aileron market balance: issue 4

8/3/2019 Aileron Market Balance: Issue 4

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December 4, 2011

We are beginning to generate just a bit of alpha

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after last weeks trades inthe Lean Hogs market, as well as the gains we've seen in the stock market asof late. But it must be stressed that building a portfolio is a process. It is not a single event. We cannot point to one profitable week and assume thismeans 'success'. It means success for that particular week. That's all.

I have found over the years that one of the most deadly diseases that a trader can catch is the disease of 'complacency'. Pulling in a bit of money from afew good trades with good risk reward ratios, and falling into the false belief that the next trade will always fall into that previous profitable pattern.

No matter how successful one has been in the past, a successful trader mustkeep his eye on which factors could possibly affect the market in the future.Remember … at all times, 'risk control' is job number one. After all, this is a business where one dumb mistake can undo a lot of great work. Trust me,this is something I've had to learn the hard way. No one wants to overlydamage gains that you've booked thus-far in the year.

That leads me to my next point.

The year of 2011 is drawing to a close. Many market professionals begin to'close up shop' until the next trading year. They too, are very hesitant todamage any of the gains that they've experienced during the previous 12months. Upcoming holiday observances will mean abbreviated marketsessions. Volume begins to decrease as investors and traders take time off and stop trading for the remainder of the year.

Each year, I've always been amused to watch the month of December unfold.It's as if all traders and investors are playing a game of “ last one out of themarkets, close the door ”.

I may have one or two more trades this year. But it is important, as this is anewsletter that allows you to 'look over my shoulder' as it were, for you to

1. “Alpha” is a 'market term' that means that a given portfolio is outperforming any particular benchmark. In this case, the S&P 500 Indexfor the same time period.

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Dan ShyDan Shy

[email protected]

IINN FFOCUS:OCUS:

Gains and MarketGains and Market ParticipationParticipation

Dividend InvestingDividend Investing Outlook Outlook

Trading Outlook Trading Outlook

Summary of A.M.B. ModelSummary of A.M.B. Model PortfolioPortfolio

mailto:[email protected]




December 4, 2011

know that I too have my 'eye on the door'. AsDecember draws to a close, I'll have my mind gearedtoward 2012. Which leads me to my thoughts on theequities markets and my dividend investing outlook …

Dividend Investing Outlook

Well.

I stated last week …

“I have stated up to this point that the index are acting in acontra-seasonal manner. In other words, it is working

against the seasonal norms. But it is important to keep in

mind that even during downturns, you have rallies. So

although we are in the midst of a contra-seasonal time period movement within the index and moving lower, there

will be rallies that at any moment can turn into a market

bottom.” - Aileron Market Balance No. 3, November 27,

2011

… and it seems that this is exactly how things haveturned out. Sunday night, as I was writing last weeksnewsletter I commented that by 9:57 pm the markethad slammed higher by 24 points on the S&P 500Index.

And this trend continued for the entire week ...

S&P 500 Index – One Hour Chart

The stocks we have bought to date, were extremelysmall positions, in addition to being low beta stocks.Therefore, the gains will not be as great in that particular portion of the portfolio, as the 6.25% risewe saw in the stock market last week. But the real

advantage thus far is that we have booked a great

entrance on each one of those dividend investing positions. From those entrances we can build uponthe positions with future purchases and grow our ownership in those companies. But that is all months

away.

What of the immediate future? I often state that nohuman knows the future, or what will happen in thecapital markets. But we do have to make decisions. Ido so by relying on my 'edge', such as readingeconomic factors, market sentiment, seasonal factors… and the like.

At the moment, I want to wait.

I've often compared investing and trading in thecapital markets to being engaged in a game of chess.You not only have to look at the move in front of youwhen you play chess. It's best, and more profitable, tolook four steps ahead to see possible maneuvers, trapsand developing problems. It's onlythen that you candefend yourself against what sometraders refer to as an“oops” scenario.

What is an “oops”scenario? It's a situation that initially looks wonderful

and profitable; but quickly falls apart. So let's just play this entire current situation forward …

The Overall Market (S&P 500): The market has begun to rally. We are in the midst of a seasonallystrong period. This may continue, as seasonal normscan begin to reassert themselves at any time. Aseasonal rally may last until the first weeks of January.This is what is typical. If this occurs in 2012, well …then great. We can ride our current purchases even

higher still. However, seasonally, we also see a sharpdownturn in prices after the first few weeks of January.

So it wouldn't make much sense to buy more stocks,which would diminish the cash we have in thedividend investing 'sister' account, if we are onlygoing to experience a typical, overall market seasonal

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December 4, 2011

downturn in a few weeks time. Especially considering,that as I mentioned earlier, investors and tradersgenerally begin to take time off at this time of year.

But that is only one possibility. There are other

scenarios. The market itself is approaching prettyinteresting 'resistance' levels.

S&P 500 – Daily Chart

With the problems in Europe, will we begin to headlower, and bounce down from the above region of resistance? The technical picture seems to presentsuch a scenario.

Again, there is no way to predict the future, and noway to know with absolute certainty.

This is an occurrence where the technical picture onthe chart tends to disagree with my 'edge' or 'bias'.

So again … the question comes up … what do we do?

We observe. We don't necessarily have to do

something; in the sense that we buy, sell, or hedge.

We can just watch, and wait. As with last week, muchwill depend on the overnight action in the futuresmarket. And again, as with last week, at this point I plan on having an 'update issue' of “ Aileron Market Balance” tomorrow, that is, Monday morning before

8:45 am E.S.T.There is one stock that I personally believe is still being offered for a bargain, and at depressed prices.

This does not mean that I will immediately purchasethis stock. Again, at the moment, I'm simplyobserving it's price patterns.

Allow me to explain ...

Waste Management (WM): As I have mentionedwithin the pages of this newsletter, I have actuallythinking about picking up some Waste Management(WM), but it's behaving in a weak manner, despitehigher prices in

the overallmarket. This is astock that I personally haveinterest in at around $30.00, as well as $31.27.

I personally believe that the market has been avoidingthis stock, due to the many business purchases thatWaste Management (WM) has made lately. I still believe in the company. They have fantastic revenuegrowth for the last three quarters. Their balance sheetis ok, although it's picked up just a 'hair' more debt inthe last quarter. Their operating cash flow looksfantastic. But their investing and financing cash has been taking a hit with the businesses that they have been acquiring.

So again … I personally still believe in this company.Their management has proven that it knows how togenerate good revenue. But it doesn't matter what I believe. It matters what the market as a whole believes. And right now … the market isn't buyingWaste Management (WM) very heavily.

Waste Management (WM)

Daily Chart

I might think of picking some up some WasteManagement (WM). At the moment though, itrequires a lot of careful observation.

As the above chart demonstrates, we are at pretty key

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December 4, 2011

resistance at $31.73. With such resistance, it wouldnot be surprising to see the market retrace just a bit. Iwill need to watch, wait and observe to see whathappens. There is pretty key support at around the$31.00 region on the hourly chart. I want to make

sure that this support 'holds'. In other words, that themarket does not break lower than the $31.00 supportlevel.

Waste Management (WM) – One Hour Chart

If it does break below $31.00, then I would continue tokeep Waste Management (WM) on my watchlist, butnot purchase the stock. On the 'back burner' so tospeak. If the $31.00 does not hold, then the next levelof support that I would be watching would be the$30.00 region of support.

If the $31.00 region does hold firm, and then themarket begins to rally with consecutive trading past$31.73, I may purchase the stock. If I was looking at a portfolio the size of A.M.B., I'd probably only buy 6shares of this stock. Perhaps 7 shares. Naturally, Iwould make sure that the DRIP was turned on.

And all of the comments I have made here regardingWaste Management (WM) depend on what theovernight futures market 'delivers' to us ...

Trading Outlook:

Note: By way of reminder, since the Model Portfolio has only$9,205.00 in the Commodity Futures portion of the portfolio, therewill only be 'brief day trades' at this stage of the game for Commodity Futures trading in order to escape the risk of over-

leveraged gap opens in the commodity futures markets. This is anattempt to demonstrate how account size relates to trading style.As the 'trading sister' reaches $30,000 I will graduate the accountinto 'swing-trading' and demonstrate how I would go about doingthis. The Forex account has $50.00 and is considered a micro-forex account for the purposes of the model portfolio.

Commodity Futures Trading Thoughts

Commodity Market #1

February Lean Hogs (LEG2 or some brokers

perhaps LHG12 or perhaps COW for the ETF): Atthis point, I do not plan on any further trades for February Lean Hogs for the A.M.B. Portfolio. For

small accounts such as A.M.B.'s portfolio, the moneywas made that could be made on this trade. But I haveoften stated that for accounts larger than $30,000.00, Iwill stay in a trade longer, so as to extend my gains.

So the comments I have this afternoon regarding LeanHogs is geared toward such larger accounts. If onewas still short the Lean Hog market, after the marketopens up, I would tighten the profit stop on theremaining contracts so that the profit on the remainingcontracts is locked in.

The seasonal downturn in Lean Hogs usually lasts

until the middle of December. So until that time, Iwould be 'grooming' the stop / loss lower and lower, asthe market moves lower. As December 15th

approaches, I would move the stop closer and closer tothe spread.

Commodity Market #2

March Cotton (CTH2 or perhaps CTH12): Myfundamental edge data for this market, is telling me tolook for long, or buying opportunities.

As with Lean Hogs, this market has performed

beautifully according to previous seasonaltendencies. It istypical that the Cottonmarket falls fromSeptember to the monthof November. After

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December 4, 2011

which time, we begin to consolidate, channel, or congest from November until the first week inDecember.

Which is exactly what has happened ...

March Cotton Daily Chart

At any time in the first weeks of December, thismarket can begin to rally.

The Cotton market can act in a rather volatile manner.Each tick is about $5.00, which isn't much in the realmof commodity futures… but at the same time, we canget huge swings.

I'd like to see this market pullback just a bit on the 10minute chart, consolidate, and then I would look to buy higher highs; or a break out of such congestion.

I'll want to wait and watch what the volatile, andsomewhat 'jerky' overnight market delivers. Expectmore comments on this trade in the mornings updateissue.

Commodity Market #3

March Wheat (WH2 or perhaps WH12. On

ThinkorSwim, you would use ZWH2): Myfundamental edge data for this market, is telling me to

look for long, or buying opportunities. As withCotton, this is a market that has performed to dateaccording to seasonal tendencies.

We've begun to rally on the smaller time frames,namely, the one hour and the 10 minute chart. So inthis market, I would wait for the market to pullback,congest, and then buy breakouts of any such

congestion on pullbacks.

Commodity Market #4

March Corn (CH2 or perhaps CH12. On

ThinkorSwim, you would use ZCH2): Myfundamental edge data for this market, is telling me tolook for long, or buying opportunities.

With Wheat, I'm waiting for pullbacks. But withCorn, we pulled back for the last three or four days.

March Corn

Daily Chart

So with the Corn market, I'm just waiting to make surethe base of support 'holds firm' at the 593.25 region.And definitely the 588 region. Then, in active trading,I may be looking to buy breaks to the upside of either of these levels.

Forex Markets

Forex Market #1

USD/MXN: This is a minor currency pair, and assuch, the spread can be huge. 100 pips or more. Sothe position size needs adjusted accordingly. It needskept lower than usual. For the Micro-Forex account,I'll only be trading maybe 900 units. Possibly 1000.

At this point, I'm looking for brief buyingopportunities with USD/MXN. If the market begins to pull back to the 13.51 region? Then you guess it, Iwould wait for congestion, and then buy a break to theupside. The 13.51 region of support would have tohold before I would buy the market on a pullback.

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December 4, 2011

Forex Market #2

USD/CHF: At this point, I'm looking for brief buyingopportunities with USD/CHF. I would definitely be a buyer at around the 0.9170 region on a typical 'buy thedip' pattern.

Summary of the Hypothetical Model

Portfolio

Note: In the beginning of this hypothetical portfolio, the share

purchases of the “Dividend Investing 'Sister'” will be extremely small. It is my intent to demonstrate how to grow the size of these positions from 2 shares, to 300 shares using the “three sisters” portfolio management style. It is also understood that readers of

this newsletter have a firm understanding of my 'three sisters' portfolio management system (See the Special Reference issue of “Aileron Market Balance” for an explanation of this system).

As follows is the state and balances of the “ModelPortfolio” as of this Sunday evening …

S&P 500 Since Newsletter Launch on November 13,

2011: +0.3355 %

Investing Account Balance: $4,004.38

• Return / Yield up +0.1095 % from inception

• 4 shares of PEP (DRIP on – Yield is 3.265 % )4 shares at $63.31 on 11/15/2011 w/ $5.01 Commissions

• 4 shares of PG (DRIP on – Yield is 3.25 % )4 shares at $61.94 on 11/28/2011 w/ $5.01 Commissions

• 4 shares of JNJ (DRIP on – Yield is 3.59 % )4 shares at $62.31 on 11/28/2011 w/ $5.01 Commissions

• Cash: $3,234.74

• 80.78 % Cash-$80.00 of this cash I reserve to Dollar Cost Average PEPfurther in the future-$80.00 of this cash I reserve to Dollar Cost Average PGfurther in the future-$80.00 of this cash I reserve to Dollar Cost Average JNJfurther in the future

-This leaves $2,994.74 available for new purchases• $500.00 available from Slush Fund

Stock / Futures / Forex Trading Balance: $9,255.00

( Return / Yield up +2.278 % from inception )

Commodity Futures Balance: $9,205.00

• Return / Yield up +2.849 % from inception• 3% risk tolerance gives us approximately

$276.15 for my drawdown tolerance.

• $500.00 available from Slush Fund

Micro-Forex Balance: $50.00

• 3% risk tolerance gives us approximately$1.50 for my drawdown tolerance.

• $500.00 available from Slush Fund

We had two commodity futures trades last week thatwould translate down into AMB's Model Portfolio.Both were by shorting February Lean Hogs …

• Short 1 HEG2 from 92.075 to 91.60 – PROFIT – $182.96 on 11/28/2011 (including

commissions of $7.04)

• Short 1 HEG2 from 91.375 to 91.075 – PROFIT – $112.96 on 12/1/2011 (including commissions of $7.04)

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December 4, 2011

Savings Side-Pocket Account Balance: $2,001.70

• Return / Yield up +0.085 % from inception

• $500.00 for a Slush fund / Drawdown Kill Switch fund

• $1,001.70 for a Base Savings Percentages of that Cash:

• $806.70 of this cash reserved for ' burn rate /

maneuvering' capital ( XX.XX %)

• $120.00 of this cash reserved for CD Ladder creation ( 12 % )- One $10.00 One Year CD purchased on 11/21/2010at 0.60%

• $20.00 of this cash reserved for the first side-pocket purchase ( 2 % )

• $20.00 of this cash I reserve for the second side- pocket purchase ( 2 % )

• $35.00 of this cash I reserve for the hedging account ( 3.5 % )

• $500.00 for Emergency Savings

• Getting Paid Fund: $0.00

• Redistribution to Other 'Sisters': $0.00

Total Portfolio Balance: $15,261.08 - Total

Inception to Date Return: +1.741 % from inception )

S&P 500 Since Newsletter Launch on November 13,

2011: +0.3355 %

If you have any questions regarding my personal outlook, or any other comments, please feel free to contact meat [email protected]. I will say that if you have questions about your own trading and you want to ask for myinput? Please include your most recent money management performance statistics in any email correspondence.

Until next time, stay safe … trade well, and remember that loving other people doesn't cost a dime.

Note: The above statements should not be construed as an investment or trading recommendation. Aileron Market Balance is a newsletter

that allows subscribers to look 'over my shoulder' as it were, for my own personal specific trading and investing ideas and thoughts for thenext week. But they are only thoughts as of the moment of publication, and are subject to change. Any trades or investments that I discusswithin this newsletter are simply my own thoughts regarding my own investing and trading outlook. Remember that entering any market is

an individual decision. There is no guarantee that I will enter, or have entered any of the trading or investing ideas that I discuss in this

newsletter; as larger accounts may require a different strategy as the ones presented here. This newsletter simply contains my trading and

investing thoughts for the next week. I, the author do not grant this work for wide distribution beyond any single individual subscriber as this publication is protected by U.S. And International Copyright laws. All rights reserved. No license is granted to the user except for the user's

personal use. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted or otherwise reproduced, stored, disseminated, transferred, or used, in any form or by any means except as permitted under the original

subscription agreement or with prior written permission. I personally only enter any market after watching and reading the tape and I trade

using money management principles. The losses in trading can be very real, and depending on the investment vehicle and market, can

exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 15 years of experiencein trading and investing in these markets. The Model Portfolio accounts are hypothetical accounts,with all of the inherent problems therein,

which are used within this newsletter in an attempt to track the results of this newsletter, and is run for the education of other traders who

should make their own decisions based off their own research, due diligence, and tolerance for risk. Any pictures used within this newsletter

are believed to be public domain. Any charts that are displayed using the ThinkorSwim platform, and other pictures were obtained throughWikipedia's public domain policy. The WM Logo is believed by the author at the time of this writing to be public domain, as the image was

obtained from Wikipedia, which stated: “This image only consists of simple geometric shapes and/or text. It does not meet the threshold of originality needed for copyright protection, and is therefore in the public domain .”

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aileron market balance: issue 4

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