The Market is just like your Crazy Mother

I worry a great deal about stupidity. LIke, Sarah Palin could actually be President. Or, health care reform will become an even larger hornets net of false "Rove" games to put FEAR in the market people.

But I still sleep at night.

With the market I've actually begun to worry with the overbought conditions that took over that America had taken a new "stupid" pill ( we take lots of these) and that we were creating yet another "bubble" for ourselves.

If we look back at earnings for the second quarter think of the brands: Apple, Intel, Exxon, Wal Mart, etc-they've all done well, and bank stocks have soared as they used our money to charge us higher rates. Actually, the big name stocks have not performed as well as the "off brand" stocks, and it is when I see stocks like the newly issued GMAC (we made 100%), or AIG, Fannie (FNM) or Freddie (FRE) all jump to new highs. None of these stocks appear to be long term viable investments and that the past will all be forgotten and the companies ready to rise again.

This is pure garbage, and more frightening, is much of what has driven the market to new highs as investors see "the worst is over" and "let's take advantage of these values).

The values occurred months ago, and are gone.

This is NOT to say the market will not go higher, as it will, hitting 10, 400-10,600 if it follows a classic Fib retracement from our lowest lows.

But it IS to say that the fundamentals are not there, and the overall projections to what makes a market truly perform are not there.

Remember, we see the market as your dysfunctional Mother with mood swing, and no matter how well you know her, the moods come out of nowwhere, and are largely unable to be recognized.

The market breathing is in control, and when we are unable to understand the breaths, we tend to stay away, and lock our profits.

Investing in Break Out Stocks-Current market conditions

Many traders are familiar with the term “break out stock”, often stocks that are not well known and hit a perfect point in a chart for a breakout, and can then rise 30 to 200% in a short time.

This is what we all want to trade. To hit the jackpot with. Buy XYZ at 30.00, sell at 240.00. The holy grail.

Many traders are familiar with Investors Business Daily (IBD) and William O’Neill’s famous How to Make Money in Stocks. In fact, we recommend this book for its excellent study of cup and handle charting, and “springboarding” off break out pivot points , which has many similarities.

In my many years of trading I’ve heard great success stories on the wild rides up with breakout stocks, again typically not companies known well, and in the “exposure” stage.

O’Neil teaches a CANSLIM approach to trading stocks, using all the core rules and fundamentals to help a student trader know the basics about the potential growth for the stock.

Within this approach is a very tight stop loss. Breakout traders need to be buying at the pivot, with knowledge the pivot, based on increasing volume and “exposure” of the stock, will lead the stock up, with perhaps a short test, but without exposure of loss greater than 8%.

This means these type of traders are buying for breakout, and immediately sell if the stock falls 8%.

The logic of stop loss is critical. It should be set up for each stock. At Blue Chip Options we always use a X% trailing stop loss, meaning whatever % we will use (15, 20, or 25%) trailing the stock as it moves up, so that we are not taking a stop loss on a % for our buy basis, but our current value.

The positives to tight stop loss used in breakout stocks in today’s market is that it can occur in a day. In an hour. A trader can miss a move in the market, not the stock, and the emotions of the market carry 95% of the stocks down.

A simple rule: analyze how many 8% losses you are having. Prepare to study the return on investment (ROI) on if these losses exceed the gains. They often do.

And what I consider a core rule to breakout trading; Always sell in 1/3’s.

Sell 1/3 of your position at 20% profits, the second at 50% and let the rest the position run.

You will find at Blue Chip that we will see a random stock that has high volume on options, that we’ll play, as a breakout, risking with the option play just how much we were willing to lose with the 8%.

This is one of my most important rules:

Say the stock you want to buy is 35.00 a share and you will buy 500 shares. This equals 17,500 you are willing to invest to the stock.

We’ll invest an 8 to 10%, what we would use as stop loss, or up to $1750.00 in an option, willing to lose everything (as we would if it were and would if taking such a stop loss on our investment.) It is the same amount of money willing to be lost, with greater gain potential on the option.

Markel- a nice 7.50% bond play

New Trade for Conservative Investors:

Here's a chart of the parent insurance company, Markel. Do your due diligence on this insurance giant to understand our recommendation.

And a chart of MKV, the 7.5% interest senior debenture bonds.

We suggest MKV in a CORE portfolio and as a pure bond play will not be listing it in our core portfolio, but advising clients of good chances of appreciation, and a AAA rating for 7.5% returns.

Update: Traders at www.oexoptions.com recent history: 20 call profits of over 30%, 1 put profit of 20%, and two to three put losses! We're on a roll.

How We Trade DIA Options

At www.bluechipoptions.com we often trade DIA index options. Much like the OEX, which represents the top 100 stocks or the S&P 500, (SPY), DIA acts as cash derivative options for the Dow.

You have heard so much of cash derivatives, and Bernie Madoff became infamous for “pretending” to trade OEX Options for massive profits.

The trouble with Bernie is that he simply “cut and pasted” the best buy and best sell, and posted the “results” to his investors, never really buying the option at all.

Cash derivatives options are meticulously explained at www.cboe.com

Effectively you are buying an option on the DIA at a “strike” point that is either far away from where the Dow is at that moment (called OTM, or out of the money, and not as expensive), or is “ATM-at the money” or “ITM”-in the money, both representing “strike points” either where the Dow is at that moment (ATM) or at a strike point “safely” beyond the current Dow.

Our Preferred Blue Chip subscribers receive detailed instructions on how we pick the option, and the specifics of our buy/sell and stop loss methods.

http://www.oexoptions.com/BlueChip/BCO-Subscribe.html

WE live in two realities-and a Rock is NOT hard

" In the main, and from the beginning of time, mysticism has kept men sane. The thing that has driven them mad was logic"-G.K. Chesterton

Floyd sees this as "what the heck is reality anyway? It nothing but a collective hunch".

"What we know of the world comes to us primarily through vision. Our eyes, however, are sensitive only to that segment of the spectrum located between red and violet; the remaining 95% of all existing light (cosmic, infrared, ultraviolet, gammas, and x rays, we cannot see. This means we only perceive 5% of the real world" Amos Vogel

'We live in two realities. One of a seeming fixity, "the real", with dogmas, rules of punctuation, and routines, the calendars and clock wise world of all but futile round and round; and one of whirling and flying electrons. dreams, and possibilities behind the clock" Sidney Cox

And from Eckhart Tolle "Life will give you whatever experience is most helpful for the evolution of your consciousness. How do you know this is the experience you need? Because this is the experience you are having at this moment.

And from Floyd, "Whatever experience you are having you are creating "

So what does all this have to do with the stock market, and trading? It has far more to do with the market than technical indicators, oscillators, or Lagging Indicator chart history that shows us historical patterns, according to how we interpret them.

We only see what we see and we only know what we know. It is when we believe that what we see is all there is, and all we know is all that is to be known that we are the furtherest from understanding.

My training of traders has grown in success from only one maxim: All is not as it appears.

A rock is not hard.