The fear of the Fed meeting on Tuesday has prompted many traders
to simply step aside for the next week and await a possible Santa
Claus rally the following week. Will they or won't they, change the
bias, not the rates. The debate is not over a possible rate hike but
on how the Fed will move on the bias. With many analysts complaining
about how the Fed handles the bias statements and the different
views of what they mean, the Fed may change the way they express
their views. However they say it the outcome is still the same.
Traders will worry and volatility will reign. This uncertainty was
seen with the run for the exits on Friday. The bonds held their
ground Friday with 6.38% yields.
You would think with four one-billion+ share days in one week the
Dow would have made some significant gains. This was not the case
as the index only managed to add +32 points for the week. The
broader market attempted to rally but the sellers were out in
force. The very big caps were the only NYSE stocks to post gains.
The same is true on the Nasdaq as the big caps continued to rise
but the smaller stocks lagged. Liquidity is the key. With billions
continuing to flow into funds there is just no safe small caps in
which to put the money to work before Y2K. Smaller companies are
deemed to be risks and big caps are assumed to have the problem
under control. If things go wrong, funds cannot move out of the
small caps fast enough without impacting the price substantially.
This flight to the very large caps is likely to continue until
Y2K. Adding to this trend is the year end window dressing as
funds want to show the big safe names in their portfolio in the
year end statements.
The Nasdaq has now exceeded 70% gains for the year and ranks as
the largest gain ever. Previous high years were 1991 +56.84%,
1995 +30.9% and 1998 +39.6%. Tech valuations are now the highest
since 1983 and are likely to adjust in January.
The housing starts came in much lower than expected this morning
with a -2.3% drop. Analysts expected a +1.4% gain. This shows
the Fed interest rate hikes in action as increased costs of home
ownership slow the demand. This was the lowest level since August.
The housing permits however rose more than expected which point
to a future increase in housing starts. The economy is still
cooking along at a +5% rate and that is more than the Fed will
The big turnaround today came from JP Morgan. Earlier in the
day a Merrill Lynch analyst cut their earnings estimates for
JP Morgan and JPM dropped over -$5. Later in the day after
speaking with JPM again the same analyst retracted her comments
and JPM rebounded to positive territory taking the Dow with it.
Another Dow component, GE, made several high profile announcements
including a 3:1 stock split, an increase of +17% in their dividend
and an increase in their share buyback program of $5 billion.
The triple witch of the three announcements launched the Dow
into record territory. Another Dow component, MSFT, finished the
week up +$23 or almost +100 Dow points. Remember, the Dow was
only up +32 for the week yet MSFT contributed over +100. Yes,
the Dow was technically up for the week, but was it really?
It looks like MSFT was up helped by INTC +$10 (+50 Dow), HD
+10 (+50 Dow) and DD +10 (+50 Dow). After checking there were
only eight Dow stocks up for the week, 2 flat and 20 down. Four
Dow stocks MSFT, INTC, HD and DD accounted for almost +250 points.
If it were not for three of the four new stocks the Dow would
have been down substantially. Think about it. Was the market
up or just four stocks?
The liquidity driven market is about to get another boost.
Year end bonuses for most people in the financial sector
typically go directly into the market. With the hundreds of
thousands of newly rich from the Internet boom their big year
end bonuses are also going back into the market. The funds
are faced with receiving millions of dollars every day and
nothing to do with it. The cash buildup over the next two
weeks will be unprecedented and the end of year retirement
contributions will be the largest ever. The cash flood will
make it impossible for the market to mount a serious pull
back anytime soon.
The coming week should be a week for family, shopping, parties
and friends. It should not be looked on as a great trading
opportunity. The Fed meeting on Tuesday will impact trading
on Monday and Tuesday. Wednesday is a tossup and low volume
on Thursday will make it a yawner. If you are going to open
new positions the best targets should be the very big caps.
Historically the market is up the week after Christmas but
the Y2K event could blunt that rally depending on the negative
hype in the news. This would be a good week to wait for the
bus. Bus? If you want to go somewhere on the bus you probably
would not simply hop on the first bus that came along. You
would wait for the one with your route on the header. Would
you get on a bus going to a different stop simply because
you were impatient or tired of waiting? Of course not! You
would wait as long as necessary for the right bus to come
along. This week would be a good week to wait for the right
bus. Trading just because the market is open is a good way
to lose money. There are literally hundreds of good plays
setting up for a post Christmas run. Spend your time
analyzing the prospects and narrowing your targets to
only three or four. Decide what your entry point will be and
how you are going to scale into the position. I am going to
place some ridiculous target shooting orders on several stocks
I would like to play the week after Christmas. If I get
filled this week, great! If not, I did not lose any money
and I can still buy them after Christmas. We are probably
going to get one more good rally into January and then some
instability as we see how Y2K impacted fourth quarter profits.
Plan your trades to capitalize on this rally and then be
ready to take profits.
Have a safe week in the market. Don't buy the first dip.
Plan for the January rally and execute your plan.
Reminder for our male readers: There are only three days
left before you have to shop for Christmas. I have heard
that some stores will actually take money from males,
without a spouse or girlfriend present, before Christmas
Eve but I have yet to prove this theory.
Y2K Renewal Offer!!!
Announcing the cheapest renewal rate available! $24.91 mo*
Only ten days left to take advantage of this offer.
Long time readers know that each December we offer our
subscribers an extra value package as a thank you for their
support. The package this year contains (2) of our Y2K Option
Expiration Calendar Mousepads and the Millennium Edition of
the Stock Traders Almanac, a $50 value. You will receive two
mousepads, one for home and another for the office so you have
no excuse for not knowing those expiration dates and strike
price codes. We are also giving away the Millennium Edition
of the Stock Traders Almanac by Yale Hirsch. This almanac has
thousands of facts, tips and hard information that a trader
cannot live without. Just one of these facts can pay for the
newsletter subscription for the entire year and there are
thousands of them. This is the serious stock traders bible.
And the offer is.....Renew your subscription in December at the
annual rate and receive (2) Y2K Option Expiration Calendar Mousepads
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an annual subscription. The supply of almanacs is limited so
don't delay. Click here for more info.
QCOM - DEC-390 Calls, Naked Dec-400 Puts
Last week the chart on top was predicting a blowout soon. I
was long the Dec-390 calls @ $13 and short the Dec-400 Puts
@ $54.50. As you can see by the second chart is was a very
profitable play. I covered the naked puts on Tuesday for
$4.00 for a profit of a little over $50 per share. When the
drop started just before the close I was afraid they would
spike up again and closed the position. They eventually
expired worthless but who can complain about a $50 a share
profit? I closed the Dec-390 calls on Monday at $30 which
was WAY!!!! too soon but again, who can complain about a $17
profit when the Nasdaq can connect at any minute? I took
advantage of the Wednesday drop to buy the Dec-420 calls at
an average of $22 and sold them on the open Thursday for
$32.75. On Friday I felt the market and QCOM would tank by
the end of the day and I sold Dec-440 calls naked at the open
for $10.00 and covered them just before the close for $5.00.
This is a one minute chart of QCOM for late afternoon. I had
been nursing the $440 calls as they hovered around $10-11.00
all afternoon. When the sell off finally came I was sitting
on the trigger. When it bounced on $444 the first time I
covered 10 contracts @ $5.00 and put in a limit buy to cover
10 more at $4.00. When it bounced at 15:45 I was afraid it
was going back up. By the time I decided to change my limit
price it started back down again but I was already nervous.
I changed it to $6.00 and got a fill at $5.63. I was also
riding some OEX puts and as soon as I got the fill I switched
screens to watch the OEX. You can imagine my surprise when I
checked back just before the close. I was thinking about buying
some Jan calls but when I saw the spike I was in such shock I
decided to wait. If I had only held off covering those naked
calls five more minutes I would have been burnt toast. Never
fail to take a profit when offered. Especially when there is
only 15 minutes until expiration!
JDSU - DEC-240 Calls
Good plan, bad entry. I had entered the DEC-240 calls UQD-LH
for $8.00 on the previous Fridays drop. I tried to catch the
falling knife and got stabbed. It continued on down and I got
stopped out at $6.00. Hindsight is 20:20 and Wednesday morning
I could have bought the same calls for $2.00 with a high on
Friday of $25. I had removed JDSU from my watch screen and
missed the rebound completely until the gap open on Thursday.
ARBA - $240 Calls
This play suffered from December decay. I had a nice profit
going into the weekend on the Dec-240 calls bought at $9.25.
After the dip at the open on Monday they never recovered the
premium from the previous week. I closed at a profit for
$12.00 but remained disappointed. The bounce off resistance
took all the expectation out of the premiums and it never
INKT - $150 calls
Luck never hurts. Sometimes your luck is all bad and sometimes
you can do no wrong. The gap open on Monday offered too much
of a profit to pass up and after looking at the chart for
Tue/Wed I am very glad I sold for $30. I wish I could be lucky
like this for a $15 profit on every play! This is not normal
and you should not expect this kind of return.
BVSN - $90 calls
I had bought the Dec-90 calls BDV-LR for $14.50 the previous
week on the strength of the saucer bottom formation. They
looked ready to breakout over $110 again and the chart above
shows the perfect follow through. I jumped at the chance to
sell at the open on Monday for an average of $28 for another
double. I was kicking myself at the close when they were
trading for $45 but +100% gain is still 100%!!.
MSTR - Stock and Jan-170 calls
This is the painful part. I owned 1000 shares of MSTR in
another account that I had bought the prior week. Options
on MSTR are very expensive due to the strong price swings
in the stock. Note that the chart lines are $40 graduations.
When some stocks correct they can really correct. MSTR had
gone from $100 to $230+ in about three weeks. When the Nasdaq
corrected last week MSTR fell off the cliff. I first noticed
it when it took the first drop to the $210 range. I was
concerned but a -$25 drop and a solid hold, surely it was
When the bottom fell out it really fell out. The long red
line at the close on Tuesday was literally about ten ticks.
I was holding at -$20 and I looked away for a minute or
two and now I am -$35 for the day. OUCH! Then it gapped down
the next morning. I finally sold in disbelief at $180 for a
serious hit. The good news was extremely high option premiums
were dropping like a rock. I queued up the Jan $180, 170, 160
calls on Interquote and waited for the bounce. When MSTR hit
$160 and started rebounding I bought 20 contracts of the $170
calls for an average of $20. My rationale was with 20 contracts
MSTR would only have to go back up half as much to recover my
loss on 1000 shares since I now controlled 2000 through options.
Everything was looking real good midmorning on Friday but it
eased off its highs before the close. I calculated I need a
recovery to $200 to recover my loss on the stock.
CLS - Jan-75 calls
CLS got killed on the Solectron news. CLS is the third largest
electronics manufacturer in the world. CLS was on a split run
and would probably have been $110 by now without the SLR news.
When It dropped to $84 on Monday on the news I thought it
would be a quick entry point. I bought the Jan-75 calls for
$12.75. Wrong again! The next day the bottom fell out and it
lost another -$8. The drop was temporary and with the split
coming next week and the numerous upgrades on the sector as
a whole I elected to not sell. That was a good decision as
you can see. The ex-date on the split is 12/22 and I plan to
sell on Mon/Tue depending on the market. The calls closed at
OEX - Puts
After the big recovery in the Nasdaq since Wednesday and the
possibility of a sell off at the close on Friday, which was
the last day of business this year for many funds, I decided
to play OEX puts on Friday. The huge gap open setup the OEX
for some profit taking but the JPM downgrade/upgrade at
midday stopped it dead. I was stopped out with a dollar loss
at midday but the mid-afternoon run just put me in a stronger
position. I could not believe it. The OEX was sitting right
on 780 at 3:15 and the DEC-780 puts were only $1.06x1.13.
When the market stalled at the highs of the day I bought
50 contracts for $1.13 to $1.25 (what a bargin!) and within
ten minutes the sell off started. I closed them just before
the bell for an average price of $5.50. The play only took
30 min to run but all day to wait the entry point.
I had some incredibly lucky plays this week. Actually I like
to think of them as being in the right place at the right
time. By researching and planning carefully you can help
these accidents happen more often.
The downside was my failure to bail out on the two big losers
soon enough. I did not have stops set on the MSTR stock
because I was not planning to sell it any time soon. This
just reinforces the fallacy of this type of thinking. You
should always plan for the worst and hope for the best. A
trailing stop would have taken me out well over $200 and I
would be spending my time finding new plays instead of trying
to nurse that one back to health. The JDSU play was simply
a bad pick. Good stock, bad entry. These happen to everybody
all the time. The key is to run quickly for the exits and
minimize your losses. Stocks gap down just as much as they
gap up. Stocks trending down tend to gap down and those
trending up tend to gap up. If you are already nursing a
losing position and the stock is showing signs of weakness
then which way do you think the next gap will go?
I am not planning to "trade" next week. I am planning to
target shoot some options on several stocks using the
contingent order feature on Preferred. (Place an order
to buy options based on the stock price not the option
price) This way I don't have to worry about what the option
price will be if/when the stock drops intraday.
I would like to get back into some January options on QCOM,
YHOO, JDSU, INKT, CMGI. Some of these stocks are splitting
and should have a decent split run. (market permitting)
I am not going to chase them but if I have not filled I
may consider opening some positions on Thursday afternoon.
Something you should consider for your stock only accounts.
The HHH is a basket of the 20 largest Internet stocks by
market cap and was started by Merrill Lynch. It trades like
stock on the AMEX. I bought some when it hiccuped at $162
and sold it when it rolled over last week at $180. I was
expecting it to drop more on Wednesday and missed the $163
dip. If we get any weakness in the Internet market this
week we could see a pullback to $163-165 again. I would be
a buyer here. I think the Internets will be strong the two
weeks after Christmas and we could see $190 easy. There
are no options on it yet but it does let you profit from
the top 20 stocks without having to pick one or two to
play. We all know the trend is up overall. We just do not
know which ones are going up this week. This is very safe
and with proper stops very easy to trade because of the low
Remember, my trading plan is to trade "only when profitable"
and yours should be also.