I heard a talking head recently tell me how the Dogs of the Dow performance this year was fairly poor.  I follow the Dogs of the Dow strategy just like I follow my own, but thought I would take a deeper look.  First a couple of thoughts on the strategy.  My criteria for following strategies on a real time basis are as follows: Past research has shown that the strategy demonstrates an edge The strategy can be reasonably traded in a real world environment The strategy has some reasons why it cannot easily be backtested in an automated fashion. Oh, and if you're not familiar with the Dogs of the Dow theory, I've written about it before, but I'll give you the quick overview. The strategy is that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle.  This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies. Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market.

I decided that the only thing making this weekly wrap a yearly is one session, so why not wait? I have some observations to share about Friday's session, mostly about the home sales numbers since I like to keep my eye on the XHB.  It's beginning to feel a bit more like terminal velocity.  The news is absolutely awful.  The percentage drop of 9.7% was greater than expected and October was revised down.  We're on track for the biggest annual decline since the 1960's.  The analysts are throwing up their hands.  It feels like capitulation may be near. The market had a reaction to the news and it zapped the gain for the day but didn't really send us into a tailspin.  Normally this would be good for a sustained sell off.  I'm still not adding XHB to my longer term holdings, but my trigger finger is getting itchy.

I'm going to start a new paper fund at the beginning of the year.  This is based on the article I posted about the momentum investing strategy.  As I mentioned in the article, I sent the author a couple of questions regarding filters since a simple search on % return over the last 12 months yielded a number of penny stocks and there was no volume limit mentioned.  In an effort to make this strategy realistic, I'm going to impose my own reasonable limitations here.  The screen running forward will consist of the following three items:

I like the trend in the ETF industry.  Things are becoming more and more focused.  The beauty of all of this is that when people ask me about the market and portfolio construction, I can still refer them to broad based ETFs like the SPY, DIA, LQD, or EEM.  But for those who are a little bit more interested in finer control, ETFs are serving this purpose well.  It may even be better than individual stocks because a have a wide array of asset classes at my disposal.

So here's a new one ... China real estate.  You get all of the volatility of China and real estate rolled into one.  Many are speculating that the Chinese economy and real estate in that country will continue deep into bubble territory through the Olympic games.  If you want to ride this wave, there is a new ETF available from Claymore.  The ticker symbol is TAO.  She's already a wild one too!  It opened on December 18th at 24.60.  It bottomed out that day at 21.81.  It closed on December 24th at $27.00.  That's about a 23% range in one week's time.  Wow.  Normally I can blame this volatility on lack of volume, but it has traded over 100,000 shares pretty much every session.  This isn't the most liquid thing in the world, but it isn't bad at all, especially for a new ETF.

So the name seems pretty self-explanatory, but what does this ETF ultimately hold?  It's not actual direct Chinese real estate holdings, but rather companies closely tied to real estate development in China.  As of this writing, the largest holdings are:

•  Sun Hung Kai Properties
•  Wharf Holdings, Ltd
•  Sino Land Co
•  New World Development Co Ltd
•  Henderson Land Development Co Ltd
•  Cheung Kong Holdings Ltd
•  Hang Lung Properties Ltd
•  Swire Pacific Ltd-A
•  China Overseas Land & Investment Ltd
•  HongKong Land Holdings Ltd  

For the sake of disclosure and such, I'm not holding this ETF and don't recommend buying or selling it.

Just before Thanksgiving, I mentioned how all of the retailers are predicting gloom and doom in my article, Retailers - Same Story, Different Year..  The American consumer is tapped, the credit crisis will mean a cancelled Christmas and the world will stop spinning.  None of it happened, much to all of our surprise, I'm sure.  My "prediction" is that the RTH will be trading above $93 which is where it was when I wrote the article.  I noticed the news was once again doom and gloom.  Retailers didn't hit their projections this year.  No one got xmas presents presumably.  I know I didn't because I was a bad boy this year, I'm afraid, but all of the kids did ... what gives?  Looking into the projections, the retailers have, on average, predicted a 3-5% increase in sales.

In an economy that's borderline recession with a consumer that's supposedly tapped, you were predicting an increase over last year and in some cases, it wasn't hit.  This hardly sounds like a disaster.  So even with today's "rotten" news, the RTH has a pre-market quote of $95.  If we hold on to $95 for the next couple of sessions, that would put the RTH up 2% since Thanksgiving.  This is about in line with the numbers so far.

A ho-hum week until Friday.  This put the indices nicely in the black for the week and brought them out of the red for the month.

Symbol	Opening Price	Last Week's Price	This Week's Price	P/L Week	P/L Total
ACGY	$21.22	$21.34	$20.77	-2.67%	-2.12%
AIZ	$64.74	$65.86	$68.27	3.66%	5.45%
BLK	$198.32	$208.95	$216.15	3.45%	8.99%
BAP	$71.19	$77.91	$75.97	-2.49%	6.71%
HSC	$58.73	$62.95	$64.70	2.78%	10.17%
OII	$63.78	$69.42	$68.47	-1.37%	7.35%
MTL	$90.98	$92.92	$98.96	6.50%	8.77%
SPN	$34.64	$34.69	$34.73	0.12%	0.26%
				1.25%	5.70%

Here's how the major averages did this week.

DJIA	S&P 500	Nasdaq
13339	1467	2635
13459	1484	2691
0.90%	1.16%	2.13%

I closed the RIO position just a couple of days shy of expiration.  It's a shame it took a nasty spill there right at the end of it's life.  The maximum loss would be $160 per spread ($2.50 between the 2 strikes - $0.90 credit).  I closed at $2.00 which put me $110 into the red on this one.  I don't want to sound cocky here, but I don't think I would've done anything differently.  I opened the trade according to my plan, but RIO just kept going down more than it went up.  With both puts in the money two days before expiration and I was still $0.50 away from the maximum loss, I consider this decent from a risk/reward perspective.  I ultimately risked $110 to make $90.

I was happy to see that there is some action being taken against risky lending.  I'm not one that likes to see the federal government intervening and sticking its nose into anything much at all, but I felt like I had some crystal ball powers with all of this.

I still make mention of the conversation that me and a friend had over lunch one day in 2003.  Apparently his father was being sold an interest only loan so that he could retire earlier since his house payment would be substantially less (today).  With his father having an ounce of sense, he ended up getting what he came in to get.  A refinance at a fixed, lower rate.  But this got us to talking about how they're pushing these loans to anyone and everyone and how many people are getting into situations that they probably won't get out of easily.  And then ultimately the emotional whining will begin about people being thrown on the streets.  Then guess who's going to have to bail them out?  The people who make proper decisions.

I wish I had a more sympathetic view of this, but everyone that I know that is in bad financial shape is that way because of a deliberate course.  Some have even told me that they live for today, not tomorrow.  Scary.

For details of the plan, please see the article in the New York Times.

I finally heard someone on CNBC that made a bit of sense.  He mentioned something that I stated last week, that we've pretty much reverted to mean and that we're in a "comfortable range".  He said we're basically north or south of 13.3K.  He sees us anywhere from 13K to 13.6K over the next few months.  This is a prediction that I can finally agree with.  The "Dow 20,000" and "Dow 2,000" crowds are just a waste of air time.

How do you play a range?  Maybe I'm still not used to it yet, but this range seems a bit volatile, so it's probably a decent time to be a premium seller.  I have a few credit spreads going right now and they're all out of the money except for one (R.I.P. RIO).  My play has been to sell put credit spreads on the down turns and bear credit spreads on the shots upwards.  I have been using charts to assess where we are in the range.

(click to enlarge)

My favorite chart type for use with RightEdge can be downloaded from the Trading Systems section here and it simply plots 1 and 3 standard dev Bollinger Bands along with a MACD.  For me, visually, the price moving up into the shaded area indicates a potential overbought or oversold situation.  I'll let the MACD do a little bit of confirmation for me, but it's discretionary and also based on the current positions that I hold.  In other words, if I'm heavy on the puts, I may be a bit more interested selling some call spreads before a real extreme range is hit.

But back to the original comments, we appear to be in a range right now.  Will this break through up or down and become a full fledged bull or bear market?  I have no idea.  No one else does either.

Another week in the books.  The fed shenanigans made for increased volatility.  It also caused the markets to remain in a bad mood.  Looking at my trusty chart in RightEdge, I see that we've pretty much reverted to mean.  So while you undoubtedly hear the doom and gloom on the tube this weekend, we're really not overbought or oversold for the short term.

I'll likely weigh in on the inflation numbers from yesterday later this week, but my god, what a surprise.  Commodities way up, dollar way down, interest rates slashed with reckless abandon.  It's surprising that any number is surprising.

So enough with the surprising already, on to the numbers for the week.

Symbol	Opening Price	Last Week's Price	This Week's Price	P/L Week	P/L Total
ACGY	$21.22	$21.71	$21.34	-1.70%	0.57%
AIZ	$64.74	$65.21	$65.86	1.00%	1.73%
BLK	$198.32	$213.16	$208.95	-1.98%	5.36%
BAP	$71.19	$73.82	$77.91	5.54%	9.44%
HSC	$58.73	$62.44	$62.95	0.82%	7.19%
OII	$63.78	$71.52	$69.42	-2.94%	8.84%
MTL	$90.98	$99.00	$92.92	-6.14%	2.13%
SPN	$34.64	$35.40	$34.69	-2.01%	0.14%
				-0.93%	4.43%

Here's how the major averages finished for the week.

DJIA	S&P 500	Nasdaq
13625	1504	2706
13339	1467	2635
-2.10%	-2.46%	-2.62%

Month to date the DJIA is down 0.24% and the S&P 500 and Nasdaq Composite are showing a bit heavier losses at 0.95% and 0.94% respectively.

Enjoy your weekend.

I don't currently subscribe to any stock picking service.  In fact, I don't think I've ever subscribed to any stock picking service.  I don't believe in them.  Information sites and software to help you gather information about your own picks are highly recommended if they suit your needs.  But simple "buy x tomorrow at the open" sites have no long term edge.

We don't run ads at The Market Skeptic.  I'm an uncompensated author and do this for fun, but there are a number of ad running, market news sites that I frequent that do run ads and many of them have recently been running an ad for doublingstocks.com.  I don't know why I was curious to see how many people actually tried this service only to be disappointed, but I was.  I suppose it's similar to watching a movie that you've seen a hundred times.  This movie was no different.  Plenty of claims of losses and unable to get a refund.  Nothing new here.  The thing I found quite humorous though, comes from someone who has already done a lot of detective work.  Lee Thomas of bestwaytoinvest.com writes the article "Stock Trading "Robot": An Online Marketer's Scam Exposed".  You can read his full article by clicking here.  Apparently there is/was a site out there called pokerbobby.com.  This site claims that an ex-software engineer at partypoker created the first online poker playing bot.  If you've run into Doublingstocks.com, you'll know that the software "genius" from that site is allegedly an ex-Goldman guy.  What's funny is that the pair of guys that are apparently the brains of the operation have the exact same photos (names are different) and same artwork, slightly modified, on both sites.  Because, really, what are the odds of someone who plays the market to also play poker?  That, or maybe running these pick services isn't profitable enough to afford a new web design and photography.  Is this service a scam?  The evidence seems to suggest that is probably is.

 

In my quest to find news not related to the fed on Tuesday, I came across a very interesting idea.  The article was posted by Eddie Elfenbein at CrossingWallStreet.com. It is based on his research of the works of Dr. Ken French.  To summarize, the idea here is that momentum stocks outperform all others time after time.  The criteria is that Dr. French takes the best performers over the last 11 months and holds them for the 12th month.  The next month, rinse and repeat.  The "worst" portfolio returns an average of 17+% per year.  

The tax advantage for currency ETNs is history.  With currency ETNs, one could buy the FXE for example which directly represents British pounds held and interest paid at the prevailing rates.  These ETNs would not pay the interest directly to the shareholder, rather, they'd apply the interest to the value of the ETN itself.  Therefore you would not have to pay tax on this income until you sold.  Second, since this is/was considered a "pre-paid contract", the taxable rate was 15%.  No longer.  The tax rate can now be up to 35%.

The week before last the "probability of recession" articles were all the range.  After reading the weekend rags, I cannot find any mention of this gripping headline just a short week ago.  What's changed?  Well, oil dropped considerably last week, but it seems like the inverse correlation between the stock market and oil is passe.  The 10-year inched above 4% but that barely made any news.  Is this all hinged on the inevitable rate cut?  I stand by my gut feeling that the cut may cause a bit of a sell off.  Here's the problem, I'm not really putting my money where my mouth is because I can't argue with the market.  Prior cuts have sent the market soaring.  I've put on a small bearish position in case I'm right, but why fight what's been fact.  The truth is, all that you read or hear on TV is conjecture.  People trying to sound like they know what they're talking about, but they don't know what's going to happen.  I know this is not earth shattering news, but in a time where the articles of the day attempt to predict the market over the course of the next few months or years, this point needs to remain clear in one's head.

I almost titled this article "Why People Embrace Technical Analysis" because it's really been shining lately.  If you look at things like Bollinger bands and the MACD which are very basic technical indicators, the S&P, while increasingly volatile, has more or less stayed within the ranges of the bands.  The chart below shows that the S&P is now into overbought territory.  To me, the probability of the S&P breaking through these bands and continuing upward seems far less likely than it reverting to the mean.  This is a lot of the reason for my recent conversion from a bull put spread to an iron condor on the DEC contracts on the SPY.  Do I believe this absolutely going to happen.  Not a chance.  If so, I'd remortgage the house and buy a bunch of DEC SPY calls and ride it up to heaven.