Tax Season 03/25/12

Just passed another birthday and looking back wonder how quickly the years have gone by. There is a lot I am thankful for; my family being the first and foremost and decent health being the second. Sure, I have had my trials and tribulations along the way but that is life, isn’t it? I have learned more from my mistakes although I try to tell myself to also learn from the good stuff. Stock trading, managing my portfolio would never have happened if I had not lost so much money in 2001-2003 when I was totally ignorant about the markets. Out of those losses came the learning of a new field, having taught myself technical analysis as well as options. I have done well by the goals I set for myself. I wanted to be able to protect my money first, and grow it gradually without losing money any year. So far that is where we are and after weathering 2008 I feel I can accomplish that in the future also. I have learned to listen to the voice of the market and take its cues (most of the time!).

It is tax season now. Always nice to have profits and gains so that you can pay your taxes. Working at a decent job gives you a more certain income than trading. Everyone dreams of trading for a living but that is possible for the very few. I am navigating our family’s retirement portfolio and the decisions I make will impact our future. This year has been nicely positive.

Last week I saw an overbought situation. I brought my hedges up to closer to the money. As the market dropped, these hedges have gained value and Thursday night I started slowly selling a small part of the hedges. I am expecting the market to thrust up again and maybe in April that may be the last thrust up before we see some serious corrections. Markets don’t just climb up forever. Maybe it will be renewed fear about running into the debt ceiling or the political fights that are ahead in the near horizon but my plan is to ease back the throttle mid-April.

Let us see what the charts say. Looking at the chart on DIA (Dow Jones 30) I see that my primary signal (larger blue arrow pointing up) says we are in an uptrend but in a pullback. My secondary signal (smaller arrow pointing up) is saying buy into the dip. I think I will continue to reduce my hedge; which will be like cutting the shackles to enable the upside movement.

SPY is still Long 03/17/12

The chart on SPY is still l,ong. Chart is attached below. I have not posted this chart in a while because there have been no changes from my Go Long post on SPY back in 12/23/11 I believe. SPY is the Exchange Traded Fund (ETF) for the S&P 500 and is a decent proxy for the market. SPY is now more heavily weighted with AAPL and some say when AAPL pauses and will pull back, so will the market. Others offer RSP as a better proxy for the market. RSP is an equal weighted S&P 500. Kind of like the US Congress vs the Senate on its representation of States in the Union. No commentary on politics here.

SPY is tearing up in a tight trading channel heading North. First signs of weakness will be a break in the channel; and then the push back up. Usually markets take a while to top, so I feel I have plenty of time. I am long on my 401K as well; but I do have hedges on.

I have seen a down signal on GLD as well as TLT which is a bond fund. Clearly the market is demonstrating strength and the bond funds are losing participation as money moves away towards equity. Real estate funds IYR, SPG have picked up. At the down signal; on GLD, I sold GLD Call spread. That means I sold a Call At-the-money and bought a Call Out-of-the-Money to reduce my risk exposure. It is the opposite of buying a Vertical Call spread. As GLD swings sideways and drops, the Call spread is worth less and less and I can buy it back for less than I sold it.. I am currently about 60% profitable on the Call spread – wish I had done more.

When I got the down signal on CAT and I sold my long Call option position, I should have done the same and sold a Call spread on CAT. I did not want to fight the long market direction and CAT and chose not to; but my technicals were correct and that too would have made money for no other reason than time decay on the ATM call option. Usually I like to sell the ATM call option as it has the most time value.

I learned options from taking a course with Optionetics in Detroit, MI with Tom Gentile himself as the teacher. He is an excellent teacher but back then, a lousy technical analyst. He was high on Elliott waves and gave 5 picks to the class of about 150, and all 5 went the wrong direction!!! I could not have done worse…but he taught the class real well, and I learned how to handle options to protect my investments, collect premium, as well as use vertical spreads for reduced risk, maximize gain. We also learned more complicated methods that I choose not to use. Enough on options. Market direction remains Long albeit a little overbought.

All I needed to Know about the Stock market I Learned in Kindergarten

By Paul Townsend  Associate Vice President – Investments, Wells Fargo Advisors LLC
3/9/12
Review A-

I attended Paul’s talk at our local AAII Chapter meeting this Saturday. Turns out I had heard him speak many years back in Birmingham, MI at a local AAII chapter there. It was interesting to see how his methods and perspective had changed from then.

Although Paul has a catchy title, let us be real – they certainly could not teach these methods at Kindergarten! After debunking the first myth with his title I found Paul’s talk interesting and informative. He still uses Dorsey’s Point and Figure (P&F) techniques combined with trend lines and has combined this with IBD and Dorsey Wright’s Relative Strength comparison tools to pick and invest in the strongest. I like that – and I think that strategy comes from William O’Neill, the founder of IBD. Buy strength as the strong rise faster in an up trending market.

Paul points out that the most important lesson one needs to master is to have a disciplined method to Buy – Hold – Sell a stock, mutual fund or ETF. He has also been disillusioned with mutual fund money managers and has switched to ETFs. He learned his lessons in 2002 when he blew through his IRA account holding tech stocks like Sun Microsystems from 60 to 4. Unfortunately I did the same back then, which is what prompted me to learn technical analysis… Paul gave a basic lesson in Point and Figure charting. I have read Dorsey’s book on P&F and also tried it with Metastock and although it is fairly sound if you stick to it and follow it, I found it to be no better or different than any other technical analysis tool. I did like the fact that Paul has stayed with P&F charting and expanded his tool kit by using IBD and Dorsey Wright’s comparative strength analysis to select ETFs in a portfolio.

“As long as you are being rewarded for the risk you are taking, we should hold the stock” is one of his quotes. Agreed.

Another quote from Paul has to do with following a disciplined method that makes you do what you don’t want to do – buy and sell at the right time.

“My job is to get men to do what they don’t want to do” – Tom Landry, legendary Dallas Cowboys football coach.

Paul attributes success in investing to the P&F method which allowed him to stay with his big winners for a long time – 1-2 years. He points to his holdings in MCD which he just exited after being in it for 1-2 years. He clearly has learned to use P&F and understands how P&F ties to support and resistance, and when a stock is above a trend line. He also had charts showing the fall of Enron and how P&F had allowed him to advise his clients to exit when the stock was in the 70’s. Same with C where he saw exit signals when C was 49.

None of this is earth shattering in my mind. Basic technical analysis also permits you to do the same. Part of the key is how clear is the method in giving you a Buy and Sell signal and finally do you believe it enough to follow it? The real gem in his talk was at the end when he described how he has adapted and follows Dorsey Wright’s Relative Strength matrix to select which ETFs he stays in. This is the essence of how I manage my 401K choices as well. Visiting Dorsey Wright’s website gave this white paper that I will highlight

http://dorseywrightmm.com/downloads/hrs_research/White%20Paper%20-%20Relative%20Strength%20and%20Portfolio%20Management.pdf

There are many more gems there and I will enjoy digging and hunting for them. I believe there is good value in Relative Strength (RS) analysis to select the strongest. Still, I find the drawdowns can be excessive and therefore prefer to use tactical asset allocation models to limit my buy and hold times or use options to reduce the volatility.

I heard Dorsey give a talk at the MTA meeting here in Charlotte last year. He was very confident and impressive. I really like what he is doing. Also, I like IBD. Perhaps the key here is that Paul has evolved and found a good combination in Dorsey Wright’s methods and IBD to put a complete package together.

For full disclosure I must say that a friend of mind did give Paul a large sum of money to manage about 7 years back. Paul did not do much with it and his results were very mediocre. My friend eventually pulled the money out. While Paul gives a great talk and has put some great tools together, I cannot verify how good he is as a money manager at this time. I will stick to my own methods. I still appreciated the talk he gave and will spend more time with using IBD and relative strength as one of my strategies to select what I should put money into and will take a close look at the Dorsey Wright website..
http://dorseywrightmm.com/

And remember  “Up is good and Down is bad, unless you are short the market”.

401K Analysis remains Green 3/4/12

It is the beginning of the month. Time to run my 401K analysis and look at the weekly charts. Quick glance through the charts show everything is pointed upwards with the exception of the Fidelity Government Income Fund which is meandering sideways to slightly down and same with the PIMCO Global Bond Fund. Rest is mostly equities and they are all enjoying the push from the markets climbing nicely over the last two months and throughout 2012.

The first Fidelity 401K fund I am in points towards Vanguard Explorer Admiral, Artisan Mid-Cap, Fidelity Mt Vernon Growth and Lazard Emerging Markets Equity as the top funds I should be in.

The second Fidelity 401K fund I am in says Royce Opportunity, WFA SPL Mid Cap VL, Fidelity Growth Strategies and Fidelity Blue Chip Growth have the strongest momentum.

I am long in my 401K strategies accordingly although I remain partially hedged due to my cautious nature.

Otherwise, I closed my position in Gold and Oil and took the profits of the table. I have covered rising gas prices for the next quarter with the profits made – value of the dynamic hedge as posted last week. I got a long signal for SNDK and went back long in it.

The market is at a resistance level and we shall see how it handles it. Normal expectation is for it to pull back, gather strength and then surge through in April. After that we shall see if we need to sell in May and go away.

The only thing we have to fear is fear itself-nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. 
– Franklin Delano Roosevelt