October 8, 2012

Bullish Bias Continues

Dear Big Money Options Member,

Mark Twain once wrote “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”  The Dow Jones Industrial Average is at a 52-week high and near its 2007 all-time high.  Our market sentiment indicator continues to be bullish.  The Fed is placing a steady, positive monetary pressure on the financial system which is pinning interest rates at low levels and lifting asset prices.  Stocks and home values are up.  The job market continues to crawl forward.

While October has been a month known for market crashes, we do not see this as a likely event this month.  Investors will likely have to wait until after the presidential election next month before the market becomes peculiarly dangerous.

This morning, the World Bank lowered its 2012 GDP forecast for China from 8.2% to 7.7% and cut its 2013 GDP growth forecast by 50 basis points to 8.1%.  For the developing East, the World Bank is now projecting growth of 7.2% this year, versus 7.6% before, and 7.6% for 2013 versus 8.0% before.  Every major regional economy is experiencing slowing economic growth.

Earnings season officially starts with Alcoa’s earnings report on Tuesday.  According to Thomson Reuters, third quarter earnings are projected to decline 2.4%.  If earnings decline, it would be the first decline in quarterly earnings since the third quarter of 2009.  The earnings factor to watch may not be the actual results for the third quarter so much as the guidance for the fourth quarter.  Fourth quarter earnings growth is projected to be up a lofty 10%.  Managements may be conservative in their guidance for the fourth quarter and 2013 partly because of the uncertainties associated with the fiscal cliff.

Offsetting weakening economic conditions across the globe is the open ended monetary expansion commitment by the Federal Reserve and the European Central Bank (ECB).  On Tuesday, President Mario Draghi will speak at a public hearing at the European Parliament in Brussels.  The European sovereign debt crisis is currently dormant and Draghi is likely to offer more soothing words to ensure the beast does not awaken.

The risk in buying options in a market that becomes range bound is the underlying stocks do not advance fast enough to offset the negative impact of time decay.  We will be quick to take profits when the opportunities arise.

REVIEW OF TRADES/POSITIONS

New Positions

Delta Airlines (DAL) – On Oct. 1, we recommended to buy to open the DAL Dec 10 calls (DAL121222C000010000) for $0.65 or better. As of Friday’s close, this position was trading at $0.91. We continue to like this trade below our limit price.

Opko Health (OPK) – On Oct. 4, we recommended to buy to open the OPK Nov 4 calls (OPK121117C000040000) for $0.60 or better. As of Friday’s close, this position was trading at $0.60. We continue to like this trade.

Closed Positions

None

Open Positions

Our Top Trades — the trades that we recommend you enter now if you haven’t already — are marked below with an asterisk.

Arch Coal International (ACI– On Aug. 9, we recommended to buy to open the ACI Jan (2013) 8 calls (ACI130119C00008000) for $1.38 or less (our entry price was $1.21).  As of Friday’s close, this position was trading at $0.40. This trade is attractive at these levels.

Atmel (ATML) – On Sep. 27, we recommended to buy to open the ATML Nov 6 calls (ATML121117C00006000) for $0.30. As of Friday’s close, this position was trading at $0.30. We continue to like this trade.

*Delphi Automotive (DLPH) – On Sept. 11, we recommended to buy to open the DLPH Nov $32.50 Calls (DLPH121117C000325000) for $1.10 or less. As of Friday’s close, this position is trading at $1.06 (+25% on the week).  We continue to like this trade at or below our original limit price.

*Delta Airlines (DAL) – see New Positions above

DexCom (DXCM) – On Sep. 24, we recommended to buy to open the DXCM Oct. 15 Calls for $0.75 or less. As of Friday’s close, this position was trading at $0.30.  We continue to like this trade below our limit price.

*Iamgold (IAG) – On Sep. 19, we recommended to buy to open the IAG Dec 17 calls (IAG121222C00017000) for $1.10 or less. As of Friday’s close, this position was trading at $1.15. We continue to like this trade.

Office Depot (ODP) – On March 20, we recommended to buy to open the ODP Oct 4 Calls (ODP121020C00004000) for $0.50 cents or less. With front month options and $2.35 stock, we need a BIG surprise in the next two weeks to get out of this position with a profit.

*Opko Health (OPK) – see New Positions above

Patterson-UTI Energy (PTEN) – On Sept. 13, we recommended to buy to open the PTEN Nov 17 Calls (PTEN121117C000170000) for $0.85 or less. As of Friday’s close, this position is trading at $0.35.  We recommend holding this position.

QLogic (QLGC) – On August 21, we recommended you buy to open the QLGC Jan (2013) 12.50 Calls (QLGC130119C0001250) for $1.25 or less.  This position closed at $0.35 on Friday. Cumulative net deltas are still bullish but remain below 5-day average. We recommend holding this position.

Rubicon Minerals (RBY) – On June 13, we recommended buying to open the RBY Dec 5 (RBY121222C00005000) calls for $0.25 or less. As of Friday’s close, this position was trading at $0.06.  Cumulative net deltas are still bullish.  We recommend holding this position.

Parting Shot: Target-date Mutual Funds

Target-date mutual funds automatically adjust their asset mix between stocks, bonds and cash to de-risk a portfolio as a “target-date” such as retirement approaches.  De-risking involves gradually transitioning investors via autopilot on a “glidepath” from stocks to bonds until the target date is reached.

Research Affiliates simulated the performance of target-date funds versus a constant 50-50 stock/bond portfolio and an inverse strategy which became more aggressive over time.  The Target-date fund simulations underperformed both the 50-50 and the inverse risk-on strategies.

The glidepath nature of target-date funds moves to a defensive posture just when the investor has enough money to make the effects of compounding highly impactful.  Today, the strategy may carry even higher risk as it is migrating investors into a negative real return at a time when the desperately need to build wealth to support long-duration retirement.

Investors should be wary of investment programs that make no allowance for current market conditions.  Dynamic rebalancing, even yearly, based on actual performance is a good idea.  More frequent dynamic rebalancing based on a forward looking market sentiment indicator is an even better idea.

We will email you our market sentiment indicator for free every Friday if you sign-up at www.deltaim.com.

Have a great week trading,

Nick Atkeson and Andrew Houghton
Editors
Big Money Options

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