Market Down .5% For Second Down Week In Row!

The market dropped sharply on Friday as investors sold stocks in the wake of unrest in Egypt. The flight to safety came as concerns that upheaval in Egypt might spread across the Middle East creating more world tension and uncertainty. In particular, Oil prices rose sharply as the risk of supply concerns grew. We think the Headline risk from Egypt will cause only a temporary, but needed pause in the market. The bigger story is the recovery of the US economy, where reports last week showed that GDP growth rose a solid 3.2%. Some analysts suggest the recovery was even stronger than those numbers suggest after adjusting for inventories built up from prior quarters. In addition, to date quarterly earnings reports have been overwhelmingly positive. There are still many more companies left to report over the next two weeks, but the consensus is that we will see more of the same positive reports. Interest rates remain low and we even had reports of growth in New and Existing Home sales. All in all, the data shows the US economy is recovering and that consumer confidence is improving. The US recovery is the bigger story that will drive the stock market higher longer term. However, given the uncertainty in the world and the volatility surrounding earnings season, we think the best strategy near term is to show patience and minimize trading activity. In our own trading, we sold Herbalife (HLF) last week for a 2% gain. Herbalife has had disappointing stock performance after trailing the market the past three months and we were happy getting out with a small gain. We plan to sit on the sidelines this week given the market uncertainty and the onslaught of earnings reports, but will remain opportunistic with our trading as conditions warrant. We were opportunistic last week with the purchase of our Walter Energy call spread and have already seen our position soar from a net entry cost of 47 cents to $4.15 per share! Sometimes the best trading opportunities arise when volatility spikes and investors overreact.

Volatility Rises As Market Takes Pause

Volatility rose sharply, 19% to end the week at 18.47. We wrote last week that the market had become somewhat complacent, particularly in light of the already strong market run since September 2010. We saw that trend reverse somewhat as fears and nervousness rose, particularly in stocks that have had the strongest recent performance. We saw the biggest weekly losses in the High Alpha Momentum stocks, some of which we carry in our own portfolios. In addition, the Russell 2000 fell 4.3% for the week, while the S&P dropped only .8%. We would not be surprised to see a bit of a correction or at least range bound trading over near term. Frankly that would be healthy for the market by helping to establish support levels from which the market can later rally. However, as we mentioned last week, the right approach is to stay fully invested and to ride out any short term fluctuations in what we believe will be another strong year. A market pullback would be an excellent time to buy and load up on quality stocks. Market news last week was mostly positive yet the market still fell, a sign of nervousness, although some notable companies did miss earnings estimates. Next week will bring an onslaught of more earnings reports and the market appears uncertain of where it will go. The better strategy may be to show patience and not make too many moves until after this quarterly earnings season is complete. The next two weeks should be telling for the near term direction of the market. Of course, we would be major buyers if we get an unexpected and major correction. As for trading, we purchased Jabil Circuit from our watch list, a stock that has come under recent selling pressure, but one that we think will recover nicely. We also purchased an opportunistic call spread against Walter Energy, after the energy sector sold off last week. We really like the risk return tradeoff on our WLT position as we purchased the option position for just 47 cents per share, but have the chance to make a whopping $20 per share if the underlying stock can return to previous highs from just a few weeks ago by June of this year. We also closed our short TCK put position for a 95% gain.

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Market Up 2.8% In First Two Weeks!

A strong start to the New Year has the market up 2.8% in just the first two weeks. Last week, quarterly earnings season began with Alcoa, JP Morgan, and Intel, all of which exceeded expectations. Earnings announcements will gain speed over the next few weeks and the early consensus is that the majority will show growth, although perhaps not the heady growth levels shown in 2010. We also saw acquisition activity from Duke Energy and DuPont, the latter a stock that we own in our portfolio. Buyouts are a sign that corporate America is feeling more confident in the economy and the recovery. The other significant development is market volatility which has dropped to very low levels as measured by the VIX at 15.5. That means fear in the marketplace has subsided as investors become more confident and take on more risk. Some will argue that low volatility suggests complacency which can set the stage for a correction. Frankly, the market has made a strong run since September 2010 and a small correction would not be surprising. However, we think the right approach is to stay fully invested and to ride out any short term fluctuations in what we believe is a longer term bull market. The other positive of low volatility is that option prices are relatively cheaper and that makes buying long positions far less expensive, whether that be for speculation or protection. As for trading, we sold one stock last week, Humana for a nice 27% gain. Humana is a quality company, but we think we can reinvest these proceeds into a stock that has better prospects for six month price appreciation. We are now 90% invested in both equity funds and plan to look for additional stocks to buy.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? Our complete list of watch list stocks can be found on our website, along with our commentary, see the link below. We have twelve stocks on our watch list representing nine potential buys and three potential shorts. We have several semiconductor stocks on our watch list and would caution investors to avoid buying too many stocks in the same industry. Frankly, we try to limit our investment holdings to no more than 20% from any one industry, but generally try to stay closer to 10%. Getting this allocation right is important as stocks in the same industry tend to move in the same direction, which reduces diversification and increases risk. Also, we have three stocks as candidates for short selling, but would caution that short selling in a rising market can be very risky. These three stocks are all overpriced and have seen recent selling pressure, but a rising market overall can help provide support to these stocks. A less risky play would be buy puts or put spreads to play a downward move instead of shorting these stocks outright.

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New Year Spurt Leads Market To 1.1% Rise!

The market started the New Year with a spurt leading to a 1.1% weekly rise. That is a good start to what we think will be another excellent year. If right, 2011 will be the third straight year of double digit gains, something that has not happened for quite some time. The news last week was light but did include job reports and retail sales figures. The jobs report was mixed and retail sales were lower than expected, but both of these areas still showed improvement. The recovery appears very much on track, but it is clear this recovery will take time. Corporate Earnings reporting begins next week and will gather speed throughout the next month. These earnings reports will drive market direction and we expect the positive momentum to continue. The stage is set for growth as corporate balance sheets are healthy and supported by a FED pursuing friendly monetary policies. We also expect money flows into stocks to rise in the coming year as the investor appetite for risk expands and money moves away from safe assets. We expect interest rates to slowly rise in 2011 and that means bonds funds could begin to lose value. If that happens, investors will begin to move some of that money back into stocks, and that will help drive the stock market higher. All in all, we are bullish for 2011 and plan to stay fully invested. Of course, the market will not go straight up and will likely remain bumpy from pent up fear that prevails from the recent market turmoil. In that light, we plan to stay fully invested, but will hedge occasionally to provide protection from those corrections when the market moves too fast. Volatility remains extremely low, which makes buying protection through options much cheaper. As for trading, we sold one stock last week for an excellent return, HealthSpring, a 55% gain. Long term we still like HealthSpring, but felt it was better to take these profits and move the money into another stock with even greater appreciatio n potential over the coming year. As we mentioned last week, take action now and reduce bond allocations and move that money into stocks and commodities to benefit from the next anticipated leg up of what is likely a longer term bull market.

Market Finishes 2010 With Strong 12.8% Gain

It was like two years rolled into one. The first half of 2010 was not pretty as the market dropped 9%. Fears regarding overvaluation, European Debt crisis, Flash Crash, and the BP oil spill all contributed to the market malaise. However, in July the market began an incredible run rising 23% over the next six months to finish the year 12.8% higher. Corporate earnings growth, monetary stimulus, and low interest rates helped reverse the trend propelling the market higher. Corporate balance sheets are flush with cash which has fueled the return of M&A activity. Strong earnings growth makes market valuations reasonable, particularly in light of low rates. The final push higher came following the change to Republican House control and the extension of the Bush Tax cuts. We believe many of the key factors that drove the market higher in the second half of the year will remain in place for 2011. Most economists have raised their GDP estimates, corporate earnings are projecte d to increase over 2010 levels, monetary policy will support market growth, and the tax measures foster economic growth. We also expect M&A activity to gain momentum and expect investor and consumer confidence to improve with the growing economy. All of these factors make us bullish for 2011 and we expect the market to end the year higher between 10 and 15%, maybe more. Of course, the ride is not likely to be smooth as we suspect 2011 will be bumpy, much like 2010. That means we could see another correction to cool down a bullish sentiment that is showing some signs of overheating. There are also other headwinds that will test market resilience including continued concerns over the European debt crisis, restrained Asian growth due to inflation concerns, double dip or stagnant Housing Market, financial regulatory changes, and global unrest in places like Korea and the Middle East. Despite the headwinds, Volatility has fallen sharply over the past few months and that mak es it cheaper to buy portfolio protection through the options markets. We think this is an excellent time to be fully invested in stocks, but to mitigate some of that risk through option protection. We were more conservative in 2010 and for the new year plan to take on more risk by being fully invested in our equity portfolios, although at times will hedge with option protection. We also plan to be more aggressive with our options trading. We had a tough year trading options as we got caught on the wrong side of the market just before the summer correction last year. However, despite these losses, we have earned a 30% compounded annual growth rate in our options portfolio since January 1, 2007. That is a tremendous return that is worth the additional risk, a remarkable result given the difficult investing environment over this time period. Our two equity portfolios beat the market averages again this year, keeping our unblemished record intact. We earned 16% on both stock portfolios versus a market performance of 12.8%. We think we can do even better relative to the market in 2011, as we were only 75% invested during much of 2010. Our oldest stock fund (tracked since Jan 1, 2006) has earned a 22% annualized growth rate over the past five years (versus .1% S&P). That is an excellent return, a rate that ensures our portfolio will more grow more than 2.5 times every five years! All in all, our portfolios, along with the market, should do well in 2011 as net money inflows into stocks gains momentum signaling investor demand and propelling stock prices higher. Take action now and reduce bond allocations and move that money into stocks and commodities to benefit from the next anticipated leg up of what is likely a longer term bull market.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!
What Stock Tips do we have? Our complete list of watch list stocks is below along with our commentary. To our watch list, we added one new stock to buy. Walter Energy is a producer and exporter of coal for the global steel industry and power industries. The stock has already has strong 6 month run rising more than 100%. That might seem a bit overdone now that the PE has reached 21, but valuation seems reasonable given the company has grown EPS 63% and Sales 30% over the past twelve months. Short Interest is high at 9%, but we view that as a bullish sign as those investors have already sold and will rush to cover if the stock makes new highs. We expect industrial demand growth in 2011 and that should propel Walter Energy stock higher. However, given the already sharp rise, we think the better play is to buy options instead of the stock. With options we can manage risk better and reduce the downside risk if the stock moves sharply against us. For Walter, we like the J un 125 and 140 call spread as that provides plenty of time for the underlying stock to move. The options are expensive, but the net cost is sharply reduced by selling the higher call price and possibly even a put. We recently purchased watch list stocks ARW and TRW for our portfolios, so those two stocks were removed. We also closed our TCK call spread and earned a whopping 333% gain from this position in our Aggressive portfolio. Overall, we are now fully invested in both stock portfolios and we plan to sharply increase allocations in our options portfolio over the next few months. As we mentioned above, we are bullish for 2011 and think this will be another good year for stocks and commodities.

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Market Grinds Out Small Gain on Mixed News!

It was an up and down week as the Market grinded out a small of .3%. However, it could have been worse had the market chosen to embrace all of the bad news. European debt concerns weighed on the market, while FedEx, a barometer for shipping, delivered a negative earnings surprise. Best Buy also delivered disappointing earnings, although the overall retail sales report was the exception with results that were much better than expected. There was enough bad news this week to drive the market lower, particularly in light of the strong run the market has had since September. The fact that the market was able to close with even a slight gain is testament to the strength and resiliency of the current market. Another sign of investor confidence was volatility, as measured by the VIX, which fell sharply as the quadruple witching hour came to a close with the quarterly and yearly expirations of options and futures. The year 2010 has been a good year for stocks and we expect 2011 to be even better as economists raise their 2011 GDP guidance and Americans enjoy extensions of their tax cuts. However, in our view, the key driver to watch is the money flows into stocks. We are seeing increases in net money stock flows and expect that trend to accelerate in 2011, driving stock prices higher. Corporations are in the best financial shape they have been in quite some time and that too provides excellent support for stocks. We continue to beat the market in both equity portfolios and expect to finish the year strong despite not being fully invested. We added to our stock positions last week with the purchase of Westlake (WLK, Chemicals), a manufacturer of basic chemicals, vinyls, polymers, and fabricated products. The stock has had a strong 6 month price run, but the stock remains cheap with a PE of just 18 relative to sales growth of 31%. Westlake has terrific operating margins relative to competitors and that will keep earnings growth very high. In our equity portfolios, we plan to increase our stock allocations over the coming weeks in an effort to be fully invested in 2011. In our options portfolio, we also purchased a Mar Call spread in OM Group (OMG, Chemical Manufacturing), a provider of specialty chemicals, advanced materials, and electrochemical energy storage solutions. Industrial demand is expected to gain momentum and that will help propel OMG stock higher. We bought the call spread instead the stock to take advantage of attractive option prices. We bought the $40 Mar call and sold the $45 with the same expiration to create the call spread. We make money if the stock rises by just 6.5% by Mar expiration and can make as much as 200% on our position if the underlying stock rises by just 15%, an excellent risk return tradeoff. With volatility dropping to low levels, this is also a good time to buy portfolio protection since lower premium prices makes buying this insurance much cheaper. We did just that last week by purchasing a Feb put spread against S&P Index (SPY). We bought the $118 Feb SPY put and sold the $112 Feb SPY put for what was only 96 cents per share. In short, we bought enough options to fully protect our portfolio if the S&P index drops between 5 and 10% by February expiration. We do not expect a price drop, but bought the insurance since option premiums were low. Remember, this is insurance and we do not expect to make money on this position. All in all, now is a good time for year-end portfolio housecleaning and to get fully invested for next year.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? To our watch list, we added three new stocks to buy and one new stock to short. Arrow Electronics (ARW, Electronic Instruments) provides products, services, and solutions to industrial and commercial component manufacturers. The stock is cheap with a PE just above 10 and carries sales and earnings growth more than double that valuation. Entegris (ENTG, Capital Goods) manufactures and supplies materials for the semiconductor and high technology industries. Entegris is a low priced stock at just $7.33, so investors could see outsized percentage gains when this stock takes off. The semiconductor cycle is beginning to rebound and Entegris is well positioned to benefit with likely strong price appreciation. TRW Automotive (TRW, Auto & Truck Parts) is the last new buy stock we added and is a diversified supplier of automotive systems and components to the original equipment manufacturers and aftermarkets. The Auto & Truck Parts sector has been one of the best performing sectors over the past 6 months, a trend that we expect to continue as valuations remain compelling. TRW trades at a PE of just 8.6 versus sales growth of 27% and triple digit earnings growth. We do not expect the company to maintain that torrid pace of earnings growth, but do expect EPS growth in the 20 to 30% range. That is still tremendous growth for a stock trading having a PE under nine! We also added one new stock to short, Focus Media Holdings (FMCN, Advertising). The stock is trading at $21.92 after dropping nearly 10% over the past month. The next support level for the stock is $17.50, so the stock could easily drop another $4 per share. Fundamentally, this stock is overvalued with an astronomical PE over 100. Any little thing could go wrong which could cause this stock to plummet further. Shorting the stock outright or buying put options is the way to position this stock. For our complete list of breakout stocks see below. Overall, the market remains strong and represents an excellent time to get fully invested.

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Renewed Strength Pushes Market Higher!

The market rallied 3% on renewed strength, overcoming a weak start. Initially the market was driven lower due to the European debt malaise, concerns that by Friday had subsided. Europe appears ready to take the necessary measures to support the debt crisis so that market risk has been reduced. Domestically, retail reports from holiday shoppers were better than expected and consumer confidence followed suit by rising sharply. The only downer was an employment report that came in below expectations, but at least showed small job increases, not declines. The unemployment rate remains quite sticky, and will likely remain high for most of 2011. All in all, we like where the market is, up nearly 10% Year to Date. We were hoping that the market would take a breather and consolidate from the sharp rise experienced since September. The 3% gain this week essentially brought the market even over the past four trading weeks as the market consolidated. As a sign of renewed streng th, bad news (Employment Report) is now seen as less bad or a glass half full instead of empty. Investor confidence in equities is growing, as evidenced by net money inflows into stocks. We expect consumer and investor confidence to continue trending upward in 2011 and that should set the tone for another good year in stocks. We plan to become fully invested in our stock portfolios over the next few weeks. We made some recent sales to accommodate year-end portfolio housekeeping. We sold the drug company AZN, Bio pharmaceutical provider IPXL, and retailer SUMR, as all three stocks have underperformed the market as well as their peers. We also purchased an Oil company stock, GEOI, and bought a call option on Texas instruments, companies that we added to our watch list last week. We plan to make additional buys in all stock and option portfolios in the coming weeks. Our stock screen is uncovering more and more stocks, a sign that overall market momentum is trending high er. Look for changes to our watch list as well stock alerts as our stock selection screen is providing ample investment opportunities. One last point, volatility (VIX) fell sharply last week to 18, a very low level over recent history. That means option prices will be lower relatively speaking, so now is a good time to buy cheap protection (puts) and to speculate (calls) on the market moving higher.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? Our complete list of watch list stocks is below along our commentary. We added two new stocks this week, Altera (ALTR, Semiconductors) and Avnet (AVT, Electronic Instruments). Altera designs and manufactures programmable logic devices, a business arena that is already showing signs of growing demand in the economic recovery. The stock is up 40% over the past three months, that is strong momentum, but there is plenty of upside left. Stock accumulation is up sharply another sign that the stock is moving higher. The stock trades at a PE of 17.7, a reasonable value for stocks in this sector, particularly in light of 54% sales growth over the past twelve months. This is also a stock where buying calls and call spreads can make sense in lieu of buying the stock outright. The second new stock is Avnet, an industrial distributer of electronic components and computer products. Avnet is just getting back to the price highs that were hit in May befor e the big market correction. The PE ratio is just 10, despite a 16% Return on Equity that tops most competitors. The stock is an excellent buy as sales have grown 30% over the past twelve months. We dropped Georesources (GEOI stock) and Texas Instruments (TXN call) from our watch list as we took long positions in both companies last week. We also dropped Clearwater Paper (CLW) as the stock has begun to underperform a market flush with high performers. As overall market momentum gains speed, our screen is uncovering more stocks, which means we can be more selective in the investment opportunities we pick.

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