The stock market has been posting gains the past few days.

After two very tough months to start 2009, what could go wrong?

Plenty, especially if you are focused on just the Dow Jones Industrial Average.

The Dow Jones has many financial-related companies, like Citibank, JP Morgan, Bank of America, American Express and quasi-financial stocks like General Electric and Caterpillar Tractor, which perform extensive lending and financing.

Remember, the financial stocks have led the charge the last two weeks, after Citibank's CEO circulated a memo to employees announcing the bank did well in January and February.  But two months do not make a full quarter, and the banks have posted significant losses in the previous quarter, as mentioned before.

In fact, JP Morgan CEO James Dimon mentioned on Friday, March 27, 2009 that March is shaping up to be a difficult month.  And financial stocks promptly swooned, bringing the rest of the market along with them.

What else could go wrong?

On Tuesday, March 31, we will finally hear the final revised 4th Quarter GDP numbers.  Remember, one month after each quarter, we get preliminary GDP numbers.  Then one month later, we get revised GDP numbers.

Then, at the end of the following month — which is also the end of the NEXT quarter — we receive the final revised GDP number.

The market took a beating on each of the previous two GDP announcements at the end of January and also February 2009.  If the number on Tuesday is revised downward, watch out.

We also will receive preliminary 1st quarter GDP numbers (1st quarter 2009) one month from now, at the end of April, 2009.  Fasten your seat belts.

One of top questions I've heard (over and over) lately has been:

What about buying Citibank down here?

As little as two weeks ago, the financial services giant was trading at one dollar (in fact it dipped briefly to 97 cents).

So?   How can we miss, right?

Well, I can think of few reasons why this may not be such a hot deal.   But before we get to that, did you ever read the first post I wrote about Citibank?  It was back in November 2007.

First, "word on the street" is the uptick rule may be reinstated.

If you were relentlessly selling short Citibank, the announcement of the return of the uptick rule ought to be enough to get you to cover your short (buy back the stock you sold short).   And while it's impossible to tell, it's my guess we saw a lot of short covering this week.

Next, the CEO of Citibank, Vikram Pandit, circulated an internal memo to employees that stated Citi actually made a profit in January and February.  That's good, right?

Maybe.

After all, the same company managed to lose $28 billion in the previous quarter.  Twenty-eight-billion-dollars!  How can a company manage (mis-manage?) to do that — in just a 3-month period?  Mark-to-market had much to do with the write-downs they took in the previous quarter.  And that rule is still in place, it has not been suspended.  So, the company may still lose money for the entire quarter.  Yikes.

What else? There are millions of new shares coming onto the market.  Citibank is converting many of their preferreds into common stock.  This dilutes the value of common shares already in the market.

Anything else? Well, yes, maybe the worst of all.  The company announced they are contemplating a reverse stock split.  A study completed in 2008 showed companies that did reverse splits found these reverse splits underperformed the market by 50% (on a risk-adjusted basis) during the three-year period after the action. “Reverse stock splits are a strong indicator the company is going to be a significant underperformer during the near future,” says Jim Rosenfeld, co-author of the study and an associate professor of finance at Emory University’s Goizueta Business School in Atlanta.

Many companies consider pulling a reverse stock split to avoid getting delisted.  But many wind up taking that path eventually anyway.  Can you imagine Citibank getting delisted from the New York Stock Exchange?

(Warning: math ahead!)

Covered call writing is when you own a stock (or buy a stock today)

…and also sell (or write) a call option against that position.

The main thing people forget about covered call writing is this: anytime you sell something, you are bringing money into your account.
Just remember that as we walk through the example.

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Say we're going to buy XYZ at $32/share.  1000 shares will cost us $32,000
It's December, so let's look at the April $35 call options.

The April 35 Call options are now trading at $2.40/contract.
We sell 10 of them and bring $2400 (not including commissions) into the account.

Your net cost to buy 1000 XYZ is essentially $29600 ($32,000 less the $2400).

Or, said another way, instead of paying $32, you bought the stock for $29.60/share.

Now what?

Well, there are three basic outcomes whenever you own a stock:

Bad news first…what happens if the stock goes UP?
Between now and April…four months…if the stock moves beyond $35, your stock will get "called" away.

If the company were to be taken over…or cure cancer…or announce some event that would cause the stock to skyrocket, this can backfire.
That's why it's not a good idea to write calls on volatile stocks.  This strategy works better on plodders.
See, when you sold ("wrote") the call option, you agreed to sell the stock if it exceeded $35 between today and the day it expires in April.
So if the stock goes up to $36, or $66, …or even $106…well, your shares are sold away from you at $35.  You only get $35.

But look at it another way: If the stock moves beyond $35, OK, the MOST you can get is $35.  But your net cost was $29.60, and it was sold at $35.
A net profit of 18% within four months.

Oh, and one more thing. If the stock gets called away from you at $35…

Yes, you make 18% inside four months.  That's true.  But you also get $35,000 cash (because the stock was sold) deposited into your account.  To invest again.
Nice.

OK, so…what if the stock does nothing?
Between now and April...four months…if the stock does not exceed $35, the option (which you sold) will simply expire worthless, and you simply keep the money.

Remember, you sold it way back in December at $2.60.  Keep the money in your pocket.  And you still own the stock.  Pretty good!  You put money in your pocket while the stock did nothing!  Now you can do it again!

Yeah, but what if the stock goes down?

Between now and April...four months…if the stock moves below what you paid for it, stop and think for a second…no one will exercise an option to buy the stock at $35. Because they can buy it in the market at the current price.  Remember, you sold that call option way back in December at $2.60.  Keep the money in your pocket.  And you still own the stock — at a net price of $29.60 — so your loss is probably less than someone who bought it at $32 the same day you bought.  Good for you!  You put money in your pocket while the stock actually went down!  Now you can do it again!

By the way, these are not made up numbers.

This is a REAL company that YOU are familiar with — and probably use their product every day.  I do.
It's a stock that virtually everyone in the United States is familiar with and trades on the New York Stock Exchange.

By the way, at $32, this stock carries a current yield of 5.70%, a lot more than money markets.
For more additional information, including the name of the stock, call the office at 732-223-9000.

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Pretty sad story reported recently…but sad, as in pathetic.

Guy Wyser-Pratte, who is known on Wall Street as a shareholder activist and runs a $500 million hedge fund, recently reported that the private banking operation of J.P. Morgan Chase had "somehow" allowed many small electronic transfers out of his personal account, over a period of time (15 months). Each transaction represented only several thousand dollars. However, the total of these withdrawals was more than $300,000. But these electronic transfers were not authorized.

Did he get all of his money back?

No. The end result of his saga, apparently will be a recovery of just $50,000.

Why?

Apparently, Mr. Hotshot Wall Streeter never bothered looking at his monthly bank statement. Look…if you don't contact your bank or broker within 60 days from the date the statement is printed… you are essentially saying "I agree" with everything printed on that statement. And you probably won't have a leg to stand on if you come back six months (or a year), later announcing some discrepancies found on your statement. The responsibility is yours.

Now, Wyser-Pratte claims that since he opened that account "years and years ago" he doesn't recall signing a document agreeing to that "60 day" stipulation.

He's right…he probably didn't sign anything like that. But maybe he should look on the back of his bank statement! It's usually written there…every single month. It ticks me off that some big shot takes his eye off the ball and tries to put the blame on someone else.

If you get a statement from a bank or broker — and you don't do anything regarding a possible discrepancy you may find within 60 days from the date of this statement, you are accepting the statement as it's printed. Essentially, you are out of luck. Please don't tell me you are as careless as Mr. Hotshot Wall Streeter.

Didn't this guy have someone reconciling his bank statements? Scary! Additionally, Wyser-Pratte states that the monthly statements have become so complicated he had trouble deciphering them. Wow! And he manages money for a living?

This is just one of the reasons why I encourage new clients to review their first few monthly statements with me. It's important that you understand what's happening inside your account. The first step is understanding how to read your monthly statement. Look, more and more transactions are taking place electronically. You supply your routing number and account number over the phone and you are giving the keys to your bank account to someone. It's a little scary, but it's 2008. We will have to exercise a little more diligence than we did yesterday, and it comes down to having a certain level of trust.

Or — is it giving away a certain level of trust? What are your thoughts?

UPDATE: Sunday evening, 03/16/2008: Bear Stearns to be acquired by JPMorgan Chase for $2.00 in stock swap deal.
That is NOT a typo!
The stock closed at $30 on Friday. On Thursday, it was $57.00.
And yes, it was $150 last summer.

This, essentially became a giant margin call on Bear Stearns. Apparently, cash — and customers — were leaving in droves the last few days. And when the firm needed to raise more cash, they found no buyers for all of the sub-prime investments they held.

All the brokerage firms and banks dealing in these same illiquid investments may get painted with the same brush. If Bear Stearns is worth $2, what is Citibank worth? What about Goldman Sachs, Merrill Lynch, Morgan Stanley…what are they worth now?

Since these are all widely-held stocks (and Citibank and JPMorgan are stocks in the Dow Jones Industrial Average), it would not be a big surprise to see a massive sell-off tomorrow.

We remain interested in currency and commodities, and cash. Call the office if you have ANY questions or concerns, or just need a gut-check.

The Dow Jones industrial average dropped below 12,000 today, March 7. In technical terms, this is a significant move. On my point and figure charts this represents another sell signal and tells us that the average may have further to fall. Not that I want to be in the prediction business, but it appears there may be at least another 5% fall coming our way.

Additionally, the S&P 500 index also gave a sell signal when it broke below 1300 today. Remember that a large percentage of the S&P 500 index is made up of financial stocks and technology stocks, which have both been taking it on the chin.

It's important to remember that "market bottoms" are a process — not an event. It's very rare that the market will go down and snap right back. And when you consider some of the news headlines that are driving this market lower and lower, I don't think we'll get a turnaround anytime soon.

We are on defense, it's time to focus on asset protection.

The beauty of the Point & Figure chart is that the chart has no preconceived bias. A Point and Figure chart doesn't care who owns the stock, or who likes the stock…or even if somebody just predicted some stock would double in the next 12 months.

The chart only cares about the daily highs and lows of the stock price, that's all!

And over time — that alone — tells an interesting story of its own.

Which is why it is so easy to spot mutual funds, sectors and individual stocks that are about to collapse — very often, they give a LOT of clues! Red flags — like multiple sell signals, support line breaks, relative strength signals…they often come in bunches, so it's easy to tell when trouble is brewing.

And I see them all the time.

Notice I wrote that Point and Figure can be EASY. That's E-A-S-Y, meaning you don't need a PhD, or a Harvard MBA to see what's happening with your investment.

Well, if it's so easy, why don't more people use point and figure charts?

Its is true, once you get the hang of the charts, they DO become easy.

Easy, but not SIMPLE.

The biggest problem with using charts is that you have to review the changes every day, and that is something a lot of folks just cannot be bothered doing. Does it get you into some good situations too early? Yes. But does it get you OUT of some situations before a meltdown? Yes, it often can. But people want instant gratification today, not more work.

And using point and figure charts can be work.

But here is the rub: look, no system is perfect, but after twenty-plus years of doing this professionally, I have found that the point and figure charts work extremely well in helping us manage the RISK in your portfolio.

And here is why: they do not offer excuses why something things did not work, they do not blame something (or somebody) else when things go unexpectedly.

I like that.

Football coaches never predict the outcome — they expect to win! The coach runs the best plays he can, when he's got the ball.

And when he doesn't have the ball, he sends the defensive team onto the field. And so it should be with your investments.

Trying to predict (guess) where the market will go is like trying to predict who'll win the Super Bowl before training camp starts; it's a waste of time.

Look, if you want to get wrapped up in the crazy headlines from the media, be my guest: Credit crisis, bankruptcies, wild market swings, etc. It's there for shock value, and ratings. It's all a waste of time, and will take your eye off the ball.

On June 26th one of the primary tools I use, the NYSE Bullish Percent, indicated to me the defensive team should now be on the field. This meant moving from "wealth accumulation" to "wealth preservation" strategies.

And after a few weeks, the market started to fall.

You know, sometimes the "winner" in a bad market is the person who lost the least. That's really what wealth preservation (defense) is about.

Almost anyone (except my mother-in-law) can make money in a good market. But there are a lot of ways to lose money in a bad market. Don't become a statistic.

Defense isn't about predicting where lightning will strike; it's about being prepared for an approaching storm.

How do you prepare?

So…where will the market go from here? That's a trick question! Don't waste a minute on that. Getting prepared is a better use of our time than making predictions.

Got questions? Fire away. 732-223-9000.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

The market may be putting in a short term bottom here.

That's great news for traders, not so hot if you are longer term, like most folks. The short-term indicators I use, like the NYSE Hi-Lo Index and the NYSE 10-week moving average have reached pretty washed out (sometimes called "over-sold") levels.

The risk, for nimble traders, can be pretty low and sometimes, the odds can be in your favor.

Sometimes. If you are nimble. I'm not as nimble as I used to be. Are you?

The risk in jumping back in right away is that this potential bounce could be very short-lived. And then we'd be right back to a risk-filled environment.

As you've seen in some very recent posts, the real trick (if there is a trick) to making money in the market is avoiding losses, especially large losses, for any length of time.

Even in supposedly "strong" up days in the market (like on Monday August 6th), the number of new lows being made has been swamping the number of stocks making new highs. That particular day, Monday August 6th, was a day where the market was UP nearly 300 points. Yet for every stock making a new high that day, there more than 10 stocks making new lows.

As far as I'm concerned, I'll wait until these indicators actually turn UP before committing money. They can wallow down here near the bottom for weeks, and sometimes months. And sometimes, like in 2002, the real "throwing in the towel, tossing the baby out with the bath water" type of selling didn't happen until we were actually DOWN at these levels anyway.

I've recently heard comparisons of the current market to the market in 1957, and 1987 and other years. As far as I'm concerned, the market is like snowflakes, no two are ever alike.

So fasten your seatbelts, we're in for some more turbulence. That's it for today. We'll talk to you soon.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net

Our main coach, the New York Stock Exchange bullish percent chart has signaled this week it's time to bring the defensive playbook out. "Wealth preservation" becomes the key now.

The bullish percent is a "risk" indicator, not a predictor. It means stay alert, clear out your weak holdings, take sell signals seriously. It doesn't mean “sell it all.”

And it doesn't mean "Let's wait and see," either.

Regardless of what happens in the Middle East, the economy, interest rates or sub-prime loans. The main coach is telling you: "Beware! Something is going on in the markets."

*** *** ***

I'm far more sensitive to changes in this indicator when "nothing is happening." In late February, the indicator was close to reversing to defense when China burped. That was enough to push the market to defense. Today there's been no such "event." At least, nothing we can see at the moment.

Two more things:

First, the bullish percent chart is a chart showing the PERCENTAGE of stocks on buy signals. The chart has to drop at least 6% just to flip from X's to O's. A short-term bounce may happen soon. That's just the sort of "head-fake" that lulls many to sleep.

Second, just because the Dow or S&P 500 may be flat (or even going up) doesn't mean YOUR stocks or mutual funds are doing the same thing. Many people "do the freak" when they get their statement and see they lost money when the market went up (or was flat), in the same period. The bullish percent measures the percentage of ALL stocks currently on buy signals. That number is now dropping.

*** *** ***

The bullish percent charts tell us that money is flowing OUT of stocks. In the "supply & demand" game, supply is gaining the upper hand. When there’s too much supply, prices must fall. But we don't have to panic. We have a game plan to manage the risk. And we're going to stick with it.

Make no mistake: something's happening.

But we're prepared, that's our job.

Tom

Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice
www.mullooly.net
support@mullooly.net  

After Thursday and Friday's action, the "NYSE Bullish Percent" has now reversed down into a column of O's.
 
 

This reversal down into O's means the defensive team is on the field.  So we move into a wealth preservation mode from a wealth accumulation mode.
 

Does this mean the market will definitely crash?

Absolutely not!  A crash is possible…but it also could mean we experience a market that takes one step forward, one step back, for several months…months…not making a lot of headway.
 

The bullish percent is a "risk evaluator" and not a "trading" indicator.  It tells us the level of risk in the market, not how far the market could fall.
 

The risk level has ratcheted up. 
So, we need to reduce volatility in some way. 
 
 Sometimes a reversal (like we've had this week) can spur a market rally.  Think about it: in order for the bullish percent to reverse down, there had to be a LOT of selling, right?
 So when the "bullish percent" flips from offense to defense, it really tells us a few things:
 1.          It's possible to still make money, but we're now fighting a serious headwind (swimming upstream, if you prefer)
2.          The market could tread in place for awhile – or it could crash –it's a waste of time to predict what will happen.
3.          We need to review everything and kick out the weaker names.
 
It'll be interesting to see how this market plays out. The good news is we have indicators guiding us.  We'll continue to follow their direction, whatever that might be.
 
 If you are confused, have questions, or just plain curious, CALL.