ABFS	02/07/05	6.2%	Arkansas Best Corporation	Transportation	Trucking	-
COLM	01/10/05	2.2%	Columbia Sportswear Company	Consumer Cyclical	Apparel/Accessories	-
DHI	12/27/04	16.2%	D.R. Horton Inc.	Capital Goods	Construction Services	VEI AH JAN07 40.00 CALL
DSPG	02/07/05	1.1%	DSP Group, Inc.	Technology	Communications Equipment	-
ELBO	01/31/05	14.2%	Electronics Boutique Holdings Corp.	Services	Retail (Technology)	-
HELE	03/04/05	0.0%	Helen of Troy Limited	Consumer Cyclical	Appliances & Tools	ODI AF JAN07 30.00 CALL
HOV	12/27/04	24.5%	Hovnanian Enterprises	Capital Goods	Construction Services	OZW AL JAN07 60.00 CALL
HRH	12/27/04	0.3%	Hilb, Rogal & Hobbs Company	Financial	Insurance (Miscellaneous)	-
LNCR	12/27/04	-2.8%	Lincare Holdings Inc.	Health Care	Healthcare Facilities	OUN AI JAN07 45.00 CALL
PGR	12/27/04	5.4%	The Progressive Corp.	Financial	Insurance (Property & Casualty)	-
RS	02/24/05	6.5%	Reliance Steel & Aluminum	Basic Materials	Misc. Fabricated Products	-
STLD	02/07/05	13.3%	Steel Dynamics, Inc.	Basic Materials	Iron & Steel	VJM AJ JAN07 50.00 CALL
THO	01/10/05	-8.4%	Thor Industries, Inc.	Capital Goods	Mobile Homes & RVs	-
VLCCF	02/21/05	-3.2%	Knightsbridge Tankers Limited	Transportation	Water Transportation	-

4.0 Results

4.1 Trades This Week

The suggested buy criteria for each option alert should be regarded as a guideline. You may have to go slightly outside of suggested price and timing guidelines to either buy or sell. For example, the upper limit on the price of SWN was a little tight. If you stay close to the recommended pricing and timing, things should go quite well.

The past week was busy. SWN September 60.00 Call was bought at $6.50. This option is not expected to see the sudden run up seen by VLO. If it does, we will watch the stock carefully and back out when the price appears unsustainable, getting out with as much profit as we can. Otherwise, I look to be in this position for a while.

TXU July $80.00 call was purchased on 2/25 as a TTC-A and sold for a 32.4% profit on 3/4/05. BHP August $30.00 call was purchased on 2/24 and the position remains open.

4.2 Option Alert Trading History

Table 4a

Option Alert Trading History as of 03/05/05

Stock	Buy Date	Buy Price	Last	Action	P/L(%)	Option
BZH	1/31	13.70	$17.30	Sold 02/01	26.3%	BZH HJ AUG 150.00 CALL
KBH	1/31	9.20	$11.10	Sold 02/01	20.7%	KBH GU JUL 110.00 CALL
KCI	-	-	-	EXPIRED	20.7%	KCI UM SEP 65.00 PUT
KBH	2/7	11.10	$10.40	Sold 02/18	-6.3%	KBH GC JUL 115.00 CALL
EBAY	2/7	6.80	$5.60	Sold 02/08	-17.6%	XBA SO JUL 75.00 PUT
VLO	2/24	6.98	$8.70	Sold 03/02	24.6%	VLO IN SEP 70.00 CALL
SWN	3/3	6.50	$7.30	Long	12.3%	SWN IL SEP 60.00 CALL

Average Alert Profit = 10.0% per trade

4.3 Portfolio Trading History

The portfolio trading history in Table 4b lists all trades since the newsletter’s inception.

Table 4b

Option Portfolio Trading History as of 03/05/05

Stock	Buy Date	Buy Price	Last	Action	P/L(%)	Option
URBN	11/23	11.50	$9.00	Sold 11/30	-21.7%	URQ FG JUN 35.00 CALL
TXU	11/23	11.30	$6.30	Sold 12/2	-44.2%	TXU DK APR 55.00 CALL
USG	11/23	8.40	$12.80	Sold 12/15	52.4%	MAY 25.00 CALL
ADSK	12/20	8.20	$9.20	Sold 12/23	12.2%	ADQ GN JUL 70.00 CALL
MON	12/20	3.80	$4.80	Sold 12/23	26.3%	MON GJ JUL 50.00 CALL
POT	12/20	7.00	$8.00	Sold 12/23	14.3%	POT FP JUN 80.00 CALL
TXI	12/20	5.50	$9.00	Sold 12/23	63.6%	TXI GL JUL 60.00 CALL
AET	1/7	5.70	$7.10	Sold 01/19	24.6%	AET GX JUL 135.00 CALL
CLF	1/7	7.30	$9.20	Sold 01/19	26.0%	CLF GJ JUL 50.00 CALL
MTH	1/21	6.80	$9.20	Sold 02/01	35.3%	MTH FZ JUN 62.50 CALL
BZH	1/31	13.70	$17.30	Sold 02/01	26.3%	BZH HJ AUG 150.00 CALL
KBH	1/31	9.20	$11.10	Sold 02/01	20.7%	KBH GU JUL 110.00 CALL
BHP	1/28	2.25	$2.70	Sold 02/01	20.0%	BHP HE AUG 25.00 CALL
X	1/25	5.30	$4.90	Sold 02/02	-7.5%	X GK JUL 55.00 CALL
SFI	1/24	0.75	$0.30	Sold 02/04	-60.0%	SFI PH APR 40.00 PUT
EBAY	2/7	6.80	$5.60	Sold 02/08	-17.6%	XBA SO JUL 75.00 PUT
CCJ	2/4	6.60	$10.20	Sold 02/11	54.5%	CCJ IG SEP 35.00 CALL
MON	2/4	8.00	$8.20	Sold 02/15	2.5%	MON GJ JUL 50.00 CALL
TOL	1/2	7.10	$7.30	Sold 02/17	2.8%	TOL IR SEP 90.00 CALL
BZH	2/9	14.60	$16.90	Sold 02/17	15.8%	BZH HN AUG 170.00 CALL
KBH	2/7	11.10	$10.40	Sold 02/18	-6.3%	KBH GC JUL 115.00 CALL
VLO	2/24	6.98	$8.70	Sold 03/02	24.6%	VLO IN SEP 70.00 CALL
TXU	2/25	3.55	$4.70	Sold 03/04	32.4%	TXU GP JUL 80.00 CALL
BHP	2/24	2.25	$3.00	Long	33.3%	BHP HF AUG 30.00 CALL
SWN	3/3	6.50	$7.30	Long	12.3%	SWN IL SEP 60.00 CALL

Overall Average Profit = 13.7% per trade.

4.3 Experimental Filter Results

The goal of the filter tracking experiment is to observe the use of stock candidate filters to buy call options and write covered calls in rising and sideways markets and the down-market filter for use in buying put options in declining and sideways markets. So far we have not had a significant down market environment in which to test the down-market filter. Essential features of the 3 filters are described in Table 4b.

Table 4b

Filter Criteria

Description	(1) Stock Candidate	(2) Down-market	(3) Stock Candidate
Purpose	Buy Calls & Puts	Buy Put Options	Write Covered Calls
Market direction	All	Down, Sideways	All
Price	> $50	> $30	< $20
12 m EPS growth	> 80%	< 20%	> 80%
Relative Strength	26 wk >90%	26 wk < 20%	26 wk >90%
Price within	5% of 52wk high	5% of 52 wk low	5% of 52wk high
Exchanges	NASDAQ, NYSE	NASDAQ, NYSE	NASDAQ, NYSE

The relative average filter performance for the three groups of filtered stocks is compared with proxies for the major averages in Table 4c. Filter 1 stocks are those listed in Table 3a and filter 2 stocks, for the experimental filter, are listed in Table 3b. Filter 3 stocks are listed in Table 3c. Filter 2 stocks remain consistently lower than those for the Filters 1 and 3.

Table 4c

Average Filter Performance as of 03/05/05

Instrument	Past month	1 Week ago	2 weeks ago	3 weeks ago	4 weeks ago
SPY	2.1%	1.1%	0.9%	-0.3%	0.4%
DIA	2.4%	1.1%	0.5%	-0.3%	1.0%
QQQQ	-0.6%	-0.3%	0.7%	-0.9%	-0.1%
Filter 1 > $50	11.4%	1.4%	4.9%	2.8%	1.9%
Filter 2 > $30	-2.9%	0.2%	-0.4%	-1.3%	-1.4%
Filter 3 < $20	13.6%	0.7%	4.5%	6.1%	1.9%

5.0 Conclusion

The addition of initial entry dates for stocks in each of the watch lists has been helpful in identifying winners and losers. Overall watch list performance is not averaged because stocks are added and removed as their fundamentals vary. For the stocks currently listed, the short term option list is doing the best with an average gain of 13.2%. This is followed by the covered call list at 11.3%. Next are the Growth Momentum picks at 8.3%, followed by Lynch picks at 6.5%, Graham picks at 5.8% and Buffett picks at 5%.

The short term option trading system remains stable:

Average fractional profit for 25 trades, F_P = 13.7% per trade.

Fraction of trades chosen in the correct direction, F_C = 76.0%

Average fractional gain for 19 winning trades, F_G = 26.31% per trade.

Average fractional loss for 6 losing trades, F_L = -26.25% per trade.

The dollar profit goal D_G is set equal to the average capital used per trade C such that
N = 1 / F_P = 7.3 becomes the average number of trades to earn the average traded amount.

The Profit Factor for this trading system, F_G F_C / [F_L (1 - F_C)] = 2.6
Gross Profits divided by Gross Losses (includes 1% commission)

Appendix

Investment Conference Schedule

Below are links to conference registration sites where you can sign up.

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 "World Gold, PGM & Diamond Investment Conference" 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.
09-07-05 Las Vegas, Nevada "Gold and Precious Metals Investment Conference" The gold and metal resource market has demonstrated its strength and longevity, achieving sustained growth and multi-decade highs in the last year. Explore the shining prospects of gold, silver, copper, uranium and other fast-rising commodities. Realize your full potential in this sustained bull market, with Natural Resources the clear profit leaders.
09-29-05 Las Vegas, Nevada "Tradestation World Users Conference" 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.
10-02-05 Toronto, Ontario "Toronto Resource Investment Conference"
10-30-05 New Orleans, LA "New Orleans Investment Conference"
11-10-05 Millbrae, CA "Biotech Investing Conference" 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.
11-27-05 San Francisco, CA "Gold and Precious Metals Conference"
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. The Natural Resource industry's newest opportunities are presented, together with educational seminars, executive panels and investment workshops led by top finance specialists, economic analysts and newsletter editors. Admission is complimentary with pre-registration.

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