Hi Everyone,

The market is behaving pretty closely to what I expected in last Sunday’s Trading Room.  There is definitely still buying out there; but, the market has just run up too much too quickly and needed to either pullback or consolidate.  The last three days we have seen the market trade down in the morning and recover near the close as the buyers come into the market.  It also really looks like the bulls want 9000 to hold on the dow as that is where we are seeing some support. 

I am still of the opinion the next move will be higher, possibly to Dow 9500 and S&P 1020.  However, as discussed in the Trading Room, I think the markets are stuck between 8000-10,000 for the next few years.

Robb Reinhold

Today we got the rally I talked about yesterday in the Trading Room.  I said I thought the market would rally off Goldman Sachs earnings on Tuesday.  However, before the bell today, a very influencial analyst, Merideth Whitney, upgraded the stock and said she expected “blowout” earnings this quarter.  The stock opened up 6 points and set the tone for the rest of the day.  Today was one of those days where the .TRIN stays low, telling you there will be buying all day long.

The financials, retailers, etc performed well today while the commodities sector still struggled.  As I said in the trading room, we are waiting to short commodities stocks off this short term rally.  I am still watching for short opportunities on POT, BG, MOS, and CF.

Happy Trading

Robb Reinhold

I had a question from a student who was leaving his current job and moving to a new job as to what he should (or could) do with his 401k.  The benefits of having your retirement money inside an IRA (or RSP for canadians) is amazing as opposed to 401k type plans.  An IRA will give you almost unlimited investment choices, allowing you to completely control your retirement investments.  A 401k will only offer a handful of choices that will be mostly made up of mutual funds and bond funds, prohibiting you from making any other investment choices.

So, for anyone who is in this situation, he are the 4 things you can do:

1. Move your old 401K to your new 401K- I don’t like this as you are simply moving from one crappy plan to another

2. Leave it where it is- again, no control of investments

3. Open a rollover IRA and transfer your 401K into the rollover IRA- Your new broker will help you facilitate this.

       a. You need to decide whether you want to move over all the positions to your new IRA or sell them and just move over cash.  If you intend to sell all the positions when you roll this over, sell inside your 401K where there are no commissions.

4. Rollover into a Roth IRA

       a. you will have to pay a tax bill this year on all the gains in the account.  This is best done when there are no gains to be taxed or in a year you have low income.

Hopefully this helps,

Robb

The market had a nasty day yesterday.  We have seen -4% down moves before; but, this one had some real negative underlying issues. 

1. the move came with some fairly decent volume.  

2. the advance/decline (stocks up/stocks down) was 1 to 9 (9 out of 10 stocks closed lower) and the $trin (volume of up stocks/down stocks) was very negative, showing the selling was heavy on the down stocks.  

3. commodities as a whole had terrible losses with oil down close to 9%. 

4. Gold had its first solid up day in about a month

5. Bank of America says more losses coming and JP Morgan states it will need more help from the government.

The measure of a bull market is the ability to recover after days like this.  If we can manage a positive close today, we may see a continuation of the rally.  If not, I think we have seen the top. 

As I talked about in the Trading Room class, there are 4 different ways to put on this trade.  There is no difference in risk/reward, break-even points, etc. in any of the combinations below.

Bull Call spread 310/320  bear call spread 340/350
bull put spread 310/320   bear put spread 340/350
bull call spread 310/320  bear put spread 340/350
Bull put spread 310/320   bear call spread 340/350

All these trades have the same risk graph and all will need the same treatment at expiration. Any option spreads that are in the money will automatically be exercised at expiration.  For instance, if you had a bull call spread at 310/320 and the stock closed at 330, you would buy the stock at 310 and sell immediately at 320.  You would make $10 on the stock minus you original debit (usually $4).  This is done automatically over the weekend.

1. If the stock closes between 320-340, do nothing.  All options will either expire worthless (If you used credit spreads) of will be exercised at full profit.

2. If the stock closes above 350 or below 310, do nothing.  All options will either expire worthless or will be exercised at full loss. ($2.45 on this trade)

3. If the stock looks to close between 310-320, you will need to close out that leg of the trade (buy the option you sold and sell the option you bought) and let the other leg expire worthless or be exercised at full profit.

4. If the stock looks to close between 340-350, you will need to close out that leg of the trade (buy the option you sold and sell the option you bought) and let the other leg expire worthless or be exercised at full profit.

Hopefully this helps!

We are still in a bear market; but, we are experiencing a bear market rally at this
point.  Most of the time, these rallies will last 6-8 weeks and run about 20-25% off the
bottom.  Until we have improving economic conditions…or at least sideways, we will
still be in a bear market.

It took me a long time (probably a couple years) until I could “plug my nose” and go long
at times like these.  Emotionally, you don’t have any desire to play the long side and
the thought of buying a stock…especially a financial stock makes you sick.  At times
like these, just make sure you are buying stocks that were strong in the market crash. 
This way, you know you are most likely buying a higher quality stock.  And after that,
make sure you have protection (stops, options, etc.)

One strategy you may want to look at is a bull call spread.  It is a low risk trade that
you may feel comfortable making.  Matt goes throught them in the Advanced Options class.

Thanks,
Robb

When a company sells stocks, it is important to know if this was stock they already owned (called Treasury stock) or if they are issuing (creating) new shares. If they are simply selling treasury stock, there should be little to no effect on the stock. If they are issuing new shares, this typically has a negative impact on a stock since this creates dilution of the current shareholders. Imagine you own 10,000 shares of a company that has 100,000 shares total outstanding. You own 10% of the company. However, lets say the company issues 100,000 more shares to raise capital, the value of your investment would go down since you only own 5% now.

The only time investors don’t mind a new stock issue is when they are issuing stock to buy a new company. In our prior example, if the company used the money to buy another business the same size, you would now own 5% of a company that is twice as big. As you can see, your investment didn’t really change in value.

But, one last thing about trading news events. I said this many times in the Trading Room, “understanding the news isn’t important. The reaction to the news is what we need to understand.”

Hopefully this helps,
Robb

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