July 2005

The fact that my newsletter once came free to about 6,000 subscribers hasn't stopped at least a few of them from complaining constantly about how awful it was. 'Go back to kindergarten and learn how to write,' admonished one. 'And while you're at it, try learning how to read a stock chart.' A frustrated trader, perhaps? You can never be sure, although some of these guys are about as subtle as the Unabomber. As you know, the forecasts in Rick's Picks are no longer free, but even so, I still get uncivil letters occasionally from lurkers who have tuned ' obsessively, I would gather ' to the more generalized comments that I disseminate each day to other Web sites. Paid subscribers will attest that my specific forecasts are more than marginally above dart-board accuracy, but those who have never viewed the insider pages seem to think my whole reason for being is to see a once-headlined $477 forecast for gold pan out. And it will, although not nearly so soon, apparently, as I'd predicted. To better acquaint non-paying readers with the contents of Rick's Picks, I have reproduced below the items that came up for discussion during yesterday's Q&A session. This is a weekly event, usually lasting several hours, that is geared toward providing coverage of subscribers' favorite stocks, commodities, indexes and options. It is also designed to increase the scope and profitability of the service, since it brings to my attention tradable issues that I would not ordinarily look at and which often cry out for technical coverage. Here, then, is Wednesday's fare, posted in real time alongside my regular forecasts and recommendations for such favorite trading vehicles as the mini-S&P, -Nasdaq, -Dow, oil, gold, bonds and bellwether stocks. Where charts were included, I have reproduced them as well.

Hey, if you've got a story to tell, don't be shy! Yesterday's tips here on how to spot phony gurus and trading instructors elicited some interesting tales from paid-up subscriber Joseph S., who qualifies as a true expert on the subject. Joe writes as follows: 'Thanks for the column about spotting gurus! Having spent perhaps $70k on various trading seminars over the past seven years or so, here are some of my observations: 1) Traders who have reached the very highest levels of success have no ego about what they do. They don't insult other traders or styles of trading, they don't care what anybody says about their own techniques, and they never criticize a student who decides to drop their class. 2) Traders who have reached the very highest levels of success have no secrets. They'll tell you in detail everything they do, perhaps out of altruism, or perhaps because they realize that maybe one student in 10,000 has the discipline to master the trading game. 3) Published track records are LIES, LIES, and more LIES; you must track trades yourself to discover the true results of any trading style. Missed Ride on Titanic A few anecdotes: *** One online S&P trading system offered a one-day free trial of their day-trading chatroom. On the day I monitored their chatroom, they took loss after loss, including one trade that was stopped out just before the market reversed and made a big move. Apparently, their chatroom admin software was buggy, and they didn't realize that I had been in the room that day. At the end of the day, they sent me a note berating me for 'missing all the action in the chatroom today,' and posting the 'official' chatroom results: several profitable trades, including one trade that caught the very

Like many of you, I am constantly being bombarded by marketing hype from investment gurus who claim they will make me RICH. And although, like you, my gut reaction is to assume that most of them are charlatans, I too have a greedy spot for the right pitch. So far, though, I've come across nary a one that has delivered on its promise. Not that there aren't any gurus out there whose advice can make you money. Just that none even comes close to the salacious claims advanced in their promotional material. My specialty is put and call options, and my greatest skepticism is therefore directed at gurus who sell advice related to this particular investment/trading vehicle. I've been trading options for thirty years, both as a floor professional and as a retail customer, and have written on the topic for many publications, including Barron's, Stocks Futures & Options magazine, and Stocks and Commodities. I am therefore well qualified to give you the lowdown, and it is this: If you're looking to reach Easy Street by trading puts and calls, you're in the wrong game. You've got a better chance of striking it rich by drilling for oil in your back yard. Mastering a Few Tricks So how do I reconcile this with the fact that I put out an advisory each day that emphasizes option trades, along with stock, futures and commodities strategies that frequently employ puts and calls? Very simply, I try to avoid making outrageous claims and instead concentrate on helping you understand and use the best tricks that I've learned over several decades. My contention is that, to have any chance of profiting with puts and calls, you need to string together at least three or four such good tricks on every single trade. This is what we have

I've toned down talk of Armageddon in my comments here recently, even though I remain convinced the U.S. and global economies are inching toward a deflationary bust of millennial proportions. Stock charts have helped to temper my bearishness, since most have been pointing at least moderately higher. This was certainly true back in May when I told you to prepare for the 'tediously bullish' summer that has indeed unfolded since. Not that a tepid stock market has muffled the hubris of the bulls, who continue to embrace the illusion that an economy hopped-up on debt is the very picture of health and vigor. They will doubtless revel in this folly until the day the bottom drops out ' which is to say, when the Fat Lady sings�on CNBC. We cannot know precisely when this will happen, but it's not difficult to imagine a sequence of events that could turn today's ebullience quickly to fear. In my scenario, an 'unexpected' downturn in the stock market comes first, undermining investors' confidence and adding crushing weight, both real and psychological, to our debts. As the stock market's slide deepens, the consumer economy and asset values crash, setting the stage for a balky, 1930s-style recovery that would take at least a generation to achieve critical mass. Screw Instinct Some of you may be wondering at this point how an 'unexpected' downturn in the stock marklet can be predicted. The answer is, it can't -- although hardly a day goes by when I don't hear from some market-savvy pen-pal eager to give this oxymoronic and manifestly futile task a try. And yes, I'm no stranger myself to the embarrassment of having one's errant forecasts recalled by others. That's why I've become increasingly engrossed in my stock charts and focused on outcomes that are more or

Google shares were getting bludgeoned in after-hours trading, down nearly $17 on word that revenues had grown by 'only'100% over a year-earlier's $700 million, and that profits had merely quadrupled. Here's how the resident genius at Susquehanna Financial struggled to explain it: Revenue was a little better than published expectations, said Marianne Wolk, the firm's Internet analyst, but there "was not as much upside as some had hoped." If your rich uncle had died and left you $100 million, this is like saying, geez, I always thought he was richer than that. Reminds me of one of my fraternity brothers, who, if he'd drawn Bo Derek as a blind date, would have dumped her for not being blonde enough. (Click on chart to enlarge) Talk about being hard to please! Ms. Wolk's perfunctory explanation aside, though, we should all recognize that the sell-off in Google was triggered not by disappointment, but by the fact that everyone and his mother was already long the stock in anticipation of the news, which for all intents and purposes could not have been better. The lesson here is that being an 'insider' can be risky, especially if ten thousand other investors have been gifted with the same, vine-ripened piece of intelligence. Buy the Spread Granted, the stock's steep dive will have taken some of the steam out of our September 320-August 320 calendar spreads. However, if you didn't buy this position the first time around for $340, I'd suggest laying in a small supply now, perhaps at even lower prices, since I am still confident the stock will reach a minimum $326. Google has been shaken down for a reason -- so that the smart money can now buy more for less. But the fact remains, the company is one of very, very few

Yesterday's two-and-a-half hour Q&A session covered quite a bit of ground, and I was able to field questions from more than a dozen paid subscribers during that time. Some of what we discussed bears repeating, including a 1242.50 target for the mini-S&P that was broached at the end of the session. That is now my minimum objective for this vehicle over the near term, and it will be short-able using the strategy spelled out in the newsletter. Please note, however, that even minor progress above the target would imply that the futures are bound for the next, at least: 1260.75 (also short-able). (Click on image to enlarge) It's not possible to predict whether either will be achieved simultaneously with a rally target I've provided for Google, but if so, it could conceivably open a window of opportunity for bears the likes of which we have not seen in months. In the meantime, Google still has some ground to cover, and if you haven't done so already, I would urge ' make that, beg ' you to try the calendar spread described here in detail the other day. Although I cannot guarantee you a profit, the spread would be my <i>Pick of the Month,</i> if I were to tout such an opportunity. (We do offer a <i>Pick of the Day,</i> as you already know.) Even if you put on the spread just one time, risking $350 or so, it has the potential to pay for your subscription for years to come. Shorting Beazer When the opening bell sounds this morning, we'll be focused on one other potential opportunity, a short in Beazer at a hidden-pivot target that is coming up fast. This could prove to be a major top in the stock, although even if it is not, our planned entry

T-Bond futures have been flaccid since early June, presumably correcting the ten percent rally that began nine weeks earlier. But is it merely a correction? From a hidden-pivot standpoint, the last few days have taken a heavy toll. Recall what I wrote here in early June: 'After spiking to within three ticks of our hidden-pivot rally target at 119^20 yesterday, the futures corrected with equal ferocity, ending down on the day. Friday's top has the potential to be an important one, but it would take a decline to below 115^19 to corroborate this.' Several subscribers, having noticed that this week's lows breached 115^19, wrote yesterday to ask, What next? For now, we remain bullish on the long-term, but more cautiously so than before, and we are now neutral on the intermediate-term trend. There are several reasons for this, all of them technical. For one, as I've just noted, the September 30-Year contract has dropped beneath 115^19. That's not a hidden pivot, but rather a prior low whose breach has created a bearish impulse leg on the daily chart. Technically speaking, this is the most significant negative event for the 30-Year in at least two years, so we can hardly afford to ignore it. (Click on image to enlarge) As you can see in the chart above, the bearish AB impulse leg exceeded three prior lows without an intervening rally of more than a day's duration. The decisiveness of this directional change therefore qualifies as impressive, and it would take a rally to at least 119^12 to undo the damage it implies. Moreover, we see that the accompanying stochastic signs are regular ' i.e., non-divergent ' suggesting that the downtrend that generated them is likely to continue, presumably for at least the intermediate term. To put a bullish spin on all

It should be clear to you by now that we don't need much price movement to trade 'em up profitably -- only swings that produce intraday highs and lows, and the ability to use ultra-tight stop-losses. On Friday, for instance, the biggest intraday swing in the mini-S&P was just 6.25 points, or $312. In retrospect, you might ask why anyone would have bothered to attempt to trade such a burp. But if one is able to get on board at the exact low of the move, as we did, and to do so with an initial stop-loss of just two ticks, then even the dullest of days can be rewarding. And not just for day traders, either, as we proved that same day in Sirius Satellite Radio. The stock had peaked earlier in the week at 7.49, its highest high since January, and we took some profits on our long position near the top of the intraday spike. (This lowered the cost basis of our remaining shares to 4.65, by the way.) By week's end, Sirius had sold off sharply and appeared headed down to a hidden-pivot support at 6.53. So we bid there for 'replacement' stock, using a 6.49 stop-loss. (It proved adequate, since SIRI subsequently turned from 6.51). Yesterday, shares of the radio broadcast company traded as high as 6.96, getting us off to a great start. In Google, we opened a position on Friday that has a longer life span, buying the September 320 ' August 320 calendar spread for 3.40. This is a low-risk bull play on a stock that has become almost too pricey to play with. But the way we're going about it, there's not much at risk ' plus, the position has the ability to produce a profit of as much as $1,500

The chart below shows just how leaden stocks have become lately. Since peaking in late 2002, the VIX has fallen to within a hair of ten-year lows and now threatens to turn an already lethargic summer comatose. These days, technicians must burrow down to 15-minute charts to find anything resembling a trend, and the randomness of each session's opening would vex a svengali. We continue to plug along nonetheless, searching out opportunities that promise to deliver dollars for dimes. Such as in Google, which can be confidently expected to reach an important top near $326 before the August options expire. We were in there swinging yesterday, attempting to buy calendar spreads that will yield dollars for quarters, if not for mere dimes. The temptation in dull markets is to swing for the fences, setting up for a big move in either direction. But I remain skeptical that this summer will produce a big anything. Some of you might recall a headline that appeared here in May, 'Summer Forecast: Bullish Tedium'. So far, unfortunately, the prediction has been on-the-money. Not much we can do about it, though, other than enjoy the summer. Autumn will be here all too soon. *** In Praise Of Deflation My fellow deflationist Jas Jain weighs in below with some novel thoughts on the subject: The highest real GDP growth in the U.S., based on production data, seems to have taken place during the mostly deflationary years of the 1880s and 1890s. Economic growth may have been as high as 15% a year for two to four years. At the time, inflation was more likely to cause depressions or recessions than deflation. People are generally ignorant of deflation and its effects because they have only known inflation. Japan's economic problems have nothing whatsoever to do with deflation.