General Market Index (GMI) table

9th day of $QQQ short term up-trend; $GLD turning up? Writing calls on $GLD; $GMCR, $QCOR, $IRBT green line break-outs

@ 9:13 pm
GMI6/6
GMI-27/9
T210864%

I have told you that I have been writing weekly calls on my position in GLD. GLD is an ETF that owns gold.   I have been learning how to bring in a nice income by writing calls on GLD because gold seems to be turning up in a Stage 2 up-trend. Gold often reflects investor fears about the world situation in general and/or about currency inflation. It will be a while before we learn what is behind the apparent up-trend in gold.

Here is how I make money from my position in GLD.   GLD closed Friday at $127.58 per share. Weekly calls on GLD that expire next Friday, 2/28, with a strike price of 127.50 closed at 1.05 and with a   bid/ask spread of 1.01/1.05:  Screen shot 2014-02-23 at 2.38.23 PM. For the purposes of this example, I can sell this call option, the right to buy 100 of my GLD shares from me at 127.50 per share for a price of about $1.01 per share.   In other words for every call I sell, some call buyer will pay me about $101 (call=100 shares x 1.01 per sh).   This a yield of 1.01/127.58= .79%, excluding commissions.   But wait, if I can repeat this each Friday, or 4 times in a month, that equals an expected return of 4 x .79= 3.17% for the month!   How would you like to make 3.17% each month on your investment?

So, what are the risks?   On the next Friday, I get to decide what to do based on GLD’s current price.   IF GLD is below 127.50 (the strike price of the calls I sold) the person who bought my calls will not use the call to buy my shares from me because he can go into the open market and buy GLD for less than 127.50. Thus the calls I sold expire worthless and I just pocket the money I earned from selling them.   As long as GLD does not fall a lot in the week, I do not care because I simply turn around and sell again a new call on my shares at a new strike price to earn more income.   If GLD were to plummet in one week, however, the premium or”rent” I took in will not cover the decline in price of my shares.   That is the main risk. On the other hand, I rely on my technical analysis skills to alert me to the possibility that GLD is turning down.

If , however, on next Friday, GLD is trading above 127.50, I can just buy back the calls I sold.   I do not mind paying more than I sold them   because on the last day of trading before their expiration, the price of my GLD goes up and converges with the price of the option.   Thus if GLD is trading at $130, the call to buy the stock at 127.50 will be trading close to $2.50 (130-127.5).   I still get to pocket the time premium from selling my original options and can repeat the entire process over again for the next week.   If GLD closes the week at $130, I turn around and sell new calls with a strike price of $130 or $130.50.     I know some of this is difficult to understand.   If you want to learn more about the process of selling covered calls, read Alan Ellman’s books listed to the right if this post.     You may also come to our joint AAII DC Metro workshop next July. Click here for Alan’s website.

If you can’t wait, I will attempt to explain this example mathematically.   I buy GLD at a current cost of $127.58. I sell the 127.50 weekly call option for 1.01 per share.   Time value of call= 1.01 – (the true value of the option if it were exercised today, 127.58-127.50=.08)   =   (1.01-.08)= .93.   Thus the most I can gain from this trade is the .93 per share time value. If, for example,   GLD were selling at $130 next Friday near expiration, the options I sold will be worth (130-127.5)= 2.50 per share.   So maybe I could buy them back around $2.52 per share.   Thus, I bought GLD shares at 127.58 and sold the call at 1.01 and bought each back at 2.52:   Net cost of my GLD shares= 127.58-1.01 + 2.52 = 129.09 per share.   My stock cost me a net of 129.09 but GLD is now selling at 130.00, so I have a profit of .91 per share, excluding commissions (the original time value of .93 – the extra .02 time value it cost me to buy back my calls). This trade would yield me $91 for each call sold or a weekly per share yield of .91/127.58= .71% or about 2.9% per month, excluding trading costs.

I do not sell covered calls on growth stocks because if the stock takes off, my gain is capped by the strike price of the calls I sold.   If the strike price is 150 and the stock goes to $200 I have to deliver my shares to the call buyer at $150 per share.   This is a reasonable risk for me to take for GLD but not for rocket stocks that can gap up huge. Let me know if you found this example useful……

Here is a weekly chart of GLD.   Looks like the beginning of a Stage 2 up-trend.

GLDweekly02232014

The GMI (see table below)   remains at 6 (of 6).   I am therefore looking at growth stocks. GMCR, a stock I first wrote about in 2009 when it broke to an all-time high, has just broken out of a new green line base to an all-time high. Check out its monthly chart.

GMCRMONTHLY02232014As has QCOR.   Check out this weekly chart.

QCORweekly02232014

IRBT, a stock Judy has been talking about for a long time, also broke out last week. Check out this weekly chart. I like the large volume spikes.

IRBTweekly02232014

Meanwhile, QQQ remains in a beautiful RWB rocket pattern. Tech stocks rock!!!!!

QQQGMMA02232014

This up-trend is reflected in the GMI stats:

GMI02212014

 

 

 

Further Thoughts for DC Metro AAII; $QQQ remains in Stage 2 up-trend; $TSLA– green line break-out

@ 7:55 pm
GMI6/6
GMI-28/9
T210863%

I spent a wonderful morning Saturday presenting a workshop to the DC Metro AAII Chapter. The audience of primarily Boomers was very appreciative of my rather conservative presentation. I stressed the desirability of focusing more on ETF’s than individual stocks in order to lessen volatility and stress levels.

As always, I recalled some points I wish I had made.   First, all should investigate the use of U.S Government I-bonds for ultra safe money.   These are U.S. savings bonds that adjust every 6 months to the level of inflation. Thus they are very safe and their yield will rise if interest rates do.   They will not fall in value like regular bonds can when rates rise. Read all of the rules on I-bonds here. I believe they are better than CD’s or savings accounts. The current yield is 1.38%

I also wanted to tell new readers that they can have the GMI stats mailed to them every day by entering their email address in the box to the right of this post. I do not release your email address to others.   The box by which to subscribe looks like this:

Screen shot 2014-02-17 at 7.26.09 PMYou may also view my Houston TC2000 webinar from 2012 by clicking the link to the right side of this page.

As to this market,   all of the indicators in the GMI and GMI-2 are positive.   Furthermore, the GMI flashed a Buy Signal on 2/12.   Friday was also the 5th day of the new QQQ short term up-trend.   The longer term up-trend is very intact.   Look at the Stage 2 up-trend in the weekly chart of the QQQ.   The QQQ is nicely above it rising 30 week average (solid red line).

QQQweekly02142014Hopefully this nonsense about the Dow chart looking similar to its chart from 1929 has dissipated.   This market looks no way like the one in   1929 leading up the the great crash.   But the market climbs a “wall of worry” so bring on the whiners.   I will become concerned when the pundits start saying that the market has nowhere to go but up….

I have been talking about a bottom in gold (GLD ETF) for several weeks.   Last week GLD closed back above its 30 week average for the first time since January, 2013.   I think it is early, but we might be seeing the beginning of a Stage 2 up-tend. I have been buying GLD and writing weekly calls on the position. The return is about 3% per month on my investment. Check out this weekly chart of GLD. Note the double bottom around 114.50 and the flattening 30 week average.

GLDweekly02142014Finally, TSLA had a green line break-out last week.   It will be interesting to see if the stock surges after earnings are released this week.

TSLAweekly02142014

Here are the GMI stats: (click on to enlarge)

GMI02142014

 

Is this the end of the correction? 14 stocks at all-time highs!

@ 10:14 pm
GMI2/6
GMI-27/9
T210849%

The truth is that no one knows for sure.   IBD does still label the market in a correction. As I define it, the QQQ short term down-trend completed its 10th day on Friday.   Another flat or up day on Monday will end the down-trend and begin a new QQQ short term up-trend. I am   most certain of a change in trend when it persists for at least 5 days, however.   I sold most of my SQQQ on Friday and will sell the rest on Monday if the QQQ holds.   I will then buy a very small position in TQQQ and will only add to it at a higher price later in the week, probably on Friday. If a new short term up-trend begins and it is for real, then I will have many days on which to accumulate TQQQ.   The key is to not rush in but to ease into the new move.   On the other hand, if the QQQ weakens a lot on Monday, I will buy back some more SQQQ and ride the continuing down-trend.   One must be agnostic in this business and ride whatever trend becomes apparent…..

Newhighs02082014As my readers   know, I do not like to go long stocks in a general market down-trend.   I find it to be very useful, however, to watch the new high list during declines because stocks appearing on it are exhibiting unusual strength. Any stock that can come through a correction and trade at a new high is demonstrating a lot of technical support. It is also much easier to find winners when there are only a handful of new highs. On Friday, only 14 stocks (out of 6,000) came up in my new 52 week high and good fundamentals TC2000 scan.   All had recent quarterly earnings up at least 25% and   increases in revenues.   I think these stocks are worth researching for possible purchase in case a new up-trend begins. They appear to the left, sorted by recent EPS change, with the biggest earners at the top.   Thus, the top six stocks each had quarterly earnings up more than 100%.   Funny how stocks with big earnings increases appear on the new daily high list even during a market correction. It is noteworthy that all of these stocks are at or very close (GMCR) to trading at their all-time highs.   Now that is a show of strength…….

I prefer to buy strong stocks when the GMI is on a Buy signal.   The GMI closed Friday at 2 (of 6) but the more sensitive and short term GMI-2 rose to 7 (of 8). The GMI flashed a Sell signal at the close of trading on   1/27 and remains so. I am therefore mainly in cash in my trading accounts but I do have a small position in SQQQ and GLD.   My position in GLD is based solely on the technical pattern.   It just looks like it is in a Stage 1 base. Note from this table that the QQQ has now closed   back above its 10 week average, a very promising sign of strength. We will learn this week if the short term decline is likely over. Do not forget, however, that the QQQ remains in a longer term Stage 2 up-trend, as defined by Stan Weinstein.

GMI02072014