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DEALING WITH VOLATILE MARKETS-The Media Experts vs. The Blue Collar Investor

WOW! For the last six weeks I have written articles that I’ve had to put on the backburners for future publication. This is due to the inordinate amount of market volatility. That’s all I’ve been thinking of, so I assume that most of you have been consumed with the same issue.

Many media experts have spoken with authority on the current direction of our Economy and the Stock Market in particular. As Blue Collar investors we study and evaluate these comments and make our own decisions as to how to proceed. The rationale behind this philosophy is simple: If these financial gurus cannot agree with each other, following the advice of any single one of them is an exercise in futility and a recipe for disaster. Here are some of the statements (compliments of these experts) that I’ve heard or read of late ( any sarcasm you detect is simply a figment of your imagination).

The Media Experts Speak

I- On Our Economy:

      1-We are entering the early stages of a recession ( 2 quarters of      negative economic  growth as measured by the  Gross Domestic Product    or    GDP). There have only been 11 recessions since the end of World War II.

2- We are not in a recession ; we are in temporty economic slowdown.

3- We are not in a recession but approaching one( quote from former Fed Chairman, Alan Greenspan).

II- Bull vs. Bear Market:

      1- We are entering a Bear Market. This is a Stock Market decline of 20% or more.  There have been 10 in post war history lasting an average of 1.3 years and taking 2 years to recover.

2-We are in a Bull Market Correction. These are declines of 10-20% in an appreciating market. Since WW II, there have been 16 lasting an average of 5 months and taking 4 months to recover.

III-  Are the Financial and Housing Sectors and Equities turning around?

     1- They have hit bottom and now is the time to get in and buy these stocks.

2- The sub-prime debacle will not turn around until the 2nd or 3rd quarter of 2008. Hold off until mid-year before jumping in.

3- It will take at least until the 2nd half of 2009 before we recover from this sub-prime mess. Do not buy these stocks!

4- Point in Time:

     1- It is Tuesday

2- It is Wednesday

3- No, it’s Thursday (okay, a little sarcasm here).

One Blue Collar Investor’s Take on these Issues

Items 1, 2, and 3: The Economy, Stock Market and Housing and Financial Stocks:

The Stock Market is more complex than ever before. There are a myriad of factors that determine market and equity direction. Included in these influences are fundamental, technical, domestic, global and psychological entities. In my view, there is no person, group of people, or even sophisticated computer software program that can accurately predict all  market and stock movements. There are simply too many variables, many of which cannot be scientifically quantified.

For example, this week the Fed dropped interest rates 75 basis points. Under previous parameters, this would be a major market positive. However, the European Central bank, Tne Bank of England and The Bank of Japan have NOT followed suit. This is now a challenging problem for our markets. What will happen? Who knows! In the past, when the Fed reduced rates, we could say with confidence that the market would respond positively. Not anymore.

Here is another example of Global Complications: We have a trade deficit of 6% (more exports than imports). This represents an outflow of domestic currency to foreign markets. Foreign nations may decide to sell large amounts of the US dollars it holds. This may drive the value of our currency down, making it more costly to purchase imports. This will also negatively impact our financial markets. Eliminating this trade deficit will go a long way in helping our financial institutions recover.

Therefore, regarding items 1, 2, and 3, the Economy, the Stock Market, and the Housing and Financial Equities, we cannot predict with certainty what will occur in the future. All we can do, is dramatically put the odds in our favor. However, that being said, most economists agree that the economy has been unusually resilient during an era of high oil prices, sub-prime issues debilitating the housing and financial institutions, and a weakening dollar. That tells me that there are a lot of positives to offset these MEGA-negatives. Here are some that I see:

     1-Tons of liquidity sitting on the sidelines waiting to jump in.

     2- The major market indicies were up in 2007 despite these issues.

     3- Demand, globally, for basic materials, energy, and construction could offset our weaker domestic housing and financial issues.

     4-The Fed seems to be responding to economic downturns with interest rate adjustments.

     5- Congress is also responding with an Economic Stimulous Package.

     6-The Japanese Yen is down in value, thereby strengthening our liquidity position with regards to the Yen-Carry Trade.

     7- Many economic indicators like the Jobs Numbers are holding up well.

     8- Major Corporations are reporting positive Earnings Reports even in this environment. Recent examples are HON, CAT, and MSFT.

    9-Consumers are still spending!

Item 4- Point in Time:

It is definitely Monday (no more sarcasm, promise).

What Does All This Mean?

Unless we are convinced that we are in the midst of a long term Bear Market (and I am not), we continue to sell options. For new investors, I would recommend to continue to paper trade until the volatility subsides. More experienced investors should still do well as long as you do your due diligence. There are industries that are going up in value even in this climate. We must locate the greatest performing stocks within these industries. That’s what Blue Collar Investors do.

One way to do this is to utilize the IBD website as follows:

1- From the IBD homepage, hit the link to the IBD 100.

2- Open the Excel Spreadsheet and view the last column on the right: Quarters of Rising Sponsorship. The stocks with the highest numbers have the greatest amount of cash flowing into its industry. In other words, the institutional investors are supporting this stock and its corresponding industry.

3- Run these stocks through the IBD checkup site.

4- If the industry meets our system criteria, scroll down and add stocks from the list of the industry’s 5-top performing stocks.

5- Now select the best of the best.

Here are some that I found; once again, I leave it to you to run these through the Scouter rating and do a technical analysis (most charts will look sub-par):

Gold and Silver:

ABX
BVN
AUX
AEM

Medical Systems and Equipment:

VMSI
OMCL
ABAX
SMTS

Chemical Manufacturing:

MOS
CF
LXU

In addition to this search, I decided to do a customized search, hoping to track down even more stocks that have managed to perform well in this difficult environment. In this endeavor, I really set the bar high. To pass my screen, these stocks must have excellent earnings, both realized and projected, over the last few weeks as well as the last year. In addition to this, these equities must have low debt and meet all IBD, Scouter, and technical analysis screens. Naturally, they must all be optionable stocks.

 Amazingly, I managed to locate 10 stocks that met these rigid requirements:

ABX
GRP
HES
IAG
LXU
MOS
RTN
SCRX
SPN
VMSI

I leave it to you to check the chart patterns and do the calculations to see if you want to add any or all to your watch list.

Bonus Idea:

Every so often I come across a stock that I like but just misses our system criteria. I will not put the equity on my watch list but will keep an eye on it. One such stock is WLT, an energy (coal) company. It is scheduled to come out with its Earnings Report the first week in February. If the fundamentals are positive, I will add this one to my watch list. Check it out and see what you think.

To the experienced investors out there, times like these are uncomfortable but not shocking. To the new investor, I want you to know that this extreme volatility is an aberration as to its extent. It is the market volatility that gives value to our options and ultimately will put cash in our accounts.

Wishing you all the very best in investing

Alan




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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

10 Responses to “DEALING WITH VOLATILE MARKETS-The Media Experts vs. The Blue Collar Investor”

  1. Glennroid January 28, 2008 4:20 pm #

    Wow! Alan. Thanks for the great input. Very helpful.

  2. Dennis Mc Comb January 31, 2008 3:48 pm #

    Much finer comments than the usual analysis’s that are on every channel. Thanks for the refreshing view of things.

  3. Dave Smith February 14, 2008 4:59 pm #

    Our team has been tracking a portfolio based on the stocks and options the class picked on Jan 19 with one exception – we bought back our option on PPDI and sold the stock when we found out that the earnings report was due on Feb 6 (during the option period). Although we took a loss on PPDI at the time, we converted “dead” money to cash profits by buying PRXL – another company in the same industry group as PPDI – and generating an additional $660 by selling 3 contracts of the PRXL FEB 55 call @ $2.20. So far we look to be making about a 3% return (36% annualized) on our investment. I’ll post our final returns after expiration Friday (Feb 15).

  4. Glennroid February 15, 2008 6:28 pm #

    Alan,

    I just finished my first month’s buy (on paper). I bought 5 stocks that I picked out using the methods I learned in your seminar with approximately $50,000 to start.

    From buying $44,953 worth of stock and selling options, my profit was 6.76% ($3037) for the month. That’s incredible because even with the tremendous volatility of this month that plays out to an amazing 81.07% annual return.

    What’s really interesting was that of the $3037 return only $47 was from stock increases. All the other income was from selling options.

    I still have much to understand about proper exit strategies, but obviously there is something very smart and logical about this system and it works.

    Thanks so much, this is very exciting!

  5. admin February 15, 2008 6:53 pm #

    Congratulations Glenn,
    Please post the ticker symbols of the stocks you purchased this month so we can all benefit from your great choices.
    Alan

  6. Dave Smith February 15, 2008 8:09 pm #

    Here is our team’s final return. We bought the following stocks (paper trading):

    CMED 400 shares
    MON 200 shares
    PRXL 300 shares
    SID 600 shares
    VIVO 600 shares

    We sold the following options:

    MON Feb 2008 105.0000 call
    MON Feb 2008 100.0000 call
    CMED Feb 2008 50.0000 call
    SID Feb 2008 75.0000 call
    SID Feb 2008 80.0000 call
    PRXL Feb 2008 55.0000 call
    VIVO Feb 2008 35.0000 call

    On expiration Friday (Feb 15) we made a return in one month of 3% or 36% annualized.

    Thank you, Alan!

  7. Glennroid February 16, 2008 2:45 pm #

    Hi there,

    This is what I bought (on paper):
    MON 100 shares for 110.50
    VIP 200 shares for 34.21
    CMED 200 shares for 47.08
    MOS 100 shares for 91.26
    SID 300 shares for 28.40 (this split 3:1)

    I sold options of:
    MON 1 @ 110
    VIP 2 @ 35
    CMED 1 @ 45
    CMED 1 @ 50
    MOS 1 @ 90
    SID 3 @ 28.33 (split 3:1)

    6.76% return or 81.07% annual. WOW!

  8. Tony C. February 18, 2008 7:44 am #

    Here’s what I bought for 2/15 ;
    MTL 100 shares@81.50 (wish I bought more!)
    TNE 300 shares@21.68
    APOL 100 shares@74.17
    SMTS 300 shares@23.50
    CYBS 400 shares@16.51

    MTL strike@75 /14.40
    TNE strike@ 17.50/5.90
    APOL bought back for .20 (Exp Fri)sold stock and then bought ARD @37.05 strike@35/4.00
    SMTS strike @22.50/1.90
    CYBS strike@15/1.85

    Safe but nice returns! I stayed IN THE MONEY,Big Time.

  9. Alan February 18, 2008 8:21 am #

    Thanks to Dave, Tony, and Glenn for sharing these great stock picks with us. I particularly encourage the use of in-the-money strikes during these volatile times especially if the chart shows a mixed technical picture. I would much rather you find this out paper trading rather than by losing money.

    I can’t tell you how good it makes me feel when I see relative stock market neophytes making such intelligent stock selections and using sophisticated market terminology that just a short time ago was not even close to being part of your vocabulary.

    Thanks for the feedback, you’ve made my day
    Alan

  10. Ralph Smith July 12, 2008 4:02 am #

    This is a well organized, useful service

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