May 3, 2010 Weekly Newsletter

Monday, May 03, 2010

Good Afternoon Traders,

Option4Options, LLC trusts that you are having a great trading day and we hope you will find our weekly newsletter educational and informative!

Today's Newsletter will discuss the following:
 
Market Outlook, Briefly Speaking!

Sell in May and Go Away?

Options Strategies
 
 
 

Market Outlook, Briefly Speaking!

Following Friday's sharp selloff, U.S. stocks are up sharply today.  Goldman Sachs (GS) shares are seeing a nice bounce following the Berkshire Hathaway (BRK.B) shareholders meeting.  Warren Buffett's staunch defense of Goldman's CEO Lloyd Blankfein apparently is helping the financial sector as a whole.  The market is also seeing support from the much-anticipated merger of UAL (UAUA) and Continental Airlines (CAL) which has been formally announced.

Is our current winning streak over?  Time will tell.  Last week the Dow and NASDAQ declined for the first time in the last nine and the S&P marked only it’s second down week in the last nine.  While the overall market seems to be positive today, we feel that may be short term (1-3 weeks in nature) and we are not sold on its direction for the next 10-15 weeks.

As the earnings season begins to wind down, we feel there will be a need for a correction in the coming weeks.  Therefore, we suggest being careful with your allocations to long term equity portfolios at this time.

The economic calendar is full of reports that will have a huge influence on the market including the April employment report coming out on Friday.  Analysts feel the employment picture should continue to improve and should they be accurate, employment would have its largest gain since December of 2006.

Housing inventory is high and is still hurting the real estate and construction industry.  Estimates show that the housing inventory will need another year to get more in balance.   Home construction was down over 1% in March due to the coming expiration of the homeowner tax credit.  On top of that, homeowner "WalkAways" are up over 31% in March and home financing is still a difficult process.

GM and Ford are seeing improving sales and many other industries are improving slightly.  Analysts say that they are seeing a significant turn for the positive in the economy.  With the overall numbers improving, it is encouraging for our economy in the long term over the next year.
 

Sell in May and Go Away?

There is an Old English saying that goes something like this:

"Sell in May and Go away, don’t come back till St. Ledger's Day". 

From May to October is historically considered the worst six month stretch for the stock market.  According to the Stock Trader's Almanac, from 1950 to 2008, the Dow Jones Industrial average rose an average of 0.1% in the May-October time period versus an average of 7.3% from November through April.  2009 was an exception with an 18.3% gain from May through September.  Last year was helped by the recession and recovery but this year we could see a return to the normal trend, especially since we are in overbought territory in the markets and we are coming off a 3 month rally.

Market crashes or corrections have occurred in September or October in 1929, 1974, 1987, 2001, 2002 and 2008.  Regardless of this history, the market still has a positive record since 1929 of better than 1% for the May-October time period.  Interesting though is the fact that the November-April time period has outperformed the May-October time period by more than 65%.  Either way past performance is no guarantee of future results.

Standard & Poor's chief investment strategist, Sam Stovall, author of "The Seven Rules of Wall Street", says you have to be in it to win it.  Stovall has calculated that over the past 20 years, the consumer staples and the healthcare sectors outperform the market 65% and 60% respectively between May and October.  Stovall proposes what he calls a semi-annual rotation strategy in which 50% of holdings are in consumer staples and 50% are in healthcare between May and October.  This could be done by way of using the Consumer Staples Select Sector SPDR (XLP) ETF and the Health Care SPDR (XLV) ETF.

According to Stovall, stocks do worse between May and October for three reasons:

• Cash infusions into the market generally happen in the first quarter of the year stemming from tax refunds.
• Investment of the prior year’s IRAs needs to be funded by April 15 and 401(K) contribution limits are typically fulfilled early because bonuses, typically paid out in March, are reinvested.
• Warmer weather months lead much of the investor class to take vacations, preferring to "focus on their tans rather than their portfolios".  End of year corporate earnings revisions, if disappointing, may also lead to equity outflows in September, usually the worst performing month of the year.

You are the judge, Pick your strategy!

(If you have a story you would like to share then please share it by emailing us at :)

newsletter@option4options.com

Option Strategies

Put Options -(one possible strategy) Why?

• Investor is in a Bear Market and bearish on Stock Investing.
• Investor's advantage in Stock Market Investing is to leverage put options with limited stock investing risk.
• Investor wants to buy puts in anticipation of a decrease in stock investing value
• Investor does not want the unlimited upside risk of committing stock investing capital for a short sale of the shares.

Put Options, Trading Puts Example:  ABC stock is trading @ $36.

Outlook: Bear Market- Would like to profit on bear market outlook for ABC stock with limited risk.

Put Option Trading Strategy:

Buy 10 Contracts ABC August 35 strike Puts at $2.25 per contract.
                      (Equals 100 shares per put contract)

Cost of Put Option Trade:         10 x 100 x $2.25 = $2,250.00
                                               (Controls 1,000 shares)

*All values shown are at the time of expiration.  Commissions and other trading fees not included. 

At Expiration of Put:

Maximum Profit = Price of underlying stock reaches $0.00

Breakeven = Strike Price – Premium Paid = $35.00 - $2.25 = $32.75 per share stock price

Maximum Loss = Total Premium Paid = $2.25 per share x 10 x 100 = ($2,250.00)

In Summary: Purchase an ABC put if you anticipate a significant decline in the stock and you have a timeframe in mind to realize your forecast.  Risk is limited to the total premium paid for the Put.  Profit is theoretically limited.

Hopefully, our market outlook, ideas and strategies will be helpful for your trading success.  Please visit our website to view other information and strategies that may interest you at:

 www.option4options.com/services

Good Investing!

Option4Options, LLC

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