Adios 2011 and Good Riddens

2011 was a particularly challenging year. We had the flood, the reconstruction, Jack taking on a new school, the glorious wedding events, the decision to add on to Jack's room, dealing with the business issues of the Tsunami in Japan and the Arab Springtime uprising, as well as couple of other business issues I would not feel comfortable sharing.

As with any other challenging thing in life, we must choose to learn from it. Investing is no different.

In the Salve Lucrum portfolio, we suffered a 2.70% loss for the year. That would be the realized loss. In the next week or so we are going to do a forensic on our top 5 losses and top 5 gains. I suggest you do the same. There is only one way to get truly good at investing and that is to learn from your mistakes and find out what you did right.

At quick glance, I lost money by not following the The CAN SLIM simple rule of ALWAYS ALWAYS ALWAYS selling when you drop 8% from the opening position. Most of my wins came in the precious metals, volatility plays, and AAPL.

In our second largest account, my son's trust account (where I cannot play in the options market) we enjoyed a 4.3% gain mostly due to gains in the metals and energy.

All of the other accounts had realized losses and gains in the -1% to +7%. So to counter Salvay's cheap shot that I am not proud of my performance last year, phishah! It was a tough year and I spent a lot of time and money learning the options market. I spent money on books and online courses and in the real world school of hard knocks.

I am hoping that knowledge will make me a better investor and trader and if any of that passes on to you, that makes me very happy.

So What's New For This Year

Personally, I am going to limit my option action strictly to volatility plays via the VXX, and by using "Buy Write" or "Covered Calls" options. The volatility that skewed the market last year has not gone away and we do not see it subsiding anytime soon. As a result, embrace it with the simple strategy of covered call options.

Steven Sear (Barron's) wrote a great piece on this concept this week and I STRONGLY encourage to pick up this issue and cut this column out. Because the fear is still in the market place that there will be an implosion in Europe and the US will struggle dealing with its own debt issues, that fear interrupted by brief periods of greed will make a volatility play very viable in 2012.

We encourage you to not only read this article but all the readily available information on covered calls, make sure you understand how they work, make sure your account is set up for option trading and then start out very slowly.

This is very simple to do. Let's say you have 100 shares of GWW Grainger (This is one of our core holdings for 2012.) It is selling for 187.19 (Buy Point as of 12/30 is $186.50 stop order at $171.00). This will only work with stocks that you have done your homework on and have a strong conviction on. If the market is in a really or a confirmed uptrend as defined by the number of days of accumulation or distribution or defined by the IBD or as defined by my regurgitating that information to you in this blog, sit back and enjoy the ride. Once the market is identified as in a correction or even a rally under pressure, look for 1 out of the money call options for GWW that is 30-60 days out.

That means that the strike price of the option is just barley above the current price of the stock and the expiration date is in February or March. If you look at the option lists today you should see a 190 dollar (just out of the money) February 18 call option. That would be the one to consider IF the market was in a downturn. It is selling for $5.30 a contract. IF the market was in a correction you would sell one contract for $5.30 generating income for you of $530.00. If GWW followed the market as it usually does, the value of that call option would fall. You can either buy it back later at a lower price or let it expire worthless keeping the $530.00 pure profit. Again we will only be using this strategy on stocks we feel very strongly about and in a downward moving market.

CAN SLIM and the IBD

Over the break, as we looked at the various portfolios and some of my stupid mistakes, I went back and restudied the whole CAN SLIM investment strategy and realized that I lack the focus and discipline to make consistently wise decisions on a daily basis.

The beauty of the CAN SLIM strategy along with the IBD and investors.com, is it takes my paradigms and emotions out of play and provides me a simple set of rules to make myself and the Salve Lucrum Family a few bucks better than the broad market.

So I will be using and sharing the tools of the CAN SLIM system almost entirely through out 2012. I know it will out perform the broader market and help me achieve my personal goal of achieving twice the 10 year yield for most if not all the accounts.

Here are a couple of slides I am borrowing from the CAN SLIM Level One Home Study Course I reviewed over the break.

First is an impartial endorsement by the AAII which states:

The here is the basic definition of what the components of the CAN SLIM system is.

If you want to be a better trader and a truly successful investor, you should read and take to heart the strategy laid out in O'Neil's book, How To Make Money In Stocks.

There are a lot of things to like about the system, but here are few I have rediscovered, knowing the daily market direction becomes easy and relative to your trading decisions, valuing stocks based upon fundamentals and technicals becomes easier the more you do it, choosing an entry AND EXIT point are no longer emotional decisions, and selling become more mechanical than emotional.

If anyone wants or needs a primer on CAN SLIM, just drop me a note and I will buy you a copy of O'Neil's book as my gift for you to start off your New Year right.

Now What Do We Do The First Week Of The Year

Monday Today

The Eurozone PMI index reported a gain today but it was off a 28 month low, so it did nothing to help get ours or any other market excited.

Tuesday

The ISM survey come out and it is expected to be to the upside. The survey queries purchasing managers about the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. All of this stuff helps dictate market direction. (Hint: Important stuff in the CAN SLIM strategy.) If it comes in above 53, good news. If not bad news. It will be a market mover to the upside if we break 54 and downside if we fall below 52. Our guess is somewhere in that range so it is built into the current figures.

Construction Spending numbers are released which are the dollar value of new construction activity on residential, non-residential, and public projects. Data are available in nominal and real (inflation-adjusted) dollars. Look for public spending on construction to drag this number down. The guess range is -.5% to 1.5%. It should fall in the range so don't look for much market reaction. A fall below -.5% will suck a point off the market and give us a significant distribution day for the Dow and S&P.

Keep an eye on Europe for a disappointing German unemployment number. The UK will have a PMI report showing a further increase in inflation.

Wednesday

Factory Orders should improve. If we come in stronger than 2%, look for a nice day in the market.

In Europe look for more inflation as the Eurozone CPI is relased. Frances manufactured goods will surprise to the upsides lowering the VIX for a day or so.

Thursday

The ADP report will "tell" of a further drop in Friday's unemployment figure. All of this should be good news for the market.

Look for further improvement in jobless claims numbers. This too is a good sign for the market.

The ISM non-manufacturing survey comes out. The non-manufacturing ISM surveys more than 375 firms from numerous sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade. The non-manufacturing composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). If we can get this dog above 54, look for a nice spike in the market.

We will have more pricing data out of Europe and look for inflation to come up a bit more. You will see some disappointing retail figures out of Europe and a relatively strong manufacturing number out of Germany. Most of this will not be a surprise to the market so it will suck it up.

Friday

There are some robust employment figures expected on Friday. If we can achieve or beat expectations look for a nice strong finish to the market. Again market direction is so important to the CAN SLIM strategy it will tell you what to do with your money.

If we do not add any distribution days to our list this week and can see a 2% upside like I am guessing, you can find some nice new positions or add to existing ones at the right buy point. What is the right buy point, great question.

Send me a ticker or two and I'll show you how to find a good buy point if any. Better than that if I find a good buy point I'll get in with you. This could be fun so send them my way.

CAN SLIM Holdings

GWW Buy Point 186.40. Out at 171.00

XOM Buy Point 85.31. Out at 77.85.

NUAN Buy Point at 25.55. Out at 23.50.

MSFT Buy Point at 26.02. Out at 23.95.

MGRC Buy Point at 28.56. Out at $26.55

Watching:

APEI, CLR, EPAY, FTNT, HCP, INTC, MG, SXCI, and V.

Please drop me a note and I'll kick around a buy point if it meets certain other criteria. Have a great New Year.

Salve Lucrum