Tuesday, December 24, 2013

Triple-Digit Profits Possible With This Dogs of the Dow Strategy

The Dogs of the Dow is a well-known trading strategy. There are a number of variations, but last year I explained how to use call options to capture triple-digit gains from the Dogs. The results are now in for 2013, and a $1,089 investment grew to over $3,000 with my approach. Before looking at what to do now, let's review how I recommend trading the Dogs of the Dow and what happened in 2013.
The basic idea behind the Dogs of the Dow is to buy the 10 highest yielding stocks in the Dow Jones Industrial Average and rebalance the portfolio once a year. The Dow Jones Industrial Average contains 30 of the biggest companies in the world. There is little risk that a company can go into bankruptcy while it is a member of the Dow, and that reduces the risk of buying the stocks. The Dogs are the stocks that offer the best value, using the dividend yield as a measure of value. Over time, the strategy is expected to outperform the index.
Most studies agree that the Dogs of the Dow is an effective stock-picking strategy with the results at least matching the buy-and-hold returns available from the index over the long term.
One of the variations of the strategy is to buy only the five lowest priced stocks from the list of the 10 highest yielding stocks. Most studies find this approach does better than a buy-and-hold strategy.
My recommended variation is to buy long-term call options on the five lowest priced, high-yielding stocks. Last year, I recommended calls expiring in January 2014 that would give us exposure to the stocks for one year. To minimize trading costs, I recommended calls with strike prices as close as possible to the stock's price at the time. The exact options are shown in the table below.
Dogs of the Dow 2013 Call Option Strategy
*As of Dec. 19 open
This strategy significantly outperformed buying these five stocks. The gain in the stocks would have been 22.5%. Dividends could have added another 4% or so to the strategy. The Dogs of the Dow had a great year, but my call option strategy did more than six times better.
This year, the five lowest priced, high-yielding stocks and my recommended January 2015 call options are:
Dogs of the Dow 2014 Call Option Strategy
Buying these five call options would cost about $1,306. Because these five options would cost much less than 100 shares of each stock, traders are committing a smaller amount of funds to this strategy than they would if they bought each stock. The trading capital saved by using call options could be invested in another strategy, providing diversification and the opportunity for additional gains.
The risk is limited to the price paid for the options. In the unlikely event that all five stocks fall to zero, the trader would lose less than $1,306. If we see a new bear market in 2014, or a significant sell-off in stocks, investors following a buy-and-hold strategy with the Dogs of the Dow stocks could lose much more than that in dollar terms.
Recommended Trade Setup:
-- Buy the five call options identified above to duplicate the Dogs of the Dow strategy
-- Do not use stop-losses
-- Close all trades at the end of 2014
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Responsys Inc (NASDAQ: MKTG)

Responsys, Inc. provides email and cross-channel marketing solutions that enable companies to engage in relationship-based marketing across various interactive channels. The company offers Responsys Interact suite, a software-as-a-service platform that provides marketers with a set of integrated applications to create, execute, optimize, and automate marketing campaigns across various channels, including email, mobile, social, the Web, and display. Its platform also leverages third-party applications and data from real-time sources allowing customers to deliver targeted content to its customers and known prospects as part of their interactive marketing campaigns. In addition, the company provides professional services, such as strategic, creative, deliverability, campaign, education, and technical services.
Please take a look at the 1-year chart of MKTG (Responsys, Inc.) below with my added notations:
1-year chart of MKTG (Responsys, Inc.)
After rallying from beneath $6 to $18 in September, MKTG formed a solid resistance at that $18 (blue). Earlier this month, the stock pushed through that resistance on a large increase in volume. Now, MKTG is clearly resisting $20 (red).

The Tale of the Tape: MKTG has a level of resistance at $20 and support at $18. A long trade could be made on a break through $20, or on a pullback to $18, with a stop placed under the level of entry. Traders could also enter a short trade on a break below $18.
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China Interest Rate Crisis Continues: 7-Day Interest Rate Doubles to 10% in One Week; China Bans Words “Cash Crunch”

globaleconomicanalysis.blogspot.com / Mike “Mish” Shedlock / Monday, December 23, 2013 3:21 AM
A “cash crunch” is on in China. But don’t call it that, because China banned use of the term last week.
The New York Times reports China Rates Approach Crisis Levels Despite Central Bank Measures.
 An exceptional bid by China’s central bank to curb soaring interest rates and relieve pressure on the financial system appeared to have come up short on Monday, as Chinese money market rates shrugged off the measure and continued to approach the crisis levels seen in June.
The central bank, the People’s Bank of China, said late Friday that it had provided more than 300 billion renminbi, or about $50 billion, in short-term funds to selected banks over a three-day period that week.
Rates continued to surge on Monday, however, in China’s money markets — a key source of short-term funding for commercial banks and also for financial institutions engaged in risky, off-balance-sheet shadow lending.
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Former Goldman Banker To Head CMHC: “Canada’s Mortgage Monster”

Back in 2011 and 2012 we profiled the one organization that was among the key support pillars not only under Canada’s housing market (and according to many, bubble), but also the entity that by providing tens of billions in cash and loan support to Canada’s banks, served to rescue the financial sector from rather unpleasant consequences: the Canadian mortgage insurer Canada Mortgage & Housing Corporation (CMHC) also known as “Canada’s Mortgage Monster.”
Recall from a 2012 report by the Canadian Center for Policy Alternatives:
 The official story of the 2008 financial crisis goes like this: American and international banks got caught placing bad bets on U.S. mortgages and had to be bailed out. But not in Canada. Through the financial crisis, Canadian banks were touted by the federal government and the banks themselves as being much more stable than other countries’ big banks. Canadian banks, we were assured, needed no such bailout.
However, in contrast to the official story Canada’s banks received $114 billion in cash and loan support between September 2008 and August 2010. They were double-dipping in not only two but three separate support programs, one of them American. They continued receiving this support for a protracted period while at the same time reaping considerable profits and providing raises to their CEOs, who were already among Canada’s highest paid. In fact, several banks drew government support whose value exceeded the bank’s actual value. Canadian banks were in hot water during the crisis and the Canadian government has remained resolutely secretive about the details.
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First Trust NASDAQ Global Auto Index (NYSE: CARZ): This ETF Could Be the Biggest Winner in 2014

ETFs are designed to decrease risks by offering investors access to a group of stocks. However, the use of highly specialized indexes by ETFs can increase exposure to the riskiest sectors and lead to large losses when trends reverse. To find the right balance, we look for ETFs that have diversified holdings and can benefit from several investment trends.

Heading into 2014, we see several important economic themes developing that should have a large impact on stocks. In the U.S., robust retail spending in November and an upward revision to October's data has led to hopes that consumer spending will pick up in 2014. Since consumer spending accounts for about two-thirds of GDP, it is unlikely we'll experience a recession if this trend continues.

Recent data also indicates that Europe will finally be joining the U.S. economy in an expansion. And with Asian economies expected to expand too, this could be the first synchronized global expansion since at least 2008, when the credit market crisis sparked deep economic declines around the world.  (more)

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