The China Stock Market
February 28, 2007
The Smart Profits Report: Issue #399
Wednesday, February 28, 2007
The China Stock Market: Shanghai Selloff Triggers Global Fallout… But The Warning Signs Were Already There
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
It’s hard to ignore a once-in-a-decade event. Snow in central Florida… A change in expression on Al Gore’s face… Like these unusual events, when something happens very infrequently, it commands our attention. And an event like this happened just yesterday…
While America was sleeping, the China stock market (Shanghai Composite) was in the midst of a brutal selloff that saw it dive 268 points (8.8%) by the end of the day. It was the largest single-day drop for the index since February 1997.
China Stock Market Plunge Jolts Global Markets
Traders across Europe reacted negatively, with the German, French and Spanish markets all slumping 3% and London’s FTSE-100 index down 2.3%. The major U.S. market indexes followed suit, with the Dow Industrials, Nasdaq Composite and S&P 500 down 3.3%, 3.9% and 3.5% respectively at the close today.
But here’s the big question: Is China’s slump the proverbial straw that breaks the camel’s back and sends the market into a corrective phase, or is it just a temporary hiccup in the third-longest bull market in stock trading history? More importantly, how should you react to today’s market swoon? Let’s take a look…
Global Selloff After China’s Meltdown
While the global markets sold off following China’s meltdown today, the world hasn’t yet come to an end. Consider these facts about the Shanghai Composite Index that puts some perspective on today’s big drop:
- Even after the 8.8% spill, the Shanghai Composite is still up 3.6% in 2007.
- Including today’s fall, the index is still up an incredible 174% since its lows in the middle of 2005.
- China’s government made no announcements that triggered the fall, so there is no structural reason for a continued decline.
Most pundits have reasoned that the big fall was the result of profit-taking after the big run-ups mentioned in the points above.
But for me, the “profit-taking” argument can always be loosely translated as: “We couldn’t find any other real reasons, so this is our last resort explanation.” After all, an 8.8% single-day plunge would be some of the most rabid profit-taking in history.
Here’s the more likely scenari Today’s events illustrate panic selling more than just benign profit-taking - and the warning signs were already there…
What Goes Up Must Come Down
In my message to you here last week, I wrote about the key market factors and warning signs that signal “topping behavior.” For the U.S. markets, this includes:
- Record inflows of cash into mutual funds and exchange-traded funds.
- All-time lows in the Volatility Index (indicating a high level of complacency).
- An extremely long run in the current bull market (the third-longest in history).
The same logic applies to the China stock market. Before today, it already had several fresh warning signs in place - and is extremely overbought. Even if the markets are going to head higher in the short or intermediate-term, they need some relief from overbought conditions.
In addition, the China stock markets have a 10% limit for price drops in one day and a number of stocks hit that level yesterday. This means that there could be some residual selling pressure in those stocks that didn’t reach their market equilibrium price.
Critical Direction Determined In Next 2 Days
The next two days will be critical for determining near-term direction. Yesterday’s action means the markets traded below their monthly lows, so we’re now negative for the month of February. The key issue now is whether enough buyers come in to “save the month” and put it back in the black, or if the pullback continues in earnest.
The pullback seems to be the most probable direction.
In your own portfolio, it’s vital that you honor your stops and keep your discipline. These steps are always a winning formula for long-term success.
Great trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- Despite the Chinese stock market’s nosedive on Tuesday, the country’s economy continues to blast forward. In 2006, GDP growth hit a blistering 10.7%, the fastest rate since 1995 according to the World Bank. This year, the Bank projects a 9.6% growth rate. And that’s not likely to stop. In fact, growth is projected at 7% to 8% every year for the next decade.
- China’s economic explosion is filtering to many of its citizens, who are getting richer by the day. Personal wealth is increasing, and the country is expected to have 520 million cellphone subscribers by the end of 2007 - 60 million more than in 2006. And one small company with “haptics” technology is going to make every phone ring in a new way. Find out more about how this technology is about to explode in China.
- Because of continued expansion in countries like China, bulls contend that the copper market is set for a rebound in 2007. China’s surging economic growth means the country will have to begin buying copper on the world market once again. For complete details, check out Smart Profits #398, Copper Prices: The Bullish And Bearish Case For Copper With A Smart Profits Approach.
Related Articles:
- The Best Emerging Market of the 21st Century
- Stock Market Index Trading Strategy: A 2-Step Approach To A Successful Trading System
- 2006 Stock Index Comparison: Here’s How To Play Both Correction or Breakout Scenarios
The Chart Of The Week
Google (Nasdaq: GOOG) has reached a critical support area. A close below the $450-452 area would almost ensure a further drop to close the gap shown on the chart below. However, if this is only a one- or two-day market pullback, look for GOOG to react quickly and decisively to the upside after this test of support.
Sphere: Related ContentForeign Investments:
February 26, 2007
Lock in 18.5% Yields by Investing in Foreign Companies
Smart Profits Issue #500
February 26, 2007
Guest Editorial by the Street Authority
|
U.S. stocks have never moved like this. Never. The highest one-year gain the S&P 500 ever reported was +45% — and that was a lifetime ago . . . in 1954. In 2007, the S&P 500 didn’t even crack the top 50, coming in 76th out of the world’s 90 major stock-market indexes. |
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| The Tiny Country Where CDs Yield 12.14%
In the U.S., a nation running huge budget and trade deficits, T-bills don’t even pay you 4%. In fiscally sound Iceland, you can get more than 12% right now in an ultra-safe short-term CD. Visitthis link and I’ll show you how to capture these 12.14% interest rates in ultra-safe CDs. It will change the way you think about investing forever. |
Dividends Play a Leading Role
On top of eye-popping returns, when you venture off the U.S. exchanges you also find freakishly high yields.
While U.S. shares pay less than 2%, the average stock in New Zealand yields more than 7%! And there are dozens of Kiwi blue chips throwing off 9%, 10%, 11% and more!
Check out my chart and you’ll see how much more other markets yield. And I’m not even including a dozen other smaller markets that are also paying more than the U.S.
Poland, for example, yields an average 3.6%. Singapore yields 3.4% . . . Greece, 3.7% . . . Holland, 3.4% . . . and Taiwan, 4.1%. And remember, those are just the averages. These figures are weighed-down by a large number of stocks that don’t yield a cent.
According to Jill Evans, manager of the Alpine Dynamic Dividend Fund (ADVDX), dividend yields on foreign exchanges are currently running about double the meager average payout of roughly 1.8% among S&P 500 firms — and fatter quarterly paychecks are just the beginning.Whether it’s Brazil, Hong Kong, or Turkey, dividends send the same message in any language. Specifically, recurring dividends represent millions (or even billions) in annual payments to shareholders. And companies that can meet that obligation in both good times and bad can usually be counted on to deliver consistent cash flows.
Furthermore, dividends can also act as a built-in safety net in a falling market. As the price of a stock drops, its yield rises — thereby attracting investors. This tends to prop up dividend payers in a down market and can even set a floor on the share price.
Simply put: dividend-paying stocks can usually be trusted to deliver above-average long-term returns with less volatility than the broader market. According to renowned professor and market researcher Jeremy Siegel, the top 100 highest-yielding stocks in the S&P 500 have returned +3% more per year on average than the index as a whole.
And if dividends can make that much of a difference in our low-yield domestic environment, imagine what the generous double-digit yields commonly found overseas can do for your portfolio. These are exactly the types of stable, high-yielding foreign companies I introduce my readers to every month in my premium newsletter — High-Yield International.
It’s the only publication of its kind dedicated exclusively to finding high-yielding securities in foreign markets. In it, my mission is to show my subscribers how they can earn steady yields of 8% . . . 10% . . . even 15% or more by investing in these foreign millionaire makers.
In recent issues of High-YieldInternational,
I’ve profiled several of the most promising markets for dividend-lovers,includingAustralia, New Zealand, and Canada. In the process, I profiled several promising high-yielders, including an electric utility with a 9.6% yield, an up-and-coming mining firm with an 11.3% yield, a natural gas monopoly with a 13.0% yield, and a small, undiscovered transportation stock with an 18.5% yield, among many others.
If you’d like to learn the name of these companies — plus receive a steady stream of foreign stocks, funds and other investing ideas with abnormally high dividend yields each and every month — then I’d like to extend you a personal invitation to try my premium international investing newsletter . . . High-Yield International. Visit this link to learn more.
Thanks for joining me on my search for today’s highest-yielding securities!
– Nick Lanyi
Editor
High-Yield International
| Which country listed below offers AVERAGE dividend yields of 7.3%?(Hint . . . the answer may surprise you)
(A.) United States |
Today’s Smart Profits Notes:
- Recently, this service has helped members lock in gains of 806% in two months… 345% in three weeks… and 159% in one month. As I write, readers are in a perfect position to capture 205% by April 15. And you could get in on that opportunity, too. To help get you started, WaveStrength Options Weekly (WOW) is available for half price. Visit this link to find out how you can register at this special low rate today
Related Articles:
- Emerging Markets: Four Ways To Cash In On The Made In China Debacle
- The Economy of India: GDP Growth Is Exploding And Stocks Are Surging… Is It Time To Bet On India?
- Israel’s Emerging Market: U.S. Markets Deflate As The Tel Aviv Stock Exchange Rises 254% Since 2002
Foreign Investments:
February 26, 2007
Lock in 18.5% Yields by Investing in Foreign Companies
Smart Profits Issue #500
February 26, 2007
Guest Editorial by the Street Authority
|
U.S. stocks have never moved like this. Never. The highest one-year gain the S&P 500 ever reported was +45% — and that was a lifetime ago . . . in 1954. In 2007, the S&P 500 didn’t even crack the top 50, coming in 76th out of the world’s 90 major stock-market indexes. |
|
|||||||||||||||||||||||||||||||||||||||||||||
| The Tiny Country Where CDs Yield 12.14%
In the U.S., a nation running huge budget and trade deficits, T-bills don’t even pay you 4%. In fiscally sound Iceland, you can get more than 12% right now in an ultra-safe short-term CD. Visitthis link and I’ll show you how to capture these 12.14% interest rates in ultra-safe CDs. It will change the way you think about investing forever. |
Dividends Play a Leading Role
On top of eye-popping returns, when you venture off the U.S. exchanges you also find freakishly high yields.
While U.S. shares pay less than 2%, the average stock in New Zealand yields more than 7%! And there are dozens of Kiwi blue chips throwing off 9%, 10%, 11% and more!
Check out my chart and you’ll see how much more other markets yield. And I’m not even including a dozen other smaller markets that are also paying more than the U.S.
Poland, for example, yields an average 3.6%. Singapore yields 3.4% . . . Greece, 3.7% . . . Holland, 3.4% . . . and Taiwan, 4.1%. And remember, those are just the averages. These figures are weighed-down by a large number of stocks that don’t yield a cent.
According to Jill Evans, manager of the Alpine Dynamic Dividend Fund (ADVDX), dividend yields on foreign exchanges are currently running about double the meager average payout of roughly 1.8% among S&P 500 firms — and fatter quarterly paychecks are just the beginning.Whether it’s Brazil, Hong Kong, or Turkey, dividends send the same message in any language. Specifically, recurring dividends represent millions (or even billions) in annual payments to shareholders. And companies that can meet that obligation in both good times and bad can usually be counted on to deliver consistent cash flows.
Furthermore, dividends can also act as a built-in safety net in a falling market. As the price of a stock drops, its yield rises — thereby attracting investors. This tends to prop up dividend payers in a down market and can even set a floor on the share price.
Simply put: dividend-paying stocks can usually be trusted to deliver above-average long-term returns with less volatility than the broader market. According to renowned professor and market researcher Jeremy Siegel, the top 100 highest-yielding stocks in the S&P 500 have returned +3% more per year on average than the index as a whole.
And if dividends can make that much of a difference in our low-yield domestic environment, imagine what the generous double-digit yields commonly found overseas can do for your portfolio. These are exactly the types of stable, high-yielding foreign companies I introduce my readers to every month in my premium newsletter — High-Yield International.
It’s the only publication of its kind dedicated exclusively to finding high-yielding securities in foreign markets. In it, my mission is to show my subscribers how they can earn steady yields of 8% . . . 10% . . . even 15% or more by investing in these foreign millionaire makers.
In recent issues of High-YieldInternational,
I’ve profiled several of the most promising markets for dividend-lovers,includingAustralia, New Zealand, and Canada. In the process, I profiled several promising high-yielders, including an electric utility with a 9.6% yield, an up-and-coming mining firm with an 11.3% yield, a natural gas monopoly with a 13.0% yield, and a small, undiscovered transportation stock with an 18.5% yield, among many others.
If you’d like to learn the name of these companies — plus receive a steady stream of foreign stocks, funds and other investing ideas with abnormally high dividend yields each and every month — then I’d like to extend you a personal invitation to try my premium international investing newsletter . . . High-Yield International. Visit this link to learn more.
Thanks for joining me on my search for today’s highest-yielding securities!
– Nick Lanyi
Editor
High-Yield International
| Which country listed below offers AVERAGE dividend yields of 7.3%?(Hint . . . the answer may surprise you)
(A.) United States |
Today’s Smart Profits Notes:
- Recently, this service has helped members lock in gains of 806% in two months… 345% in three weeks… and 159% in one month. As I write, readers are in a perfect position to capture 205% by April 15. And you could get in on that opportunity, too. To help get you started, WaveStrength Options Weekly (WOW) is available for half price. Visit this link to find out how you can register at this special low rate today
Related Articles:
- Emerging Markets: Four Ways To Cash In On The Made In China Debacle
- The Economy of India: GDP Growth Is Exploding And Stocks Are Surging… Is It Time To Bet On India?
- Israel’s Emerging Market: U.S. Markets Deflate As The Tel Aviv Stock Exchange Rises 254% Since 2002
Copper Prices
February 22, 2007
The Smart Profits Report: Issue #398
Thursday, February 22, 2007
Copper Prices: The Bullish And Bearish Case For Copper With A Smart Profits Approach
by Mark Whistler
Small-Cap Specialist, Mt. Vernon Research
If you’ve tracked copper prices over the past few months, you’ll know that the market has been anything but shiny. As the chart below shows, having topped out in May 2006, the price has endured a steady decline since, and is down about 30% from those lofty levels, even sinking below its 200-day and 50-day moving averages.
If you’re a copper bull, that’s not exactly a pretty picture. But undeterred, the bulls have recently jumped back into the game and are slugging it out with the bears on Wall Street over supply issues.
- The Bull Case: Because of continued expansion in countries like China, bulls contend that the copper market is set for a rebound in 2007. They point to the fact that after copper prices became overheated in late 2005 and 2006, Chinese manufacturers dipped into the State Reserve Bureau’s copper stockpile to try to relieve the price pressure. And China’s surging economic growth means the country will have to begin buying copper on the world market once again.
- The Bear Case: On the other hand, the copper bears point to China’s relentless determination to become a more self-sufficient country. And with regard to the copper industry, it received a huge boost in 2005, when it found a copper deposit of almost 27 million tons. This find “… is likely to greatly ease the country’s longstanding heavy dependence on imported copper,” according to the China International Mining Group.
They’re both persuasive arguments. But there’s one wildcard that tilts the odds in the bears’ favor…
Sluggish U.S. Housing Market To Slam Door On Copper Rally
If the recent New Residential Construction report is indicative of what’s to come, the U.S. real estate market is set to endure some troubling times. The report revealed that housing starts plunged by a hefty 14.3% in January, to the lowest level since 1997.
So what does this mean for copper and copper prices?
Simply put, copper is a major material in home construction. In fact, homebuilders use almost half of all copper in the U.S. And if there is less housing going up, demand for copper will wane as a result as will copper prices.
So if you’re invested in copper, or copper stocks, you should expect some choppy, rangebound trading in 2007.
A Savvy Approach Towards An Uneasy Market
And this is the time when the savviest investors begin to use non-directional trading strategies to hedge against any uncertainty. That approach applies, no matter whether you invest in the equity market or futures market.
If the copper market does continue to lag, you could see some consolidation in the form of increased merger and acquisition activity (M&A). If so, copper shareholders would reap the benefits because it could result in stocks rising throughout the industry, as companies pay premiums for buyout targets.
However, you shouldn’t play a guessing game with merger activity - otherwise you might as well slap your money down on the roulette wheel. The copper industry faces an uncertain future, considering the weakness in the U.S. housing market, unknown open market demand from China, and the prospect of industry consolidation.
Overall though, a rebound in U.S. housing, or news that China is buying on the world market could both trigger an upside push. Add in the aforementioned potential M&A consolidation, and the bulls certainly have a case. However, these events are currently wildcards and there’s no guarantee that it will play out that way. So until more developments surface, expect choppy trading to ensue.
If you own copper, or are thinking about investing in the market, the best strategy for now is to trade small until the picture becomes clearer, and simply make sure you have clear, distinct stop-loss points set for your trades.
Good investing,
Mark Whistler
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Today’s Smart Profits Cribsheet
- For more information on commodities investing, look no further than my Mt. Vernon Research colleague Lee Lowell. Lee is one of very few people who’s actually gained first-hand experience of this lucrative market, having spent six years as a market maker at the New York Mercantile Exchange. In his first book, Get Rich With Options: Four Winning Strategies Straight From The Exchange Floor, Lee reveals the four strategies that he personally uses to churn out profits in the options arena. And using real-life examples of actual trades and insider tips, Lee shows you how to use these techniques decisively for the fastest route to riches in the options market. For more details, visit this link.
- While in-depth, everyday coverage on television and the Internet means most people are familiar with how to invest in stocks, investing in commodities often takes second place. Unfortunately, that means many are losing out on potentially lucrative gains. So if you’re unfamiliar with how you can claim your share of profits, Investment Director Karim Rahemtulla will show you how to use futures contracts to “create your own mini hedge fund” in Smart Profits #114, Commodities: How to Create Your Own ‘Mini Hedge Fund.’
Related Articles:
- Credit Spread Trading: How To Be Wrong… And Still Win On Your Trades
- Options Strategies: The Perfect Options Strategies For A Seesaw Market
- Exchange Traded Fund Investments: Four Key Advantages Of Exchange-Traded Funds
Stock Market Trend
February 20, 2007
The Smart Profits Report: Issue #397
Tuesday, February 20, 2007
Stock Market Trend: Stock Market Enters the Danger Zone with 4 Significant Trend Warning Signs
By D.R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
I was hiking on the Appalachian Trail in my native state of Virginia and heard a rapid rattle in the leaves. It was the unmistakable raspy sound of a rattlesnake’s tail. My friend and I froze. I slowly looked in the direction of the sound and saw the brown diamond pattern. A rattlesnake usually signals this way when it fears an attack and is warning that it will take action to protect itself. So while it didn’t definitely mean we were going to get hurt, it did mean that we needed to be on heightened alert before proceeding. But knowing we were a safe distance from snake, we gave it a wide berth and continued along the trail.
How does this relate to investing?
Well, if today’s stock market could rattle, it would. Just like that snake on the trail, it’s giving us some definite stock market trend warning signs that this relentless one-way run up is nearing a danger zone. Should we panic? No, not necessarily. But it does mean we should be very wary of making any sudden knee-jerk moves.
So let’s take a look at what stock market trend warning signs are in the air - and see what actions we can take to combat the situation…
Stock Market Trend Warning Signs
There’s no doubt that the stock market is overextended to the upside. After all, it’s moved almost straight up since September with no significant pullbacks. That in itself is a warning. But there are four other considerable stock market trend warning signs:
- Record Net Cash Inflows Into Equity Funds: When large amounts of capital flow into stock mutual funds and equity exchange-traded funds, that’s a reliable sign of a pending market top. (The same is true for market bottoms and large net outflow of funds). Last week, AMG Data Services said weekly net inflows totaled $10.8 billion. That’s an all-time high. This development could raise a major “red flag” for the markets.
- Volatility Index Has Hit All-Time Levels: The original CBOE Volatility Index (VXO) reached it’s all-time low on January 24 this year. While the VXO (and its re-mastered offspring, the VIX) can be overused and misused, many consider the volatility index to be a prime indicator of market fear or complacency. And all-time levels certainly grab my attention. When they’re at all-time low levels of fear, or high levels of market complacency (that is, investors don’t seem to be worried), it could signal a potential shift in trend.
- Dow Jones Industrials, Transportations, And Utilities Have All Set New Highs: When combined together, the various Dow indexes form a central part of Dow Theory, and their agreement on market direction is typically bullish. While all three heading up in tandem is usually a good sign, the fact that they all hit new highs in the same trading session for the first time since 1998 has traditionally been a sign of market topping activity.
- We’re In The Third-Longest Bull Market In U.S. Market History: According to the 2007 Stock Trader’s Almanac, the current bull market is now the third longest we’ve ever seen. The only longer ones occurred in the 1920s and the 1990s. And we all know how both of those stories ended…
The stock market is definitely showing signs of topping. But just like the rattlesnake’s warning signal, this is not a time to panic. Here’s what to do instead…
Assuming A Heightened State of Alertness
Even after markets become overbought, they can continue to drive upwards for long periods of time. But when they give off exceptionally important signals, it’s essential that you pay attention and assume a heightened state of alertness.
So depending on what kind of investor you are, here’s the plan for combating the stock market trend warning signs…
- If You Have Long-Term Trades That Are Performing Well: Great! Hang on to them and make sure your stops are set at the right places, in case a market pullback occurs.
- If You’re Considering Entering The Market For The Long-Term: Stand down, soldier. This is not a good time to jump into the market with new capital. With these many warning signals running around, prudent money will wait for a pullback or even correction before jumping in.
- If You’re A Shorter-Term Trader: Be wary with volatility contracting here. The market has a tendency to make “blow-off tops” (a rapid and strong upward surge, followed by an equally quick slump back down) at junctures like this. Be on guard and wait for better volatility to boost intra-day trading in order to add some pop to your swing trades.
Good Trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- At times like this, it can be extremely advantageous for you to keep a closer eye on market volatility. The VXO and VIX volatility indexes can provide time-tested, important clues as to whether investors are fearful or complacent about market conditions. For a crash course, check out my colleague Mark Whistler’s insightful article in Smart Profits #381, The Market Volatility Index: Using The VIX To Straddle And Strangle Stock Options.
- What ONE thing would make a huge change to improve your investing results? I delve into how to improve your own profits by making some small changes to your trading strategies in Smart Profits #389, Improve Your Investing Results: Your 8-Step Checklist To More Successful Investing.
- As a professional investor and someone who spent six years as a market maker on the floor of the New York Mercantile Exchange, there’s one question that Lee Lowell’s friends and associates seeking the ultimate investment ask him all the time, “What’s the best strategy you recommend for investing in options?” Get all the details in Smart Profits #377, Investing In Options: 3 Powerful Option Strategies That Make More Sense Than Stocks.
Related Articles:
- Dow Theory: The Most Important And Powerful Concept In Technical Analysis
- The Stock Market’s Reaction to Good News: Why It’s Best to Sell at the Sound of the Trumpets
- Trailing Stops: How to Give Your Options Room to Grow
The Chart Of The WeekThe S&P 500 
($INX) has enjoyed one of the smoothest, steadiest run-ups in history over the past half a year. But don’t be lulled to sleep by this abnormal performance. Bigger pullbacks are coming - and sooner rather than later.
Investing In Tactile Feedback
February 16, 2007
The Smart Profits Report: Issue #396
Friday, February 16, 2007
Investing In Tactile Feedback: Haptics And Other Groundbreaking Touch Technologies Rumble With Investor Profits
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
When it comes to new technological revolutions, some fizzle and some catch fire. I believe this fast-growing industry is poised to become one of the latter. In fact, it’s already making its presence felt in many different applications - from cellphones, to bank ATMs, to car-navigation systems.
And when you talk about new technology, it wouldn’t be a surprise to see Apple (Nasdaq: AAPL) at the forefront. But it isn’t. Yes, Steve Jobs and Co. are preparing to release the iPhone this summer. And yes, it’s unique in that it doesn’t have a conventional keyboard or keypad - something we’re all used to when using a phone or computer.
But there’s a flaw - one that will be evident when the iPhone hits the stores… The iPhone lacks what is known as tactile feedback.
Grumble About No Rumble
Tactile feedback is the sensation that you get when you touch a button or a screen, and it touches back to let you know that it accepted your command and is functioning. And it’s this fast-growing touchback application that is upgrading the way we conduct our business and pleasure.
Take video games, for example. Until pretty recently, most gamers were used to playing games that made a lot of noise and gave visual cues and satisfaction. If you were playing a car racing game, you had to look at the screen to know if you were going to hit a barrier or slide on an oil patch.
But that changed in the mid 1990s when a new technology sprung onto the gaming market. It was called “force feedback,” which is better known as “haptics.” This technology basically allows gamers to feel what is happening on the screen. For example, if you shot a bazooka in a war game, you can feel the vibrations through the controller that affirm a shot. For racing games like Gran Turismo, you can feel the effect when you bounce over a bump or smash into a barrier. The feeling is transmitted through actuators in the hand-held controllers, which are sent signals by software embedded in the game and the console.
Power Up The Tactile Feedback
Fast forward to today, where the science of applying touch (tactile) sensation and control to computer interaction has moved ahead by leaps and bounds. But the potential is still untapped.
The next generation of haptics and tactile feedback allows for actual feeling of degrees of touch.
For example, whereas in the old days, if you were playing a game and used a haptics-enabled controller, you’d feel a distinct vibration when you did something that caused it. But today, you can feel a stronger response depending on the strength of the application. So if you’re energizing a light saber in a “Star Wars” game, the actual sensation that you feel will increase, based on the increase in the power of the light saber.
But while it may be fun to experience the feeling of tactile feedback in a game, there are many more important applications that are already in the market.
100% Phone Feedback
Given the “cool factor” of this new technology, it’s perhaps surprising that Apple hasn’t incorporated it into its iPhone. You see, when using a regular touchscreen phone, you have to look at the screen at all times to make sure that the button you pressed was actually pressed.
And while you might get an audible response, wouldn’t it be great if you could experience the full range of sensory stimulation through visual, audible and also tactile feedback cues?
You can. And one cutting-edge company holds the key and the patents to make this happen.
In fact, while Apple is still readying the i-Phone for release, the firm has already incorporated its tactile technology into Samsung’s line of touchscreen phones that will be released prior to the i-Phone. (More details in the “P.S.” below).
Haptics Plays Doctor: Sensory Stimulation In Surgery
Another critical area where tactile feedback is breaking ground is in the medical field - specifically in surgery.
In this case, trainee surgeons are able to “feel” their way through surgical procedures - a cutting-edge experience that allows them to gauge how they’d perform an actual operation in reality. Again, this advanced tactile feedback technology enhances the user’s visual cues.
Investing In Tactile Feedback: The Ground Floor Of An Explosive Industry
Tactile feedback and haptics are still in their infancy. But the applications that can use this technology are beginning to explode, and the possibilities for this technology are almost endless. In addition to cellphones, video games, ATMs, cars, casinos, and medical applications, it can also be used in the military field.
Imagine being in military combat. Would you want your equipment to give you audible cues, or haptic ones? This is the future of haptics - the ability to provide you with extremely accurate tactile feedback that has been unavailable to date.
But right now, few are aware of the potential power that this technology has. And even fewer are aware of the major players in the field. That means savvy investors who get in early will be the ones who will claim the bulk of the gains.
The companies that will benefit from this new sensory feedback are those in the technology field that are quick to adapt haptics to their product portfolio. Make no mistake: Touch technology, like tactile feedback and haptics, is here - and it’s here to stay.
Good trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- We’ve been following the groundbreaking progress of haptics technology in the Xcelerated Profits Report for about 18 months now - and it’s an industry that we believe is poised flourish. The good news is that there’s still time to invest in this revolutionary technology now. To find out more about the company that owns key patents, visit this link to read our special report.
- Whenever any new breakthrough technology hits the financial headlines, investors are faced with a decision over what their investment approach should be. Is the buzz for real (as is the case with haptics and tactile feedback technology, with it already used in a plethora of practical applications), or is it merely market froth? For tips on how to create a “300% return system” for times when you might have the urge to speculate, check out Smart Profits #120, Investment Speculation: 6 Secrets to Creating a ‘300%-Return System’ Using Stock Options.
- As technological advancements and the Internet have triggered a shift to electronic stock trading screens over floor trading, this is a hot topic currently making the rounds within the trading community - and it’s a development that could significantly change the trading landscape. Find out more in Smart Profits #394, Electronic Stock Trading: Electronic Era Poised To Tilt The Odds In Your Favor.
Related Articles:
- Risk In Investing: Don’t Take Insane Risks When You Have Options
- Option Strategies: The Solution To The Most Dangerous Investment Paradigm Today
- Time Stops Strategy: Your 10-Day Profit Test
The Perfect Trading System
February 15, 2007
The Smart Profits Report: Issue #395
Thursday, February 15, 2007
The Perfect Trading System: 3 Ways To Break The Perfectionism Trap And Find the Blue Rose of Investing
By D.R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
If you give roses to someone for St. Valentine’s Day today, chances are they won’t be blue - unless they were dyed that color. For centuries, the “blue rose” has been considered the holy grail of horticulture - an unattainable object, since roses lack the gene that produces blue plant pigment. Yet there are many references to this mythical plant.
We see this mindset in the investment world, too. Investors spend too much time searching for their “blue rose” - that unattainable perfect stock pick that will be the “next Microsoft”, or the perfect trading system.
Trouble is… when we become obsessed with finding perfection instead of something that is excellent, we usually find a way to put off action. And this lack of action undermines many good traders and investors.
But here’s the good news: Overcoming perfectionism in investing is possible. So let’s look at how to add purposeful action to your list of trading and investing tools…
Finding Your Own Blue Rose
Perhaps you’ve been struggling to find the perfect trading system that’s right 95% of the time and has winning trades 10 times bigger than the losers (if you find it, give me a call!)
If you are looking for that “blue rose” - the perfect trading system that doesn’t exist - you can still overcome your perfectionism by following some simple steps:
- Accept Your Losses: Nobody wants to have any losing trades. But understand and accept that you’re going to endure some. It’s just a part of the deal, just as companies must accept expenses as a natural part of their business. But perfectionists can overcome their avoidance of losses by reframing them as business expenses. Then they’re not something to be avoided, just minimized. Here’s a starting point: If your winning trades are the same size as your losing trades, you need to have at least 55% as winners to break even after slippage and commissions.
- Systems Have Trade-Offs: In complex systems like the financial markets, it’s tough to get something without giving up something else. For example, if you make changes to increase a system’s winning percentage, you usually get lower results somewhere else. Either the system will trade less frequently or the average size of the winners will be reduced. Figure out what’s most important to you, and design your strategies to fit your trading personality. Some people require more frequent wins, while some want bigger winners.
- Train Yourself To Act - Even When Conditions Aren’t Perfect: Postponing action is one of the easiest things to do. Don’t fall into the trap of never trading because the conditions aren’t perfect. The markets will always have some ambiguity. That is why we build systems with rules - so we take action even when uncertainty exists. Don’t waste time looking for a “sure thing” when you should look for something “highly probable” instead. You’ll find that taking action is much easier.
Trading systems and strategies don’t need to be perfect; they just need to give us an edge in the markets. When you’re looking for a perfect trading system or strategy to use, don’t wait for a “blue rose” to show up - there are lots of great red and whites out there that still smell as sweet.
Good trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- If you’re spending too much time trying to perfect your investment system and trades, you can save yourself some headaches with a very simple, yet very sophisticated, professional investment strategy. As Mt. Vernon Research Investment Director Karim Rahemtulla explains that LEAP options give you much more time to be correct with your trades, as well as enabling you to put much less money at risk. Get the details in Smart Profits #275, Using LEAPS: These Options Are Set to Run Full Tilt.
- Our goal here at Smart Profits is to show you how to “invest like a pro” so you can “make more money faster.”But if you want to realize an asset’s full moneymaking potential, there’s one key factor that you need to look at before you consider executing a trade. Find out more in Smart Profits #392, Limit Orders: Dodging The Market Maker’s Bullet & Side Stepping The Liquidity Trap.
Related Articles:
- Become a Better Trader: Small Changes You Can Make for Big Profits
- Risk Management and Position Sizing: Three Ways To Give Your Trades A Tune-Up
- Trading With Confidence: How You Can Develop More Confidence In Your Trades
The Chart Of The Week
This chart shows that the relative performance of the markets, represented by SPY, DIA & QQQQ - the ETFs for the S&P 500, Dow Industrials, and Nasdaq 100 respectively - is running ahead of market leaders like Google, Microsoft and General Electric. This is usually not a good sign - and yet another indication that the market is getting very top heavy.
Sphere: Related ContentElectronic Stock Trading
February 9, 2007
The Smart Profits Report: Issue #394
Friday, February 9, 2007
Electronic Stock Trading: Electronic Era Poised To Tilt The Odds In Your Favor
By Lee Lowell
Futures Options & Commodities Specialist, Mt. Vernon Research
You’ve probably seen them in action on financial television shows. Or maybe you’ve toured one of the trading exchanges and seen them for yourself. It’s a unique and chaotic experience. A mass of feverish activity, yelling, and jostling in a desperate bid to get the best price.
I’m talking about the floor traders in the pits of exchanges like the Chicago Board of Trade (CBOT) or New York Mercantile Exchange (NYMEX). There’s no doubt that these guys are relentless and a force to be reckoned with. As a market maker myself for six years at the NYMEX, I’ve seen it first-hand.
But it looks like they’ve met their match, and we could be witnessing the slow demise of the traditional floor trader - a development that bodes very well for regular retail investors like us with the advent of the electronic stock trading screen technology.
Technology Hits The Pits… And Trumps The Traders
As technological advancements and the Internet have triggered a shift to electronic stock trading screens over floor trading, this is a hot topic currently making the rounds within the trading community - and it’s a development that could significantly change the trading landscape.
Having been in the pits myself, I actually thought this would have happened by now. But I still believe that the physical exchanges will become a thing of the past in the not-so-distant future. Electronic stock trading is faster, more efficient and more cost-effective to all parties involved.
Because of my background in the job, I’m hearing lots of stories about how many floor traders are either voluntarily moving to electronic stock trading screens, or involuntarily making the move (given a pink slip).
But the thing is… there’s a major difference in how each type of trader earns a living - and it’s the floor traders who are having the difficulty making the transition. So because I’ve done both, let me give you an idea of how money is made on both sides of the fence.
The Options Market Maker’s Sole Job
As a floor trader, specifically an options market-maker, the sole job is to provide a bid and ask market for any option requested by a floor broker. These floor brokers ask for quotes for either their customers or their own firm’s traders.
No matter who we were giving quotes for, we were almost always able to buy the option at our bid price and/or sell the option at our ask price. This is in stark contrast to how we as retail traders get filled on a trade. We’re mostly at the mercy of the market makers and have to either buy at the ask price and/or sell at the bid price, unless we work a limit order and get filled in between.
The market makers make their money by doing many of these trades, where they can buy the option at their bid and re-sell it to someone else at the higher ask price, or vice-versa. When I was doing it, we didn’t care so much about the direction of the stock or commodity because that didn’t define how we made money. As long as we were buying below and/or selling above what we deemed “fair value,” that’s how we made money.
Now let’s shift 180 degrees and see how retail participants like you and I try to make money…
The Options Two-Step: Predict The Direction And The Time
If you’ve followed any of my recommendations in the Xcelerated Profits Report newsletter, or my Triple-Zone Profits Trader commodities service, you’ll know that things work a little differently.
We have to try to predict where the market might head and base our decisions on that prediction.
This is where you need to draw on a range of research, including both technical and fundamental analysis, the macroeconomic outlook, and also my personal success at predicting market direction and trading options on the floor.
However, keep in mind that trying to predict the timing of a move, or when it might get to our predicted spot, is probably one of the hardest things to do. But there are plenty of people who think they can. When you’re trading options, however, the “time” factor plays a key role in whether you’re successful or not. After all, there are many people who will “eventually” be right on their directional assessment but might be very far off the mark when it actually occurs. That’s why we show you how to use the best strategies to keep you from falling into that trap.
Electronic Stock Trading Turns The Tide
While it seems like the floor traders scoop up most of the money and it’s harder for retail investors to compete, the tide is turning on the pit crew. The increasing presence of electronic stock trading is beginning to squeeze floor traders out. Because we can now post our own bid and ask prices on the trading screens, we’re all starting to compete on an even level - and have an equal shot at making money.
And since us retail traders had to learn ways to make money on the electronic stock trading screens, we’re actually ahead of the floor traders who might be unfamiliar with this, since reading charts isn’t so important in their daily activities.
And commodity floor traders in particular hate it! I believe the reason why the commodity exchanges are the last ones to go “electronic” is because they put up such a strong fight against losing their advantage.
As the commodity exchanges get reluctantly dragged into the electronic age, the option market makers here are safe for now. But that doesn’t mean we still can’t compete. As I’ve written many times before in this column, my Delta Force Trader trading advisory, and also in my debut book, I show you how to use options investing techniques where you can use direction and time decay to our advantage.
This includes covered calls, option credit spreads, and naked put selling that I use in 95% of my own trading. And as electronic stock trading screens level the playing field, we should have many more (and better) moneymaking opportunities in future.
Good trading,
Lee Lowell
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Today’s Smart Profits Cribsheet
- There aren’t many investors who have the luxury of being wrong on their trades… yet still end up winning. But you can when you use one of the most powerful strategies: The option credit spread. Not only that… but you can also calculate your actual chance of success on a trade before you enter it. Get all the details in Smart Profits #364, Credit Spread Trading: How To Be Wrong… And Still Win On Your Trades.
- Having spent six years as a market maker on the floor of the New York Mercantile Exchange, Mt. Vernon Research commodities trading expert Lee Lowell is one of very few people privy to the rare insider tips and secrets that the pros use every day to make money. Now, in his debut book, Get Rich With Options: Four Strategies Straight From The Exchange Floor, he’ll reveal the four strategies that he personally uses to churn out profits for him in the options arena. And using real-life examples of actual trades, Lee shows you how to use these techniques decisively for the fastest route to riches in the options trading game. To get more information, visit this link.
- You don’t always have to be an options buyer, and you don’t have to own something first before you can sell it. The great thing about the financial markets is that you can sell first and buy second, instead of the long-standing philosophy of buy first, sell later. But you have to know how to sell them correctly. You can’t just sell any old option and think you’ll have a profitable trade. You have to take into consider the following in Smart Profits #267, Option Credit Spreads: Sell First, Buy Second for 50% Better Odds.
Related Articles:
- Market Makers: Hand Signals, Stress and Million-Dollar Trades
- The Breakdown Of A Covered Call Trade: How You Can Get Paid For Holding Stocks
- The Chicago Board of Options Exchange: The Website Every Options Trader Should Know
Exchange Traded Fund Investments
February 7, 2007
The Smart Profits Report: Issue #393
Wednesday, February 7, 2007
Exchange Traded Fund Investments: Four Key Advantages Of Exchange-Traded Funds
By D.R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
In 2003, six new Exchange-Traded Fund investments (or ETFs) hit the U.S. stock exchanges. But in 2006, 132 Exchange Traded Fund investments were added to the market, bringing the total up to 333. Such extraordinary growth is big news - and shows no sign of slowing yet. In fact, one report says that there are almost 350 new ETFs that have filed to launch.
And just over the past week, we’ve seen the inception of new ETFs that provide leverage in areas such as basic materials, real estate and financials, as well as funds that allow investors to play the short side in those areas by buying an Exchange Traded Fund.
This growth is occurring for a reason. ETFs offer investors several advantages that give you more choice, more control, and more protection in your portfolio. But as with any investment vehicle, the key question is not how exciting or popular they are… but whether you should incorporate them into your individual investment strategy. And that depends on your goals and preferences.
So let’s delve into the topic, and see whether Exchange Traded Funds are right for you…
Exchange-Traded Funds Uncovered
The first major benefit of an Exchange Traded Fund is that it’s a fund that tracks an index or sector, but trades like a stock on the major exchanges. So this immediately gives you the best of both the stock and mutual fund characteristics.
Here are some of the other key advantages that ETFs provide:
- Flexibility: Unlike traditional stocks, an ETF consists of a group of items, which is then offered as a security. You can group stocks together to mimic the performance of an index, a region, a country, or a sector. Exchange Traded Funds can also be used to shadow other instruments like bonds, or commodities such as gold and oil. So instead of having to become an expert in a particular field and scour the market for just one or two stocks, you can gain the benefit from an entire sector - and do so electronically, in any account, with any broker.
- Low Cost: Compared to mutual funds (which have a similar but less extensive ability to group families of stocks together), ETFs have much lower costs. The average mutual fund fee is about 1.4%, while average Exchange Traded Fund fees are around 0.32%.
- Transaction Ease: Mutual funds can only be bought or sold at the closing price every day. And most funds impose fees for anyone who holds them for less than six months. In contrast, ETFs trade like stocks on the major exchanges, predominantly the AMEX and NYSE, and you can trade them whenever you like, and as often as you wish.
- Transparency: ETF owners know exactly what stocks or underlying assets they’re holding, as opposed to mutual funds, which typically only disclose their top 10 holdings.
Investing in Exchange Traded Funds means you can buy actual commodities such as oil and gold without ever taking delivery of oil, or carrying an ounce of gold. Or you can buy foreign currencies without ever having to leave the U.S. So if the price of oil, gold, or the currency ETF you own goes up, so too will your ETF.
What’s more… you can do this without having to pay huge commission fees. And you can also buy options on many Exchange Traded Funds.
Should You Be Using Exchange Traded Funds?
Because of their diversity, simplicity and low costs, ETFs are an increasingly popular way to invest for many types of investor. Let’s see how they suit different investment styles:
- If You’re A Short-Term Trader Or Day Trader: Exchange Traded Funds have long been day trader favorites. Day traders have sustained massive liquidity in the top index ETFs, and drawn in new traders, too.
For example, the Nasdaq 100 Trust ETF (Nasdaq: QQQQ) is the most liquid stock in the world, trading over 112 million shares per day on average over the last month. Other day trader favorites include the Dow ETF - Dow Diamonds (AMEX: DIA)… the S&P 500 ETF - SPDRs (AMEX: SPY)… the Russell 2000 small-cap ETF - iShares Russell 2000 Index (AMEX: IWM)… and the oil ETF - United States Oil (AMEX: USO).
And if you want to sell any of these Exchange Traded Funds short, ETFs don’t require a “downtick” (a transaction that takes place at a lower price than the previous trade) to do so - a benefit greatly appreciated by day traders, and a big reason why these instruments lead the world in liquidity.
- If You’re An Intermediate-Term Trader Or Swing Trader: Swing traders also appreciate the liquidity and ease of short selling that Exchange Traded Funds provide. And the broad range of diversification available is a real boon to intermediate-term traders.
There are ETFs representing every geographic region and almost every sector imaginable. And using ETFs helps to spread your risk. You virtually eliminate the portfolio fallout from a single stock plunge, while also benefiting from the upside growth possibilities of many other stocks.
- If You’re A Longer-Term Investor Or Position Trader: Exchange Traded Funds are a very strong alternative to mutual funds for most long-term investors. With lower fees, tax advantages (little to no capital gains to pay) and no short-holding redemptions penalties, ETFs are increasingly prevalent in more long-term portfolios. Low ETF fees are also putting pressure on mutual fund fees - a situation that will eventually benefit fund investors, too.
Whatever your investment style, Exchange Traded Funds offer increased flexibility, diversity, and protection. And as the area looks set to continue its rapid growth in the coming months, we’ll keep you posted on developments, and ways in which you can tap into these dynamic investment vehicles.
Good Trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- When it comes to a choice between whether to invest in an Exchange Traded Fund or a mutual fund, there’s no doubt that ETFs hold several key advantages, as I mentioned in today’s message. But that doesn’t mean you should ignore mutual funds entirely. In fact, I explained how watching the actions of mutual fund managers can provide valuable clues to gauging future market direction. Check it out in Smart Profits #357, Mutual Funds: How To Interpret The Actions of Mutual Fund Managers.
- The E-mini Futures on ETFs like the S&P 500 (ES) and the Nasdaq (NQ) have completely taken over as favorite vehicles for day traders and short-term swing traders. It’s fun, exciting, and simple to trade. I didn’t say “simple to make a profit,” I said simple to trade. There’s a difference. Find out more in Smart Profits #230, E-Minis & ETFs: “Trade” E-Minis With Less Risk Using ETFs.
Related Articles:
- Options On ETFs: Increased Safety and Profit Potential
- Asset Protection Plan: How To Avoid 3 Mistakes That Will Cripple Your Investment Account
- Portfolio Diversification: Falling In Love With Investments Can Cost You Millions
The Chart Of The WeekMicrosoft 
(Nasdaq: MSFT) is showing a clear effect of the old adage, “Buy the rumor, sell the news.” Now that the launch of its new Vista operating platform is old news, the stock is experiencing a swoon. But there’s no need to panic. Until the price breaks below the marked zone just above $28, this can be considered a normal consolidation in a strong uptrend.
Limit Orders
February 2, 2007
The Smart Profits Report: Issue #392
Friday, February 2, 2007
Limit Orders: Dodging The Market Maker’s Bullet & Side Stepping The Liquidity Trap
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Our goal here at Smart Profits is to show you how to “invest like a pro” so you can “make more money faster.”But if you want to realize an asset’s full moneymaking potential, there’s one key factor that you need to look at before you consider executing a trade.
It applies to both stocks and options - but with regard to options, it’s a question that attendees at conferences ask me all the time… “Are options liquid?”
The simple answer is: “Some are; some aren’t.” And you need to pay attention, because it makes a big difference to your results. Let’s see why this is the case - and how you can combat this using limit orders, so you don’t fall into the “liquidity trap.”
The “Liquidity Trap”: Two Reasons Why Options Don’t Follow Their Stock
When we talk about liquidity with regard to options, the ability to buy and sell an option at a fair price and reasonable spread is directly related to the trading activity of its underlying security. Nine times out of ten, if the security is “liquid” (i.e. traded frequently enough so that the price isn’t fundamentally affected), the option will be, too. This allows you to make your money from it faster.
For example, let’s say you’re bearish on the housing market, and want to buy put options on one of the homebuilders because you think an imminent rise in interest rates will negatively impact the stock.
You buy your put options, and are correct in your judgment. Interest rates do rise, and shares decline. But there’s a problem: Your put option doesn’t move in tandem with the shares. There can be two main reasons for this:
- The option is one that not many investors know about, or own. So it’s thinly-traded, or “illiquid,” even though the underlying shares are liquid.
- The underlying shares are extremely volatile. This results in a large spread between the bid price and the ask price. Beware of large spreads, because this is a sign that the option isn’t very liquid.
Dodge The Market Maker’s Bullet
Large spreads usually mean that the options market maker is glad to see you coming. When he does, he’ll tweak the price as high as possible - yet set it at a price where you’ll still be willing to enter the trade.
And it’s just when you want to exit the trade that the market maker has a big advantage. Illiquid options usually mean there are few other interested buyers and sellers. So if you’re keen to sell at any price, he feels your desperation and will aggressively move the bid price lower. Or you may see the dreaded “no bid.”
But there’s a way to combat wide spreads to ensure you don’t get burned. And you can do so using one of the most powerful weapons in your options investing arsenal - both offensively and defensively…
Take It To The Limit
The best way to avoid getting yourself into a situation like this is by using a limit order.
First and foremost, limit orders give you valuable protection when entering a trade. They ensure that if you get filled on your order, it will be at or below your set price - your limit price.
And if you don’t get filled? Don’t worry. By using good discipline and not chasing the price, it’s far better to miss a trade, rather than to pay so much that you have very little chance of profiting - even if you’re correct about the underlying stock.
Don’t get sucked into the trap of “playing options.” Your sole aim is to make money. And if you don’t get filled on the entry, it’s likely that you wouldn’t have been able to exit gracefully, either.
Open And Close With A Limit Order
When the time comes for you to close your trade, use a limit order again. But be careful: Yes, you have to sell in order to make a profit. But you don’t want to risk not getting your order filled. So make sure you set your limit midway between the bid price and ask price. If the spread is wide, set your order slightly higher than the bid price.
If the spread is reasonable, set your limit order at the current bid price, just to ensure the market maker doesn’t start dropping his bid price as soon as you show up.
Even when I don’t see any obvious liquidity problems, I still use limit orders to get the best results.
For example, in one of my trading services, I recommended call options on a company, and used a strict lim