NEWSLETTERS & RECOMMENDATIONS - October 31, 2011

Dear Friends & Fellow Traders,

I was surprised to read in Barron's this week that there was surprising confidence among market pros, especially since their survey was conducted late September near the market bottom. If their survey is right we could see a possible target near 1343 for the S&P.

The market didn't rally because Europe solved all their problems. Mainly stocks just got too cheap with all that double dip talk and earnings estimates falling to $75 next year. I wrote that was all crap – see my recent blog entries. I even noted awhile back that the economic numbers we started to see predicted a 2% 3rd quarter GDP. I was too low. GDP in the quarter so far grew 2.5%. It may be a soft number but it's better than the first 6 month’s 0.8% growth.

All that’s really happened is now stocks are getting the benefit of good domestic economic and earnings news coupled with a very skeptical investor class that continued to sell stocks and buy bonds. Besides stocks are only slightly higher for the year while corporate profits have been quite strong and the global economy is still growing.

Still most professionals are predicting slow growth. So what? What wrong with slow growth? Portfolio Manager (PM) Meryl Witmer writes in Barron's, "It could be Nirvana for the stock market because companies are growing and generating free cash, and they don't have to invest much in capital spending or inventory. They can pay their cash out to shareholders or buy in their shares. A slow-growing economy creates a lot of opportunities for smart capital allocation. In the course of my career, corporate managers have gotten a lot more logical about what they do with the company's money. In fact, the capital-allocation ability of the CEO is probably our No. 1 investment criterion." I know much of the market moves are highly correlated but I believe that may change next year as investors move more to specific ideas and not indexes or EFTs.

There may be more upside for the stock market than I previously thought. Stocks are attractive because most alternatives are so bad. Furthermore, good news from a Barron's survey has 90% of PMs saying they expect to be net buyers of stocks over the next 6-12 months. Conversely, allocations to bonds and cash are set to fall. JP Morgan notes that 40% of the PMs are lagging their bench marks by more than 2.5%, the second-worst showing since 1998. I read that HFs (hedge funds) may even be further behind. I can smell performance chasing into the 4th quarter should this rally get legs from here.

Still this rally doesn't lack for non-believers. With almost 95% of stocks over their 50DMA the market is momentarily really extended. So a pause shouldn't surprise anyone. It's difficult not to be cautious. I now spend most of my trading hedging puts. I only trade my equity portfolio small around the edges lately. If I'm right and the market sells off I setup a no cost way to buy protection. If I'm wrong I can ton money on the long E-mini hedges. See the ES charts below. As always, I'll let the market tell me what to do.

This coming week’s trading attention should move to our markets with headlines from a 2-day Fed meeting, a BB press conference and the ISM number. Finally, the all important jobs number on Friday morning.

Trades of the Week in Review
I've been talking all last week about buying puts in front of the Euro ministers meeting expecting the expected minor whatever news to sell the market off later in the week. So, we get our Monday rally into resistance. Later that same day I sent an Alert Email to buy puts into Tuesday morning. Why not then into the Monday's highs? I don't know but every day that passes erodes option premium. The put should be cheaper the next morning - all things being equal. Sure enough, the ministers can't agree. Tuesday morning their meeting is postponed. Expect the expected - stocks sell off the next 2 days. I don't own the puts. My ATM 128W put recommendation doubles going from $3.00 to $6.00 by Wednesday morning. The OTM puts almost triple. Cie la vie. See Wed D chart, NET Weekly Money Chart 2011-10-28.

Pre-market Thursday morning we get a surprisingly good Euro announcement. Europe is saved for a few more months. The ministers kicked the can further down the road. I send a pre-market Alert Email to buy the 128W ATM puts under $1.00 and hedge.

We get lucky the puts open at $0.57. We're in, shorting the 200DMA retest. We start hedging long E-minis down about 8 points make a few $s on a shallow rally then we approach the mid-Uni down 10-11 points from the opening high. The Oscillator hit Jammed and returns to 44 telling us we're looking at a possible trend-up day. Besides the A/Ds are 10-1 positive. Of course, it's also written in the "Trading Bible" that when price gaps a great distance from the mid-Uni we should buy or sell the 1st time back. This trade works over an 80% of the time. Hedge big. Non-hedgers might want to exit here. The put hits $1.66.That's nice work if you can get it. See Thursday C chart, Chart 2011-10-27.

If a NET trader sold the puts, he/she could have repurchased them for as little as $0.72 11 to 12 hours later. The rest of the day played out as expected. The S&Ps made higher highs and lows until 3:30. There were another 4 long hedges possible at the mid-Uni with the oscillator pulling back to 44. We rallied back to the Aug 2 highs at 3:30 for a possible EOD (end of day) trade setup where longs generally look to close their day trades out. We get lucky. We buy more puts under $0.35. We even get an 8 point rally back from a 50% selloff from the highs. Another possible $400 hedged profit per E-mini!

The hedged trades continued throughout Friday. I sent another Alert Email Friday before the market opened that I expected the market to rest after yesterday's huge rally. I noted a range for the day between 1273-74 and 1282-84. I nailed that one and you could have added another 5-9 possible hedged trades in that range. Any remaining puts could have been sold as high as $0.62 in the 1st hour Friday. I finally sold mine for $0.05. See Friday C chart, Chart 2011-10-28.

All in all it was a hedged traders dream 2 days! I put some possible returns based on long 10 puts on Thursday’s C chart but here's what I want you to really focus on. Think some day you can be trading 50-100 E-minis for 3-4 points a try with nearly full protection all day long against 200-300 long puts that costs less than $0.50.  Each 1 E-mini hedge could be $3,000-5,000 profit per trade. Think 2-4 hedges a day. You won't trade this many contracts ever for this type of profit potential.

Keep those cards and letters coming. I read every one.

Good trading,

Stan Moore
702.558.1814