Dear Bottarelli Research Reader,
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Google Follow-up
For the second consecutive quarter, Google (GOOG – NASDAQ) suffered a decline in their critical cost-per-click rates. According to their April 14th earnings release, Google’s aggregate CPC growth was down 12% (and also down 6% quarter-over-quarter). This latest decline, which comes on the heels of January’s decline, was once again attributed to the ongoing shift in traffic from desktop search to mobile search. As you know, this is exactly what we predicted in our report titled, “Is Google Becoming Obsolete?”
It’s mid-April, and like clockwork the great thinkers on every cable financial program are pounding away with their yearly musings of “Sell in May and go away!”
I almost feel bad for these guys. They have to sit in front of the camera for hours on end thinking about witty things to say about market swings that they, quite frankly, know absolutely nothing about.
This may sound rude but trust me, it’s true. I should know. After all, I’ve wasted hours of my life as a guest on a couple of these cable financial shows.
Believe me when I tell you – it’s an absolute wasteland.
They just cut your mic and go to commercial if you try to say anything genuinely useful – or against the grain.
Sure, sometimes there’s a small kernel of wisdom to be harvested here and there.
For example, they are right about reducing your exposure to blue chip stocks right now, even if they don’t have a clue as to why. (And no, a cute little rhyme about May isn’t the reason.)
But contrary to what everyone else will say, I’m here to tell you that the last thing you should do is “go away.”
Instead, I’ll tell you what you should buy when the talking heads are all saying “sell in May”.
So, let me start by updating you on the Master Chart for the Dow Jones Industrials.
Critical Signal Stack Almost Complete
The Stacked Sell Signals I showed you last week continue to build toward completion:
- On the upper chart, last week’s candles finished out as a “Hanged Man.” And so far this week, we have a modest “white candle” but no “outside day” to cancel out this very ugly sign. (If you want to read more on candlesticks, I strongly recommend Steve Nison’s Japanese Candlesticks Charting Techniques.)
- On the lower charts, we now see the Accumulation/Distribution (A/D) line turning down. And on Moving Average Convergence/Divergence (MACD), the Sellers Cross continues to build up. Last week, the fast average met the slow average. This week, the two finally crossed.
More Sour Signals
Meanwhile, we continue to see disturbing signs across the markets.
To show the breadth of this negative indicator, I’ve drawn up a chart of the DJIA’s High-Low 10-day average. After a double-top failure, this average is now plowing back toward the same territory it occupied last winter.
Finally, there’s the most perfect of “mood” indicators: The herd is now selling on good news.
For example, the auto makers are getting record-breaking high prices for cars and trucks. But Ford (F – NYSE), General Motors (GM – NYSE) and Toyota (TM – NYSE) are all selling off on the news.
History Tells Us Exactly What to Do Next
The last time we saw these signals was almost exactly one year ago.
The road lower wasn’t exactly a straight line because Wall Street’s sock puppets in Washington fought the slide with every “tool” (aka, free dollar) they could invent.
Nevertheless, by the time the dust settled, the DJIA had still lost almost 19%.
Once again, the wags had the whole “Sell in May” part right.
But, the very last thing you should have done was “go away.”
Instead, this was the exact moment to step up your trading activity.
During the summer of the 19% Dow fall (which was the last time these signals triggered), I was “officially retired” by my former publisher. But, that didn’t stop me from recommending some specific tactical assets to a small group of traders.
The GE puts I suggested gained 176%. Goldman Sachs made 320%. And, the Disney puts I recommended reached 540%.
The fact of the matter is, any trend works for an astute option trader. Up is always popular, but honestly, anyone can make a buck or two in a rising market.
The real secret is that put options (which make you money as the markets fall) become an incredibly powerful tool during down-strokes like the one threatening us right now.
Never Go “All In”
I am not suggesting that you trade in each and every stock you own for put options.
First of all, there are some companies – particularly ones that offer strong dividends – that I would buy all the way down and just stash away in the vault. In the end, your grandchildren won’t care if you bought IBM for $180 or $170, so long as they still get to go to college on that 3% dividend.
Secondly, I don’t believe your portfolio should ever be entirely long or short.
I’ve got two words for any of the “smart guys” who go all in trying to fill an inside straight like that: Jon Corzine.
Rather, you should trim and re-weight your holdings depending on the situation. Look back at the DJIA chart for 2011 and you can see how the Fed was able to jerk the market back and forth. A player with a properly balanced portfolio can make money from both sides of these oscillations.
That’s the very essence of how Bottarelli Research approaches the market.
We’re never 100% long or 100% short.
Rather, we try to stay neutral — 50% long versus 50% short.
But, depending on the market conditions, we will bias our trading to 70% to 30% at the most extreme levels.
This methodology is how Bryan and his daily options readers have been able to rack up 28 winning trades out of the last 31 since late March. When you’re never committed to one direction, you give yourself the ability to profit off any directional move. And lately, we’ve certainly seen enough swings to keep the cash register busy.
For today, here’s what you need to know…
What to Buy Today
With the DJIA Stacked Sell Signal 70% complete, it is time to add SPDR Dow Jones Industrial Average (DIA – NYSE) puts to your portfolio. This ETF moves in lockstep with the DJIA and will drop $1 for every $100 the Dow loses.
If the DJIA drops to my probable target of 12,187 within the next six to eight weeks, a mid-dated at-the money DIA put should gain 45%. Should we see a genuine bear market tumble, those gains would quickly increase to as high as 82%.
Profits of 45% to 82% in a falling market would certainly protect your long positions during this transition from bull to bear. And once we have a complete set of sell signals, we can re-balance again with additional puts.
Sincerely,
