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...

September 8, 2006

Why Are We Simplespreaders?

Yes, indeed. Why?

In a word, history. 

Look at the chart below taken from Stan Weinstein's Secrets of Profiting in Bull and Bear Markets (and reproduced in Rule 8 of 80 Rules For Taking 40% a Year Out of Wall Street). A chart of every major average you have ever seen or will ever see looks like this. So does every sector, industry and individual chart you will ever see. Add to that the charts of gold, oil, the dollar, and interest rates. Although the amplitudes and time periods vary with the specific entity charted, the pattern is always the same - prices go up, down, and sideways in a never-ending, alternating dynamic of optimism and pessimism. Weinstein has done his work well. 

The bulls believe Stage 2 is always just around the corner, and will last for the foreseeable future once it arrives. On the other hand, the bears believe Stage 4 is also just around the corner, and also believe it will last for the foreseeable future whenever it arrives. 

But we know better. We know that the four stages, alternating back and forth, listed in the above chart, are the reality in the stock market - the ups, the downs, and the sideways. It's not that we want the markets to fluctuate that way, catching unsuspecting investors in their vice - it's just that they do. And Simplespreading exists because they do. It is the best way to take advantage of the natural progressions of the markets.

Stage 2 provides us with buying opportunities; Stages 2 and 3 provide us with selling opportunities. It's that Stage 4 that makes you wish you'd never heard of stocks, which is why we get out of positions as soon as we possibly can. The admonition of "Don't overstay your welcome" is part and parcel of our methodology. The stock market is a dangerous place. And don't ever forget it.

Sitting on the sidelines is an important facet of the Simplespread Strategy. With an annual profit goal of 40%, either by 10% four times a year, 15% three times a year, or 20% two times a year, Simplespreading encourages you to take plenty of time off from the market. Seldom would you close out one position only to immediately put that same capital right back into the market. The rally that enables you to sell is not the selloff that enables you to buy.

Recently, that fact was drilled home to us in the form of Theravance (THRX), a strong stock in the strong Drug sector. On Monday, 23 July, you could have bought the stock for $23.37 and sold the Sep 25 calls for $2.40. That position would have cost you $20.97 ($23.37 - $2.40). Your profit goal would have been $4.03 ($25.00 - $20.97). 

A month later, on 24 August, you could have sold your THRX stock for $26.43 and bought back the Sep 25 call for $2.00 (don't you just love that time decay?), netting you $24.43 on your $20.97 investment. Your profit would have worked out to $3.46, a 16.5% return in one month. Not bad work when you can get it.

Why would you have closed out the position instead of waiting for September expiration? Because by 24 August you had already made 86% of your profit goal. It does not make sense to expose yourself to another month of the market's fluctuations just to collect an additional $0.57, or 14% of your profit goal. Anything can happen during the time between 24 August and 15 September.

Let's look at it in another way. From 24 July to 15 September (expiration day) is about 7 1/2 weeks. By holding your Simplespread only to 25 August (a total of about 4 1/2 weeks), you reduced your exposure time by about 3 weeks, or 40%. So, you made 86% of your goal in 60% of the allotted time. That's efficiency!

Being out of the market serves two specific purposes: 
     1) You are out of Harm's Way, not exposing yourself to any danger. 
     2) Since you have no vested interests with your capital, your mind is free to reassess the market objectively.

Lifelong investors have to be able to survive and profit during all four Stages that have and surely will be part of every financial/economic cycle. Since we never know when one Stage begins and another one ends, we have to be ready to jump (both in and out) when the time is right. The best way to survive and profit during the four Stages is to take full advantage of rallies when they occur, then head for the sidelines to wait for another opportunity.

Simplespreading should be a winning strategy of buying stocks in strong sectors during market selloffs, hedging the buys with appropriate calls, then managing the position until it is resolved either by exercise, by being sold, or by rolling over.

It's that simple, and that's why we're Simplespreaders.

The Simplespread Experience.

FOR THE WEEK...a musical interlude

We don't know whether Weill and Anderson had shorting the stock market in mind when they wrote September Song, but its lyrics shed light on a strategy some analysts are advocating right now:

Oh, it's a long, long while
From May to December
But the days grow short
When you reach September

The rally does seem to be drawing short. Light volume on up days; heavier volume on down days. This is usually the weakest month of the year, so that puts us on our guard. Since the market has rallied, few, if any, Simplespreads are available right now anyway. 

Tobacco reached the #1 position near the bottom of the selloff on 26 July, and has held the pole position all during the subsequent rally. The #2 spot stayed with the Utilities, another group that doesn't do us Simplespreaders much good. Metals & Mining moved up one place to #3, determined to remain a strong sector. Food & Beverage dropped to the #4 position. Real Estate continued to enjoy investor blessings by moving up to the #5 spot.

The #6 position went to Energy, continuing its strong showing although some of the charts are beginning to look top heavy. Media made it three weeks in a row at the #7 position, growing stronger all the time. The sector sits right at its overhead resistance. Any increase in prices will push it into new recovery high ground. Aerospace/Defense hung tough at the #8 spot. Insurance climbed into the the #9 position, its first appearance in the Top Ten since March. Automotive, a rapidly weakening sector, barely made it by clinging onto the #10 position.

Various indicators point to the possibility of weakness coming during the next few weeks. The market is extended a bit on the upside. No new leadership appears on the horizon. How much longer can Energy and the Metals (with help from Tobacco and Food & Beverage) keep this market going? Defensive groups - Tobacco, Food & Beverage, and Utilities, have put in the best numbers during the summer rally...which is nothing to crow about. All in all, Simplespreaders should continue to try to close out as many positions as possible as the September expiration draws near, and wait for new opportunities as they appear.

THE TOP TEN...