WHERE SHOULD YOU HAVE PUT YOUR MONEY IN 2006?

A weekly newsletter based on the fact that stock market sectors are made up of industries, that industries are made up of individual stocks, and that individual stocks in the same industries and sectors move as a group. The proven best way to profit from the stock market is to keep your funds invested in the stocks of top performing sectors/industries at all times, and the best measurement of performance of these sectors/industries is their price movement over the previous six months. Below you will find commentary of Sectors, Industries, and Stocks based on the most recent 6-month period as well as updates on the past week’s action...

June 2, 2006

Simplespreading the Strong Sectors

With the subject of housing consistently at the top of the news today, this would be a good week to review how Simplespreaders should have participated in the 5 1/2-year Residential Construction rally. 
KB Homes (KBH) first showed up on our radar screens in late 2000 when the stock saucered out its lengthy decline from the 1998 highs. By September 2000, long term interest had begun a slow decline while short term interest rates were still on the rise. NASDAQ had dropped over 25% from its March mania high, but the Dow Jones Industrial Average and S & P 500 Index were still flirting with all-time peaks. High-tech mania (and foreboding fear) continued to grip Wall Street, and nothing as mundane as homebuilding attracted much attention. Yet, KB Homes rallied some 50% from its May low to its September high. The $12 area had been a sticking point in late 1999, early 2000, and again later that year in August. Finally, toward the end of September, it was able to breakout above the $12 resistance and climb to the mid $14 area. At the time, both KBH and Residential Construction were strong performing stocks and industries, ranking in the top 30% of relative strength rankings.
Several weeks later, on October 13, it dropped back onto its new area of support around $12, providing Simplespreaders with their first opportunity to get in on this stock which would eventually rise some 800% over the next 5 years. On that day you could have bought KBH stock for $12.50 while at the same time selling the January 12.50 calls for $1.32, giving you a 3-month profit goal of 11.8% by paying $11.18 for the KBH January 12.50 Buy/Write. Two and a half months later, on January 5, 2001, you could have sold the KBH January 12.50 Buy-Write for $12.50 (selling stock while buying back call), reaping your maximum profit two weeks prior to expiration and increasing your annualized gain to 51.1%
For the next 4 1/2 years, the homebuilders and KB Home provided Simplespreaders with numerous opportunities for profits.

The last opportunity came again in October, this time, 2005. Then, the $60 area was the resistance, created by the February highs. The early spring rally from $55 to $85 broke that resistance and established the $60 area as the new support. The late summer decline provided you with another great opportunity.
The stock could have been bought for $63.90 on October 17 while the January 65 call could have been sold for $5.75, which once again works out to an 11.8% profit goal for the next 3 months. On January 10, 2006, you could have sold the KBH January 65 Buy/Write for $64.70, pocketing a healthy 11.3% profit for an annualized gain of 46.7%. 
The housing industry has been the subject of numerous bearish books, articles, research reports, speeches, radio and TV specials, and condemnations since at least 2002. All have proved fruitless...until recently. Now the industry and its sector (Materials and Construction) have fallen upon hard times. 
We don't presume to predict what the long term prospects for this sector, however, we want to impress upon Simplespreaders that sector strength comes and goes, and the smart investor goes with the flow. That's the way the market works. As for now, we have absolutely no interest in the sector. But, tomorrow.....who knows. Strong relative performance numbers, higher highs and higher lows, some juicy call options, and we'll be back in business with the homebuilders.
As a footnote, although the stock rallied over 800% during the 5 1/2 years we have spotlighted, Simplespreaders should be happy taking 10-15% per trade whenever the conditions are right. When sectors get hot, it's not abnormal for individual stocks to soar hundreds of percent over the course of the run. However, being able to predict the bottoms and tops is a fool's game. In retrospect, we see what we missed, but if we are honest with ourselves, we also see the other disasters we would not have missed. Would we really have bought a boatload of stock in late 2000? Would we have held through 9/11? Would we have been smart enough to sell this past January and wash our hands of the sector? History says not.
We must remember that over the course of our lives, the stock market averages will produce returns of somewhere in the vicinity of 7%. Simplespreaders are in the game for the long run and thus must stick with a strategy which will serve them well over that long run. Hot stocks and sectors come and go; we only want to get a piece of each during the runup phase. Let the gamblers and braggarts have the rest. 

FOR THE WEEK...trying to turn it around

A mediocre showing by almost everybody except Energy, one of the strongest, and Health Care, one of the weakest of the sectors. Metals & Mining retained first place easily by gaining double what number two, Manufacturing, has over the past 6 months. Energy's strong +2.25% gain for the week kept it in third place. Aerospace/Defense barely hung onto fourth place, fighting off a GM-led Automotive sector revving into fifth place. Transportation had a good week, enabling it to drop only one spot to sixth place. Mover-of-the-week award goes to Media, whose media-oric rise from twenty-ninth to seventh place in only four weeks caught our attention. Consistently hovering close to the Top Ten since November, Banking comes in at eighth place. Chemicals hang tough in ninth place. And rounding out the Top Ten is the Granddaddy of bear market hedges, Tobacco.
The market is doing its bit to try to put in a bottom which would hopefuly turn into a resumption of the 3-year rally. A lot remains to be seen due to the tremendous amount of technical damage suffered over the course of the past month. We would be surprised if it succeeded.

THE TOP TEN...