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Posted by Martin February 01, 2015
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How do I select stocks for trading options?


A few of my followers and subscribers asked me the same question: “How do I evaluate stocks and select them to trade options”?

When I was relatively a novice to trading options I also didn’t know what stocks to use trading options. But the selection process is exact same as if you select stocks to trade or invest in them.

You want a strategy first. You want to know what you want to trade and how before you start trading. The strategy will help you to select the stocks and create a watch list. I did it the exact same way.
 
 
BornToSellYou can also use screeners which can help you to select stocks you want to trade. For example, if you want to trade covered calls against your dividend stocks you can use a web site Born to Sell run by Mike Scanlin. The web site provides an excellent tutorial on selling covered calls and it will also help you to evaluate stocks in your portfolio whether it makes sense to sell calls against them or not. I used the website myself. The only feature I missed was ability to link it with my broker’s account to do the evaluation automatically without manual entering of stock symbols and trades.

However, if you use a screener like the one above, you still have to do your homework. The screeners will pick everything it finds out there among 30,000 stocks. And believe me, not all stocks are made equal. Many of them will look awesome on paper, but they are actually junk.
 
 

OScreenerFor put options my friend Wayne told me about a good screener at Oscreener. It is a neat tool allowing you to screen for puts as well as other strategies such as spreads.

But again, with those screener you still have to do your homework and weed out junk selection (for example stock below $5, certain sectors – for example I do not trade pharmaceutical stocks, etc.). Some screeners like the Born to Sell ones will allow you to set them to avoid those sectors and stocks, so you need to pay attention to that.

Later, I stopped using screeners as my strategy shifted a bit to a different direction so I no longer needed them. But they were a great tool to select some good candidates for trading. For example I decided trading options against dividend paying stocks. I know those stocks and know what to expect from them (no sudden surprises). To create a list of stock candidates I use other bloggers who invest into dividend stocks to see what they buy, sell and what they think about their dividend stocks.
 
 

There is a lot of dividend investor who regularly publish their analysis and their stock buy or sells. To name a few:

DivHut – regularly posts his outlook and analysis about good dividend stocks which can provide you with a good stock candidates no matter what your strategy, be it options trading, or dividend investing. You can see his last post about dividend stock picks for February.

Dennis McCain Investing – Dennis is a mix of dividend and growth stocks, so following his blog will provide with ideas on growth stocks as well as dividend stocks. He also posts regularly his picks and his opinions on the stocks worth to review.

D4L – A great source of dividend stock analysis. I would even recommend to sign up for his newsletter. If so, you will receive his analysis to you inbox. Very valuable service and great source to build up your watch list of stock candidates.

Retire Before Dad – Another great source of stock candidates worth to look at. His stock picks will also help you to quickly build up your watch list. The good thing is, that you do not have to deal with junk stocks, but stocks other serious investors invest in.

Roadmap2Retire – another dividend growth investor who publishes his recent buys or sells as well as stock analysis and provides a plethora of good stock candidates to build up your list of stocks.
 
 

Of course, following those investors doesn’t mean to automatically and without thinking invest in their picks. Their goals and strategy may be different than yours, their risk tolerance, time horizon, all may not suite you and your investing style. Although I follow investors like those mentioned above, I write down their stock picks and later review them in detail using my criteria.

If looking for a stock to buy as a dividend income – I review them from the dividend growth income perspective and use the rules of that strategy such as dividend yield, growth, history, security of the dividend and many other metrics. If I look for a candidate to trade options against such stock, I review them from the options trading perspective – are they optionable? What premiums they pay? How volatile are they? How they trade options – high open interest, volume, etc.?

 
 
I also follow a few option traders and their blogs:

My Trader’s Journal – Alex runs his blog and posts regularly his naked put selling strategies. He also describes his strategies and potential outlook of each trade. In the past I took inspiration in his blog and followed a few trades myself. I remember a few trades against FCX or SWY which after I reviewed them I liked the output so much that I traded those stocks successfully in the past several times too.

Simply puts – another put selling trader who is posting his trades on a monthly basis and a great source of stocks for your watch list. I also got inspiration of a couple of trades at his web site, such as TEVA, LINN, or POT.

 
 
As you can see, you are not alone. Thanks to the internet, you can bundle with many investors and traders out there where you can start building your watch list and strategy. Those investors are good people and they always help if you ask them.

I started like that a few years ago by taking inspiration from them. You can do the same thing. You will be surprised how easy it would be to pick stocks you can continue building up on them review them further and make your decision whether to invest in them or trade them.

Recently, I posted my February stock picks. The watch list the screener was browsing through was created the way I just tried to describe above. I have approx. 150 stocks in it. But I will invest only in a handful of them if they present a good opportunity. But that’s a next part of the investing – trading process.

Now I hope you know how you can pick the stocks for your trading or investing. You can try it on your own and I believe you will be successful and also surprised how easy it was.

And for those of you who know all this and consider it a piece of cake, how do you or did you select your stock candidates in the past?

 
 




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Posted by Martin February 01, 2015
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Futures indicate very weak opening tomorrow morning


If you are already frustrated by two weak months we just passed (December 2014 and January 2015) it looks like we are going to see February 2015 as bad as January was.

Futures are already trading at a steep discount indicating S&P 500 down -1.45% -29.35. If this drop continues until tomorrow morning, we may expect the markets to open down on Monday.

 
SPX Futures
 

If we drop, then such drop can have a serious consequences for the market. And the chance that we drop below is very high. We had a support at 2000 level which we broke on Friday and closed below slightly above the main support at 1992.

Monday will be crucial. If we break 1992 level and close below it, we have a full arsenal of problems in front of us.

We have one major support at 1975 level then. We will have 200 day MA and previous (December) low at that level which may stop the fall. After that our next stop will be at 1945 and then a free fall all the way down to 1820. If we see a violent trading this coming week we may even hit our extreme level at 1900 this week before we go lower to 1820 support.

Quite a dim outlook for the market, right?

 
SPX weekly review
 

Of course the market can reverse and hold the support at 1992. If that happens, in that case the market may go up to 2034 level or even go higher and close the next week at 2082 level. Everything is possible at Wall Street. However, I do not expect this much considering the weakness of the market.

Although from the long term perspective, this market is still bullish and undergoing a consolidation which may shoot the market to new all-time highs, the very short term outlook is bearish. Since I trade weekly options, my next week outlook is bearish.

On the other hand, as a dividend investor this can be a great opportunity to get ready for buying cheap dividend stocks cheaper (even though I expect them to hold better than growth stocks).

Good luck on your trading and investing in the next week!
 




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Posted by Martin January 31, 2015
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Stocks to buy in February 2015


If you bought the stocks I recommended at the beginning of January 2015 and held them until now, you would be up 2.0%.

After the volatile and wild month we just went thru, full of wild ups and downs I can’t believe, the stocks I selected for January ended up 20%. Although it wasn’t an easy road. I noticed that at some point those stocks were in a deep hole, yet they managed to dig themselves up and end profitable.

I just stopped their price actualization, so you can go back and check it out.

So can we repeat this next month? I do not know, so let’s put my screener back to work and see if we can be as successful in February as in January. Here is a list of stocks to buy in February:

 

 

You can decide to buy only a few of those stocks or all of them or just those which pay dividends. In the list, there are a few stocks which were a bit of a surprise to me such as Ford (F) which pays 4% dividend as of this writing. Ford was a stock I was thinking to invest in at some point and seeing it showing up on my screener makes me feel very strong about this stock.

So, let’s pretend we sold all of our January selections except those which showed up again in the list above and added new stocks from this list above. Let’s see how February will end up with those stocks.

What do you think, would you invest in those stocks, all of them, some of them, or not at all?

Good luck!

Previous selection:

Stocks to buy in January 2015
Stocks to buy in March 2015
Stocks to buy in April 2015
Stocks to buy in May 2015
Stocks to buy in June 2015
 




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Posted by Martin January 26, 2015
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Legacy Reserves LP (LGCY) bull put spread trade


Recently one investor asked me a question whether I would consider selling covered calls against my recently purchased shares of Legacy Reserves (LGCY) or not. He was also concerned about the stock and its recent fall in price.

I reviewed my holdings as well as my original reasons for the trade and I must say, nothing has changed. I am even more convinced that my stock purchase will pay big in the future. It will only take time before it happens.

What was a premise of my trade? Buying LGCY was a play which will have a twofold benefit for me and those investors who are purchasing at the current price level:

 

  1. Capital gains when the price of LGCY recovers.
  2. While waiting for the recovery, you will be collecting juicy dividends.

 

Of course, conservative investors would probably skip this trade, but I see it as a great opportunity. A same opportunity I could take in 2008 have I known what I know today.

Will history repeat itself?

Today, people are claiming that price of oil is doomed and that we will be undergoing a long and painful recovery and many energy & oil companies will go belly up. Really? Are we seeing oil prices low forever?

Our society is energy driven and there will always be demand for oil. And oil prices will go up inevitably no matter what others say or think. It is not that far away when Saudi Arabia’s king Abdullah was bragging about not minding oil prices dropping as low as $20 per barrel and stay there for a long time.

Today, when oil was trading around $48 a barrel, the Saudis announced that they see oil prices bottoming. And El-Badri (an OPEC’s Secretary General) even claimed today that oil price may go as high as $200 a barrel.

But such low price of oil is painful for everybody, even for Saudis. Are their claims a sign of them preparing the world for the end this price war? Who knows? Nevertheless you will still find a bunch of pundits predicting all sorts of oil price movement in upcoming months (mostly contradicting each other). But there is one thing for sure. Oil price will start going up. When exactly that happens, how fast, and how high, nobody knows. But what goes down, must go up.

And that happened in the past already may be a guidance of a potential future development. Let’s take a look at the oil price to see what happened and what may happen again:

 
Crude oil in 2008
 

Now, let’s take a look at today’s price action:

 
Crude oil price in 2014
 

Will history repeat itself and will oil recover? I bet it will. It may be different movement as far as its magnitude and speed of course. It may take longer time, smaller price recover than before, it can continue falling forever (as talking heads want us to believe), or it can shoot up like a rocket and recover even faster than before. The price can also continue lower to reach 2008 lows. But at the end, the price will recover. I already took my bet on this by purchasing LGCY shares.

 
Will history repeat itself?
 

Will LGCY history repeat too?

I believe it will. There are a few clues from the company itself which make me an optimist and believe that LGCY will not only survive this price oil turmoil but also recover its price in full extend and continue paying its distribution without cuts.

In 2008 LGCY also took a huge hit caused by oil price collapse. It was a price drop of the same magnitude as we see today:

 
LGCY price in 2008
 

Let’s compare this chart with a price action today:

 
LGCY price in 2014
 

If history repeats itself again, we may see a nice recovery and great capital gains by the end of the year 2015. The price may reach up to $17.36 a share. And the best thing is that while waiting for the price recovery, I will be collecting extremely, nice, juicy, great, super, excellent dividends.

But the best LGCY has to offer is that even during the oil price collapse in 2008 LGCY didn’t cut its distribution and continued holding on.

Before the crash in 2008 the company paid and increased dividends from 1.64 up to 2.08 a share (9.90% yield). When the price collapsed, the yield skyrocketed to 32%. The company held the distribution thru the bad times until the end of 2010 when the price of the stock fully recovered. Then the company started raising dividends again. It went from 2.08 (9.90% yield) to 2.44 (8.41% yield). Today, at $9.94 a share the yield went up to 24.55%

 
LGCY holds dividends
 

Will history repeat itself here again? We do not know. What we know already is that management of the company in a recent presentation at USB MLP One-on-One Conference declared their determination of sustaining this same level of distribution and avoiding its cut as they did in 2008. At a Wells Fargo Energy Symposium COO Paul Horne expressed the new trend in Legacy’s navigation thru this low oil price environment by cutting expenses and making accretive acquisitions while focusing on preservation of shareholder’s distribution.

Will we see the company to sustain their distribution or will they follow their peers who already cut their dividends? So far LGCY announced its next quarterly distribution at 0.61 a share which is in line with the previous rate. So far the company holds the course.

New LGCY bull put spread 10/12.5

This is a strong enough evidence for me to believe that history will repeat itself this time again, like in oil price recovery, like in LGCY price and distribution pattern. And that the price of the stock recovers this year (although it may not be a full recovery to pre-crash level).

To give the company time to recover I decided to open a long term spread with expiration in September 2015 and sell ITM (in-the-money) strikes. This means that I speculate for the price to go above the strike prices. I see the following benefits and dangers in doing so:

 

  • A long time spread gives the stock time to get above ITM strikes making the trade OTM.
  • Selling a long time spread gives me a lot of time value to decay later on.
  • I also sold an intrinsic value which will disappear as soon as the trade progresses into OTM state.
  • If the stock recovers faster the spread may become worthless and bought back earlier than until September 2015
  • There is a danger of early assignment of the short put should the stock perform bad. This is unlikely in early stages of the trade.

 

Trade detail

 
SELL 1 Jul4 14 345 call
BUY 1 Jul4 14 355 call

@ 2.00 DAY (credit)

With this trade, the risk is relatively low (I only risk $50 per contract and have a chance to make $200 per contract). That’s a nice 400% profit!

Let’s see if this trade opens tomorrow and how it will progress during its life span.

Good luck and happy trading/investing!




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Posted by Martin January 23, 2015
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Armour Residential (ARR) Are Insiders Abandoning the Ship?


I once invested in Armour Residential (ARR) for high income. It was at the time when this stock traded at $8 – $10 range in 2009. Today, this company is down low at $3.40 a share and it looks like it is going to die after a long agony.

ARR

I invested in this stock excited about great dividends, but failed to see that this stock and company is a trap. At that time I didn’t know much about dividend sustainability. I didn’t know or ignored that high yield not always mean security and learned the hard way that dividend cuts may ruin your investment. The price drop will in all cases exceed your dividend income you received and you always lose in the end.

Although dividend investors do not care much about their portfolio value as they cherish income it produces, you still do not want to be sitting in a losing position and hoping that one day it may recover. Some investors even throw more money against their bad holding to cost average. But constant dividend cuts will catch them. Always.

I am not talking about stocks that are good dividend payers, increase dividends regularly and have a proven history of doing so. Then a large price drop of such stock is a life time opportunity. Unfortunately Armour Residential isn’t such a company.

In 2013 I decided to take a loss and walk away from ARR. Now, I am glad I did it. I closed my trades at around $6 a share at that time. Today, the stock is trading at $3.40 a share. Those who hoped for a recovery and great dividends are probably disappointed.

Although I do not invest in this company anymore, I still time to time look at it to see how my past assessment worked. Was I correct or wrong? I also time to time check discussion boards to see what other investors think. And I still receive news about this company into my inbox.

And today I received news that a company director Bell Marc (co-founder and member of the Board of directors) sold all his holdings in ARR on January 22, 2015:

ARR Holdings

When I was selling my positions in ARR, one of my reasons were that the managers showed in many occasions that they didn’t care about investors, but themselves only, unlike other dividend payers, compare it with Realty Income for example). If a co-founder and one of the directors liquidates all his position in the company, what does that tell you?

Are the rats leaving the ship?
 
 




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Posted by Martin January 20, 2015
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Realty Income: Why it is now a good time to sell as well as hold


Realty IncomeRecently, I enjoyed two articles at Seeking Alpha about Realty Income Corporation (O). One post was written by Casey Hoerth “Realty Income Corp: Why Now’s A good Time To Sell” and the second one by Achilles Research “Realty Income: Why Now Is Not A Good Time To Sell This REIT Nugget“.

While it was interesting to watch (read) the reasoning of both authors on why it is good or bad idea to sell or hold, I noticed that both authors missed one important point in this decision making process whether to sell or hold. I believe that both are actually right in their arguing. It just depends on what investing phase you are with your portfolio.

Casey is arguing in his article that Realty Income has fared way up and that it would be a good idea to trim some gains and reallocate to another equity, while Achilles is opposing it urging not to take a trading mentality with an income vehicle such as this stock.
 

Realty Income
On a daily chart Realty Income shot up from its almost 6 months long consolidation phase at $46 a share reaching previous all-time highs from April 2013.
 

These are crucial words in determining whether to sell or hold based on where your portfolio stands and how you should react.

What phase of your investing career your portfolio is?

You would agree with me that there are generally two phases in building and maintain your wealth. One phase is called accumulation, the second one is a maintenance phase. What do you do in each phase? During your accumulation phase you build your portfolio and accumulate your wealth. During the second phase you just maintain its health.

Accumulation phase

There are many opinions on how to build your portfolio and there are many legit ways to do it. But generally the accumulation phase should consist of selection of stocks you want to invest in and start building up your portfolio by purchasing your selected stocks. Time to time you prune your portfolio by weeding out stocks no longer meeting your criteria and reallocating funds into a new stock. But overall you try to keep your portfolio balanced.

I have seen many experienced long term investors having two approaches how to balance a dividend growth portfolio – one approach is income based allocation, the second is a simple percentage weight allocation.

The income based allocation maintains allocation based on a percentage of income in your portfolio – for example you allocate your funds in such manner that every stock produces the same percentage of income (i.e. 3% income of the entire portfolio). This approach protects your income. If any stock fails to deliver dividends, you only lose 3% of your overall portfolio income.

The second approach is simple, you keep allocating an equal percentage of funds into selected stocks, let’s say 5% of every stock you own and you keep it balanced that way for the entire life of your portfolio.

However, during the accumulation phase you do not rebalance your portfolio. It is also impractical to do so. If you can invest let’s say $1000 monthly, and every month you buy a stock, that stock will become overweight in your portfolio until the next month when you buy a different stock and start smoothing the misbalance of your holdings. As of today, there are not many brokers which would allow you to buy increments of stock the same way as you do in your 401k (if you have one) where you deposit your monthly amount and it is equally distributed among all mutual funds in your account.

Also during accumulation phase you may only hold a few shares, so selling a portion would make sense either.

For example, I once held 24 shares of Johnson & Johnson (JNJ) stock and I once tried to rebalance – now holding only 12 shares. What a nonsense.
 

 

I only know about one broker so far which can allow you to do that and that’s Motif Investing. Motif allows you to select 30 stocks of your own, create a portfolio (a motif) and invest an equal amount of cash every month, for example, and that amount will be equally (or as per your target allocation) distributed among those stocks.

By doing so, you can create your own mutual fund or 401 k equivalent and start accumulating. Motif Investing even offers a great bonus. If youstart investing with them you get up to $150 to start investing with when you open an account.

If you are investing in a regular taxable account (as a bridge for your early retirement), you will not have this option available and you will not be able to balance your portfolio. From this perspective, if you are in an accumulation phase, Achilles is right. It is not a good time to sell Realty Income. In this phase value doesn’t matter. You only do not accumulate in this phase and wait for the next correction to start buying this gem again. And while you are waiting, you collect precious dividends.

Maintenance phase

But what if you already accumulated enough to live off of your investments? You are done with buying and you just collect dividends? In this case I would agree with Casey when he says to trim your gains. It is a standard balancing procedure in every large portfolio. It is a method I first learned many years ago when my investing teacher basically told me:

“When a mutual fund (or stock, as he was primarily referring to 401k holdings) goes up and beyond your target allocation, you trim it by selling a portion of your holdings above your target allocation and buy those stocks which underperform.”

This sounds great to me and I use this approach in my 401k and I also plan on using this approach in my dividend portfolio once I reach my target. This method would be acceptable in my opinion even with an income based allocation due to different dividend growth, but is great with a standard percentage based allocation.

Not doing this rebalancing would cost you a great deal of money which you can boost your portfolio.

For example, today, Realty income fared way up and is overvalued (as this stock was always overvalued), but other stocks in energy sector are mostly undervalued. This is a great opportunity to take some cash off the table by selling a portion of your Realty Income and buy energy stocks such as Legacy Reserves (LGCY), Chevron (CVX). Tallgrass Energy (TEP), or some consumer goods, or technology stocks such as Ford (F), Microsoft (MSFT), etc.
 

Realty Income 5 year chart
Five year chart shows how far and steep the Realty Income moved compared to previous all-time high. Will we see a similar reductio0n in price as we saw in 2013? If so, trimming some gains makes sense. But only if you own enough shares to do it without significantly reducing your holdings. In accumulation phase rebalancing doesn’t make sense and it is better to just hold and suspend investing for some time until the stock retreats again.
 

As these stocks recover and get back up and Realty Income lags this move, you do the opposite and rebalance back to Realty Income. This approach will help you to generate some capital gains which you can reinvest and create more dividends. All you need to do is to avoid trading and do this once a year to avoid short term capital gain taxes, and I believe this would benefit you well.

In this case I agree with Casey and his call to sell a portion of Realty Income and reallocate to other dividend gems out there which lagged because of being out of investors favor, but still continue paying nice dividends and even increasing them.

Conclusion

Choosing whether to sell, hold or accumulate a stock could be a difficult task. Many investors claim that they would never sell a dividend paying stock and I agree with them, but it is not a good approach to fall in love with any stock. It is something we have to learn over time. But it is a good thing to learn to trim gains in one equity and buy another lagging equity to keep your portfolio balanced. With dividend growth stocks this is an easy task to do. You can treat them almost as mutual funds. But if you are still in accumulation phase, it would be wasting your energy and funds trying to reallocate mainly when your holdings are still limited. From this perspective it is a good approach to hold Realty income and do not sell. In a maintenance phase it is a good time to trim some gains and boost other sectors.
 
 




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Posted by Guest January 13, 2015
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Will Eurofins’ Acquisition of SF Analytical Boost Returns?


Analytical testing is currently an attractive area for investors around the globe upon which to focus their attentions. The fact remains, however, that a great deal of this investment capital needs to be utilized so that higher returns for investors will result. A major way in which testing firms are striving to put this $1.3 trillion in capital to good use is by consolidating their efforts. The Eurofins firm is on the forefront of this trend, as demonstrated by its recent acquisition of SF Analytical Laboratories.

Specializing in the testing of environmental elements, pharmaceutical products and food products, Eurofins Scientific operates in 36 nations and employs 16,000 individuals. Across more than 200 laboratories, Eurofins demonstrates superior technical and analytical methods when testing the composition, legitimacy and safety of their clients’ product samples. The lab maintains a streamlined process for acquiring samples via high-tech courier systems as well as upholds a solid reputation in working with clients on a regional and multinational basis. These strengths are viewed as a great benefit by Dave Kilber, SF Analytical’s CEO, who states that the opportunity to consolidate his company’s testing services with those of Eurofins’ enables client expansion and more diverse offerings.

Based in Wisconsin, SF Analytical brings a number of impressive credentials to its consolidation deal with Eurofins. The majority of SF Analytical’s laboratory testing is concentrated on food and drink products, dietary supplements and ingredients used by food manufacturers and processors. Because Wisconsin ranks third in the U.S. in regard to food production and first in the U.S. in regard to food ingredient production, SF Analytical has a strong regional client base for which to test the nutritional, microbiological and allergen profiles of samples. This firm also has the benefit of Wisconsin being a major water research area, as its lab offers water and environmental testing services. Boasting 2,900 clients, SF Analytical has an ISO 17025 accreditation, ensuring competent quality and validity standards in the testing of dietary supplements.

Eurofins’ acquisition of SF Analytical is to be completed by the close of November 2014. The Wisconsin location will retain all employees and will be renamed as Eurofins SF Analytical. This consolidation allows Eurofins to expand its presence in the Midwestern United States, and all of the current testing operations performed by SF Analytical will continue as usual.

This particular consolidation of analytical testing labs, as well as other potential consolidations within this sector, is intended to raise the overall profits of investors in technology and science. Current and future investors can be encouraged by the fact that analytical laboratory testing services will increase as the requirements for food and environmental safety become more stringent. Firms such as Eurofins and the newly formed Eurofins SF Analytical have an interest in proactively expanding their testing so as to ensure that their capabilities are in line with continually evolving regulations.




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Posted by Martin January 12, 2015
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Is S&P500 going to crash soon?


It may look like we are on the top and due for a correction. But are we really? I think we are not. Although Friday’s trading and even today’s price action shows weakness in the market we are still in uptrend.

We will see a correction at some point and the S&P 500 will turn down, but I think we are not there yet. Why?

Do you know how contrarian investing works? If so, then you would understand my reasons why we are still in good shape. There are still too many bearish investors out there.

According to Stocktwits about 44% of investors are bearish in today’s market. And we have seen this average bearishness since November 2014 with a few spikes lower and higher than that (i.e. up to 62% to 18% bearish investors and traders).

And now, if you ask me why I think we are still in good shape and how bearishness of investors can prove this I want you to review not too far distant example we already experienced a few years ago (people have really a very short memory).

Do you remember gold price action? In 2011 gold price spiked to $1,826.70 per ounce when it reversed and started its deep correction. When gold crossed over $1,600 per ounce my friend trader told me that we were topping the price of gold because his grandpa who has never invested in anything in his life (he had a defined benefit pension plan) suddenly became extremely bullish in gold and decided to invest in it.

Gold Price Action

In another foreign newspaper in Europe I read an article about people liquidating their savings and moving into gold. Everybody was suddenly bullish. Everybody wanted to buy gold.

My friend uses his “Grandpa Indicator” for this same reason to find out if we are really on the top of anything. Did his grandpa indicator told him to get out of the stocks? Well, not yet.

And yet the same trader uses another, similar indicator – put/call ratio. He once explained to me how that works. If so many people speculate for the market to go up buying calls, be alerted as we may be in trouble.

If too many people expect the market to crash they start buying put protection, we are still good and may expect another pull up.

And how are we doing? According to CBOE data, on January 9th 2015 the put/call ratio was at 1:2. In other words, we saw 6 million open put contracts vs. 3 million call contracts against SPX. No matter what you think, this is quite bullish.

CBOE Open Interest

People are extremely bearish, expecting the market to crash. Media and talking heads are warning us of an imminent market crash. Should we be worried? No, we are not there yet. Just check the chart below. We haven’t broke any trend yet. Yes, the price action is a bit shaky compared to all previous dip buys we experienced. However, we are still in an uptrend.

SPX

There are red flags coming out. I admit. One of the red flags was the Friday session. We received good economic data, but the market sold off. But also note that the market is dragged down by energy sector and oil price drop. Thus it is seasonal and there is no need to be extremely worried.

Yes, the market is and will be volatile this year as bulls will be fighting with bears. We may see pull backs. But crash? I do not think so. Our Grandpa indicator is still calm and doesn’t even know about SPX at all. Once he finds out, it will be the time to get out.
 
 




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Posted by Martin January 11, 2015
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My miserable performance in 2014 and goals for 2015


It is time to quickly review my performance in 2014 and set goals for 2015. I have a few accounts I use to deal with my finance. I have an account which I call TD account, ROTH IRA account, 401k account, Scottrade account, and Motif investing account.

I use each of the account for a different purpose and different investing strategy. Those taxable accounts are meant to help me with early retirement to bridge the time when I retire but yet will not be able to use 401k or ROTH accounts.

TD Account

In my TD account my primary strategy is trading options. The secondary strategy is then dividend investing. I trade options and use proceeds to invest into dividend stocks.

ROTH IRA account

In this account I use dividend growth strategy. I invest contributions and dividends into a commission free ETF as long as I save at least $1,000 which I then use to buy a dividend growth stock.

I use Motif investing to simulate mutual funds. I created a few dividend growth portfolios in my Motif account and now slowly continue investing into those portfolios (called motifs). In my Scottrade account I perform a compounding experiment. I will write about it later in my next post.

That was a review of my tools I use to get to my financial freedom. And now let’s review my 2014 performance.

These were my goals for 2014:
 

  1. Reduce my debt by 50% – FAILED
  2. Make $5,000 in options trading – FAILED
  3. Max. out ROTH IRA account – FAILED
  4. Reach $300 monthly dividends income in combined accounts (in TD and ROTH IRA accounts). – COMPLETED

As you can see I failed most of my goals last year. Next I will set my new goals and also explain my failures.

My Goals for 2015

My trading results were very good the first half of year 2014. I more than double my account. I started with $10,072.72 and soon I had almost $24,000 in my account. I was so excited about my success and I believed I was invincible. I overinvested my account and became greedy. I ended 2014 year with 17.42% gain only as I gave all my gains back. You may say it is still a good result, but I am not satisfied with it. My account dropped even below my original starting point. And yet my account is still overinvested. I am breaking my rules.

My goal for 2015 would therefore be to focus on money management and wealth creation and preservation.

I advise my readers to trade only 30% of available cash and keep the rest in reserves for trade repairs. I was constantly breaking this rule. This year my goal will be to strictly follow this rule.

My second goal will be to rebuild once again my account and keep it constantly growing.

My third goal will be to continue eliminating my debt. I was so excited about my trading results at the beginning of 2014 I stopped paying attention to my other goals. I stopped paying off my debt. This year I am determined to work harder than before on eliminating the debt.

Well, my overall year 2014 wasn’t a complete disaster. Only my trading account wasn’t going the way I wanted. My ROTH performed well. My 401k did the same and other accounts were great too. Just my trading account wasn’t that great. My plan is to change it this year.

AccountValue

I wish you a lot of success in the New Year and may your financial dream come true!
 




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Posted by Martin January 09, 2015
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Stocks to buy in January 2015


When trading options or investing into stocks I always wanted to develop a system which would tell me which stocks to buy and which to avoid. I wanted as manual and automated system as possible to avoid emotion in selecting stocks. I wanted something you can almost program into a computer and forget about it.

I tried many systems, but I was never satisfied with the results. Some were too tedious to work with and because I had to do most of the work manually I wasn’t able to eliminate the human factor which makes our decision making irrational and emotional.

And I didn’t like it.

I had a good system at some point. I called it a “Stock Picker Rank”. Based on selected criteria I assigned a rank to the stock and then based on the rank I could arrange stocks to buy or drop from my portfolio. I tested the system and it wasn’t bad. The results were nice and I last year my simulated account ended with 17% gain. Not bad, right?

But the work associated with the stock selection process, running it thru the filters and selecting the right stock was horrible and very discouraging. But I didn’t give up. I was looking for ways how to automate this system and also how to make my criteria focused more on the valuation to pick a stock which is deemed as undervalued.

I think I found a strategy which can do that. It is based on current price, current P/E, forward P/E, current EPS, and EPS forecast. Of course, there is slightly more to it, but this is all I am willing to reveal.

Then, I was able to code this into a Google Spreadsheet, insert my stock watch list in it and now the spreadsheet is screening all of my 150 dividend paying stocks as well as some growth stocks too.

Now I want to put this screener into testing, but I will do it publicly, so you can see yourself how that works and if it pays to follow it and invest. For the following year I plan to publish my selection of stocks and show results of the stocks what it would look like if you invested in it.

How the investing process would work?

 

  1. Every month I will publish new stock selection.
  2. You can buy those stocks (in your paper money trading account for example) and hold until next month.
  3. You place a stop loss 10% below your entry price. If you get stopped, get out of the stock and move on.
  4. Those stocks which remain in your portfolio let them run up holding them until they reach 25% gain. Then sell.
  5. At the beginning of the new month a new selection will be published.
  6. Buy only those stocks, which you do not have in your portfolio, avoid those you already have.
  7. Sell all other stocks which are not in the list anymore, and are showing a loss. Move stop loss to break even of the remaining stocks.

 

The procedure above may change over time as I will be playing with this strategy more during the year.

And here is the list of January 2015 stocks

 

I will use this screener to buy stocks in my ROTH IRA account. In my options trading TD account I will use these stocks (which are optionable of course) to trade bullish spreads. For example, if you are my newsletter subscriber, you have received an option trade alert to trade a bull put spread against Agrium (AGU). In fact, this trade was based on the screener above. And we opened a bullish put spread at 85/90 strikes. If the stock stays at these levels or even grow higher, this trade will end up profitable.

What if you do not have enough money to buy all selected stocks?

It is easy. Each stock has a rank added to it. The highest the rank the better, so just go and pick stocks with the highest rank and continue down the list. For example, if you can only invest $1000, then buy only 1 stock. With $2000 buy 2 stocks, and so on.

Of course the rank won’t guarantee a winning stock, but gives you a high probability of a winner.

And do you know what the best with those stocks is? Many of them are dividend paying stocks so while you are waiting for them to grow to give you nice capital gains, you will be also collecting dividends in the mean time!

Now let’s put this in test and see how that will work.

Happy trading and investing!
 

Previous selection:

Stocks to buy in February 2015
Stocks to buy in March 2015
Stocks to buy in April 2015
Stocks to buy in May 2015
Stocks to buy in June 2015

 
 




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