NEWSLETTERS & RECOMMENDATIONS - September 5, 2011

Dear Friends and Fellow Traders,

Last Minute Market Update, Labor Day 2011, Monday, September 5, 2011
As of this writing, Monday, it is unclear what just spooked the markets. It appears the ECB just announced that it had monetized a whopping E13.3 billion in bonds in the past week, nearly double expectations, and a total of E134 billion since the SMP program's (a European bailout plan) inception, the market took one quick look at just how effective this program has been, shuddered and plunged. Investors realized that neither ECB intervention nor the shorting halt is doing anything at all.

As a result, S&P is now down 23 point, the EURUSD just dropped below 1.41 and the rolling halt of Italian bank stock has started with Intessa, Mediaset and Impreglio - all trading has halted. We expect UniCredit, another Italian bank, to follow suit as usual. To me it looks as though the negative market sentiment is unlikely to change for the better in Europe any time soon. Fasten your seat belts please.

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I thought I'd start with reasons to help you understand a little better why I believe there will be no recession this year or next. Many of the experts, some of whom I greatly admire have given their reasons for a recession. The TV news and papers are full of the reasons.

Here is the problem that is perplexing investors today. I have chosen to list the reasons Doug Kass from Real Money Pro has given because I have been around long enough to find most of what Doug says to be quite informative. Per Doug,
“As it relates to job growth, initial jobs claims, corporate profit growth and capital spending all point to improving and better payroll growth than we saw Friday. But what is happening is that the negative feedback loop that I have been writing about is taking a turn for the worse and we don't yet know its impact on business and consumer spending. When we figure out the disconnect between data and sentiment we'll have a lot more clarity on what the markets will do.”
I could not have summed it up better myself. Thank you Dougie.

We will only know for sure in the fullness of time. Right now my biggest concern is Greece. As reported in both the WSJ and Reuters Friday it seems that things in Europe have fallen off the cliff. The European markets were down sharply Friday, well over 3%+. One senior IMF official was quoted, "I expect a hard default (Greece) definitely before March, maybe this year." Greece and now Italy are softening their austerity packages. Germans don't want to bailout anyone anymore. I'm concerned. I haven't a clue as to how all this really plays out and how it really will hit the US stock market. We've been hearing about this for some time now and markets after an initial shock may do what they were doing in the first place.

Stocks, especially growth stocks, have been out of favor for the last 10 or more years. Growth is cheap. Morningstar-tracked mutual funds have seen equities as an asset class go from 60% holding to 40% at the end of 2010. I can't remember equity sentiment this low. Bonds and commodities have exploded for the last 5-6 years. Many high-quality growth companies sitting on tons of cash are selling only slightly over a 10 multiple when cash per share is backed out. I am looking forward, at some point down the road, to doing massive bull calls spreads in stocks like AAPL that I once tried to buy not too long ago near the AAPL lows. Add Qualcomm to that list. They are a huge beneficiary of AAPL's product cycle. I love QCOM under $50 better if it ever drops to $45-47. I can see the stock over $70 within 18 months.

Corporate fundamentals remain strong and may even get better as costs remain low in this economic environment while selling their products to the faster growing overseas markets. These companies are seeing huge benefits from internet technology.

I like stocks heading into year end. Right now 47% of all equity managers according to JPMorgan strategist Tom Lee are lagging their benchmarks. That's a lot of possible performance chasers coming to our market ups. Combine this with further asset allocation sales of bonds and buying stock, I'm pretty excited about stocks this year into any weakness back to the 1125-50 area.

There is very little in the way of news. I'm expecting the German Supreme Court to help support the German investments into the PIIGS countries then on to the BB speech Thursday. I'm not expecting a possible Greek implosion for at least the next 10 days.

I saved the best idea for last: China can kill two birds with one stone with much higher gold prices. This article is a must read and an added bonus for considering owning gold and gold stocks big time. I told you what I'm doing with SA and the GDXJ Index.

Trades of the Week in Review
When I finished writing my last book, The Definitive Trading Bible, I never thought "The Bible" could explain trading successes by just helping traders better understand what makes markets behave the way it does and when to expect the market to do its thing. Of key note is my detailed discussion of asset allocation and EOM (End of Month) markups/markdowns, AKA portfolio manager sheninagings. Informed NET traders have the perfect trading vehicle, expiration week option trading, that limit risk while maximizing profits.

Given the current volatility, a few weeks ago I started to trade and recommend the SPY weekly options. They cost more to trade but they do offer size regardless of the day of the week. This was the first week I traded them every day given the strong fundamental reasons to trade options every day this week. See attached Friday 30-minute chart here, NET Weekly Money Chart 2011-09-01-D 1 of 3.

In last week’s Stan’s Blog I mentioned the lousy economic fundamentals coming out. We would have plenty of volatility to trade. I even mentioned I might leg into a bearish SPY put spread later. NET traders also know all about EOM, EOQ and EOY market ups or downs as the case may be. Since August was down almost 14% coming into the EOM period NET was looking for a good rally attempt into Wednesday morning. There is usually an afternoon sell off that day when the buyers step aside from this illegal markup. No one really tries to get in the way. Even the shorts know they can wait their turn. Let the bulls mark the market up and then they can sell it short higher.

There are many ways to trade the markup in this case. We can go long futures (S&P E-minis) but margin requirements have most traders selling out by the end of day (EOD) then the trick is to get back in the next day. Hopefully the market hasn’t gapped away from you. Optionally, we can buy calls and hang on. This works but if you don't hedge or are wrong traders can lose most or all of their money. On Friday the market had a massive melt-up then gapped-up through resistance. This made calls even more expensive.

When I'm looking to get long the market for a markup rally I'm looking to buy cheaper puts as the demand isn't as great as the calls at that moment. I like the fact that my risk is clearly defined as the cost of the put. I then go long the E-minis. If I’m right my upside is unlimited. I can create a simultaneous entry or, restated, go long puts and long E-minis at the same time. However, I prefer the leg-in trade. I get long the puts into a clear resistance area then wait for the appropriate retracement then I go long with E-minis. The market rallies back to resistance and I sell some E-minis but not all and repeat this strategy until a breakout comes. In the previous week the market repeatedly made higher highs and higher lows. As prices moved higher we sold all the futures in a leg-out fashion and on weakness sold the puts and continued this into strength. Then we bought the next strike put.

In this week’s example we started buying the SPY 118 OTM puts on Monday. We made a few $s on these puts but made over $3500 on the E-minis using 10 options and 2 E-minis for hedging. We continued on Tuesday with the SPY OTM 120 puts and had basically the same results. Wednesday, I sent out Alert Emails to buy the SPY 122 NTM puts under $1.00. We were long averaging around $0.88. We were long puts at massive resistance as the market retraced 50% of the entire down move by 1:00 PM. That afternoon the market fell over 20 S&P points. Thursday morning we were hedged long with the E-minis in front of the PMI 10:00 number. The number was a surprise. The markets rallied back to the Wed highs where the 122 SPY puts could have been purchased for as little as $0.57. Hedged profits were taken on that last rally. GS came out and lowered the Friday Jobs Number from 50K to 25K.The markets sold off hard the rest of the day. I alert emailed and noted on the charts I would stay long puts and hedge to make more money while we waited for the Friday numbers. See attached Thursday "C", 9/01Chart, NET Weekly Money Chart 2011-09-02-C Thu 2 of 3.

Friday morning Europe was weak with our E-minis down over 10 points before the Jobs Number. I sent an Alert Email before 8:30 to put on a small hedge. The number came out and was pretty ugly. I sent another Alert Email saying to buy more E-minis now down another 10 points. Start selling some puts when market broke 1179-80. I mentioned that I thought the low would be made early as the news was pretty much in the decline. I did write to start selling the puts below 1179-80. The low was 1178ish. Puts could have been sold for as much as $3.93. This was over 5 times our average entry price. I must have sent out at least 5 Alert Emails before 11:00 AM. I mentioned to sell half of one’s E-minis holding (or 10) that were trading 1184-5. The rest were sold lower later. The remaining puts could have been sold for as much as $4.40 or nearly a 7X return from Thursday low purchase near $0.60. See attached Friday "C" Chart, NET Weekly Money Chart 2011-09-02-C 3 of 3.

In summary, there was at least $3,500 a day made on the first 3 days with the E-mini hedges coupled with small profits coming on the actual put trade during our End of Month (EOM) market. GS told us early Monday that an asset allocation out of $153 billion in bonds was taking place. Stocks must have gotten their fair share plus short covering jammed the market into resistance where substantial $s could have been made betting smartly on the weak economic numbers coming out late in the week after the markup. Here the hedging profits were much bigger given the many huge short term swings. Even after giving back a $1,000 on the earliest Alert Email hedge from Friday morning. The put profit was icing on the cake.

If you have no idea of what information is coming or don’t know how to use it you are just playing at trading with both hands tied behind your back. If you don’t know or don’t understand that the market was just artificially marked-up over 100 points in front of major negative news (Employment and a weak PMI numbers) how were you to ever going to buy puts for the (NET) expected decline. Read my "The Bible" and profit. Call me if you need to. I know it’s a lot of data.

Keep those cards and letters coming. I read them all.

Good trading,

Stan Moore
702.558.1814