November 2006

The Democrats got a somewhat churlish reception on Wall Street yesterday, suggesting there may not be much of a honeymoon in the wake of Tuesday's sweeping political changes. We were prepared for any outcome that would make stocks get a little crazy, but it's too soon to tell whether it will be the calls we hold in IBM, or the QQQQ puts we bought as an offset, that will make next week's option expiration interesting. Regardless, we'll evidently have Gold to keep us happily engaged, since yesterday's surge pushed the December contract well above the 630.60 Hidden Pivot threshold we were using as a bullish trigger. Some Rick's Picks subscribers appear to have gotten aboard near the lows, based on the following advice, which went out Wednesday evening: 'As noted in the chat room on Wednesday, the next minor down-leg could set up a good buying opportunity. Right now, I cannot say exactly at what price, but it can be calculated once the futures fall exactly $6.20 from whatever high they are in the process of making this evening or Thursday. For example, if the so-far high at 618.90 (as of 10:15 p.m. EST) endures, that would place the 'buy' at exactly 612.70; and if the futures rally to 621.00 before falling, that would yield a midpoint-pivot "buy" at 614.80.' As it happened, the above prospectus nicely anticipated December Gold's actual movements, as you can see in this snapshot of December Gold taken Wednesday evening: (Click on chart to enlarge) *** Last Call, Australia! There are still some seats left at the Hidden Pivot in Sydney on December 2-3, so please let me know asap if you're interested in attending. You can request a registration form and further details by clicking here.

This is a stock market that loves to break all the rules, so perhaps we should expect the nagging uncertainties of a still-unsettled Congressional election to cause shares to rise. Wall Street supposedly abhors nothing so much as a future that is up in the air, but we may not know for weeks whether the Democrats will control both houses of Congress. Big Pharma seems to have made up its mind about the outcome already, even if other investment sectors have not. Pfizer, Merck and Johnson & Johnson all got whacked, acting as though a slim Democratic majority would somehow be able to revive HillaryCare and foment jihad against drug manufacturers and other providers of health care products and services. Meanwhile, we doubt that George Allen will be able to successfully challenge a close tally in Virginia that has him losing a crucial Senate race. So, assuming the Democrats will prevail in both houses, we should look for more selling in the coming weeks, not only in the drug stocks, but in the shares of health insurers, defense contractors and tobacco purveyors. If so, that would seem to make our 13045 target for the Dow more distant. But suppose investors simply ignore the supposed negatives and resume their all but relentless push higher straightaway? Actually, it's not the bulls that matter, since they are rarely so enthused about stocks as to be capable of pushing them sharply higher . That is properly the task of shorts -- popping the market through pockets of supply and doubt even as the pessimists scramble to meet margin calls. However, if this is to occur we should expect the beginnings of a short-squeeze to become apparent within the next few days, since that's about how long it will take for bears to realize that

Maybe it's the same story in other Congressional districts, but the race here in Colorado between Angie Paccione and Marilyn Musgrave makes a cathouse brawl seem like a quilting bee. I've been zapping out the sound whenever their TV commercials have aired and didn't even know till today which one was the Democrat and which the Republican. Musgrave, as it happens, is the Republican, and if you believe what her opponent has been saying about her you wouldn't trust her alone, not even for a minute, with your goldfish. But Paccione eats her young, keeps lizards in her basement for lewd and immoral purposes, and would make gay marriage the norm for anyone over the age of twelve. So which of these two ladies do we vote for? I grew up in a New Jersey town where the choice was never so difficult. There was the slate backed by the corrupt Republican machine, and there was their opponents ' a bunch of 'Democrats' who were hand-picked by�the Republicans for their blandness. The machine, under the firm hand of Frank S. 'Hap' Farley, got things done, for sure. They built the Atlantic City Expressway to Philadelphia in the 1960s, long before there was enough traffic on the road to satisfy the bondholders; and they also created the Atlantic City Marina, later renamed the Frank S. Farley Marina, when the city was at low ebb, fast on its way to becoming Camden with beaches. In 1972, the Democrats got uppity and fielded a slate of ostensibly clean, honest politicians. Compared to the grafters who were running the local Republican Party at the time, these guys were Lancelot, Galahad and Gawain. One was an obstetrician, another a recent graduate of Yale Law School. The Mr. Clean slate won, but in retrospect the voters

Is the stock market likely to go crazy after the election? A betting man might be tempted to take the odds on that one, since so many observers evidently expect angry voters to deliver a jolt of electricity to Wall Street's vitals today. The rough consensus among forecasters I respect calls for a short, nasty correction beginning as soon as tomorrow, followed by the resumption of a bull market that would enter its fifth year if it makes it till March. That would square somewhat with my own forecast, which calls for a potentially important top in the Dow at 13045, nearly a thousand points above yesterday's close. However, I'm troubled by the fact that so many seers apparently expect 'something' to happen immediately post-election. Some are predicting stocks will collapse if the Democrats recapture both houses of Congress, while others think that just putting the election behind us will clear the air and allow shares to blast off. A contrarian might be tempted to fade them both. Does that mean November option premium is a sale? I wouldn't go that far, and a glance at the chart above reveals why. As you can see, CBOE put-and-call volatility is near historical lows, and betting it will go even lower is like betting it won't rain several years into a drought. In practice, we've already placed our bet, buying IBM calls against QQQ puts. This 'straddle' was looking somewhat subdued yesterday with IBM up a point and change, but if the rally continues for even another day, the position could explode. It gives us what the pros call 'positive gammas' ' a backspread that will automatically make us longer on a rally, shorter on a decline -- and although it could fizzle over the next week or so, the fuse is

December Gold hit our bullish target yesterday but couldn't get past it, suggesting that some further consolidation may be needed to set up for the next big push. We'd projected a rally to at least 630.60 a few days back, and that's almost exactly where the futures stalled yesterday, at 631.40. However, if they can close above the target for two straight days, or trade more than 1.80 above it intraday, I'd rate the December contract an odds-on shot to achieve the considerably higher target flagged in the Touts section of Rick's Picks. We may not have to wait long, since gold shares looked primed to move higher on Friday. Goldcorp, a subscriber favorite in which we hold a small position, pushed above Tuesday's high, renewing a bull cycle that should carry the stock to at least 27.37, 60 cents above Friday's settlement price. Shares of Newmont Mining, which we also hold, looked less impressive, but the fact that they've managed to stay very overbought on the daily chart for more than two weeks is an encouraging sign. We hold a vertical call spread that was legged into for a net credit, so we literally can't lose no matter what the stock does. (Click on chart to enlarge) There is less certainty about a backspread we've been building, IBM calls versus QQQQ puts. The position is designed to generate a profit no matter which way the stock market moves, but it hasn't helped that IBM has been moving sideways for nearly three weeks. Even so, my gut feeling is that option premium is cheap right now and that buying straddles and strangles is the way to go. The CBOE Volatility Index (VIX) has been dragging bottom for more than two months while stock market technicals have steadily deteriorated. We don't

Going back to July, the Dow's current correction, now five days old, ranks as one of the biggies. I use that word facetiously, since in percentage terms the pullback at yesterday's lows amounted to a piddling one-and-a-half percent from the record high of 12167 recorded on October 26. As you can see in the chart below, the correction is about halfway to the oversold zone, stochastically speaking, so it could conceivably continue for another day or two. (Click on chart to enlarge) Someone in the Rick's Picks chat room asserted that the current doldrums would very shortly give way to a huge short-squeeze that has been building for a while. As evidence, he cited some interesting on-balance volume figures for IBM ' specifically, a positive OBV spike to two million shares on the close. 'Specs are betting on a drop,' he noted, 'but the commercials seem to be positioning for a rally. They are betrayed by the positive OBV.' Coincidentally, IBM is one of two stocks we've been using to position ourselves for a possible stock-market explosion. Our strategy is essentially a backspread that would automatically make us longer if stocks rise and shorter if they should fall. The tradeoff is that we assume premium risk on some close-in IBM call options as well as some January put options on another vehicle. You should visit the chat room tonight if you want the explicit details of this strategy, since they are spelled out in text dialogue that will remain accessible to all subscribers through tomorrow. Concerning Gold, we seem to have caught a beautiful entry point on a couple of stocks and have remained well on top of the rally since. December Gold's $11 thrust yesterday brought it within a stone's throw of our minimum target, but it is above

Gold has been moving to our Hidden Pivot targets almost to-the-tick. Yesterday's forecast, for one, had called for a rally top at 617.50, and that is precisely where the Comex December contract paused after completing the $17 thrust we'd projected. Where to next? I broached two bullish targets in the chat room whose provenance is shown on a chart reproduced in today's Touts. One of those targets is not far above, and its ability to resist the trend, even if only fleetingly, can tell use whether the futures will soon be headed up to the next. If so, gold bulls have something to cheer about, since the second target is fairly ambitious, implying as it does the biggest bull leg I've forecast in quite a while. (Click on chart to enlarge) Meanwhile, using call options that were acquired at excellent prices, we hold long positions in some gold stocks. In Newmont, we legged into a vertical call spread that has left us effectively with no risk. In fact, we put on the spread for a credit, so that the worst we can do if the stock continues higher is make $30 per spread (less commissions); and the best, make $250/spread. The second position is in Goldcorp, where we established a tracking position based on the following note from a subscriber: 'Picked up 18 Goldcorp November 25 calls on Tuesday morning at around 1.25. Actually bought in before the first hour was completely up but saw that the stock was holding its own. Will you be creating a tracking position on it? Already sold eight at 1.70 (as you have told us before, taking some partial profits early allows one to be less emotional with the leftover.) Whether you decide to track it and offer advice going forward or not, thank

My comments here the other day about the harsh new bankruptcy code continue to elicit interesting responses. Below is a letter I received yesterday from a mortgage lender who thinks that narrowing the escape route for profligate borrowers will have a positive benefit for the rest of us. This may be true to the extent that the costs to prudent borrowers of subsidizing deadbeats who walk away from their obligations will decrease if there are fewer bankruptcy filings. However, my concern is that many millions of homeowners who have been reasonably careful about managing their finances could conceivably face bankruptcy if home prices continue to fall. The crux of the problem is that a seemingly 'low' 5.5 percent mortgage can become a crushing burden if the value of the underlying collateral decreases by even as little as three or four percent. That would subject the homeowner to an effective real-rate burden approaching 10 percent, which is more than most hedge funds are returning these days. Ominously, residential real estate prices across the U.S. have already fallen by more than 3%-4%, so it's only a matter of time before the financial pain this brings about causes consumer buying to collapse. Here is the letter from the mortgage lender, who as I noted above is somewhat more sanguine than I: We All Pay 'I'm not sure if a bankruptcy attorney qualifies as an insider, as he makes his money on filing bankruptcies. I would lament my income going down by 70% also. I have been a long time 'lurker' who has read every article you have posted for the last few years. I subscribed today because I think you have been great at calling the market. I think you are right concerning the deflation issue also; however, I think that you are

My comments here the other day about the harsh new bankruptcy code continue to elicit interesting responses. Below is a letter I received yesterday from a mortgage lender who thinks that narrowing the escape route for profligate borrowers will have a positive benefit for the rest of us. This may be true to the extent that the costs to prudent borrowers of subsidizing deadbeats who walk away from their obligations will decrease if there are fewer bankruptcy filings. However, my concern is that many millions of homeowners who have been reasonably careful about managing their finances could conceivably face bankruptcy if home prices continue to fall. The crux of the problem is that a seemingly 'low' 5.5 percent mortgage can become a crushing burden if the value of the underlying collateral decreases by even as little as three or four percent. That would subject the homeowner to an effective real-rate burden approaching 10 percent, which is more than most hedge funds are returning these days. Ominously, residential real estate prices across the U.S. have already fallen by more than 3%-4%, so it's only a matter of time before the financial pain this brings about causes consumer buying to collapse. Here is the letter from the mortgage lender, who as I noted above is somewhat more sanguine than I: We All Pay 'I'm not sure if a bankruptcy attorney qualifies as an insider, as he makes his money on filing bankruptcies. I would lament my income going down by 70% also. I have been a long time 'lurker' who has read every article you have posted for the last few years. I subscribed today because I think you have been great at calling the market. I think you are right concerning the deflation issue also; however, I think that you are