Due to a lengthy vacation, I was not able to update this blog for a month. For that I apologize. So, after all this time, a portfolio review is in order.

The first big news is the CROX disaster. Crocs makes popular plastic shoes. For months their management has been saying that everything is fine and they’d meet their earnings projections. On July 24 management announced horrible earnings and gave very poor projections for the future. In other words, management lied to its shareholders. This resulted in the stock losing more than 50% of its value virtually overnight. Since this was one of our covered call plays, we did not have a sell stop order in place (which is OK as we would have taken the maximum loss if we had entered one). What I did was immediately buy back our September $12.50 calls for $.05. Then, on August 18, when CROX had a quick run up, I sold our position for $5.25.

There probably will be shareholder lawsuits resulting from this, as frequently happens. We may eventually get back some of our money from these lawsuits, but they are not relevant to this blog so we’ll just put this trade behind us. There is no defense against lying management when they lead you in a positive direction then negatively blindside you.

The next major item is that on July 24 FXI split 3 for 1, meaning that for every share of stock we owned, we now had 3 shares. It also cut the stock’s price by two-thirds, resulting in the same overall value after the stock split and causing our sell stop price to be reduced by two-thirds too to $39.85. Unfortunately, on August 19 FXI dipped below our sell stop briefly and we were stopped out at $39.75. the stock is now on the way back up, but we are out of it.

DBA was also stopped out on August 4 for $34.75 when gold and most other commodity stocks entered a temporary sell-off. I saw temporary because, as with FXI and gold, commodity shares are again up and DBA is currently at $36.60. Oh well, we have trading rules and they’ve served us well during this tumultuous time in the stock markets.

With the financial sector in so much deep trouble, and those troubles only beginning, I made a purchase on August 8 of SKF, which is the UltraShort Financials ProShares ETF. An UltraShort fund moves up at twice the amount that the financials index goes down. The corollary of this ETF is UYG, which is the ProShares Ultra Financials ETF that goes up at twice the rate the financials index goes up. Since I believe the financials have no place to go but down, I’m betting we’ll make a lot of money selling (double) short via this ETF. of course, as fast as it can go up, it can come down just as fast so we have a stop just under the six-month low for the stock.

Our portfolio now consists of only three stocks: CMIN, PRW and SKF. Overall we are down $1,161, which is just slightly over 1%. Not bad considering the DOW is down almost 15%.

I’ll be more active on this blog in the future, but please don’t forget that this site is strictly an educational discussion, not stock trading advice. Neither Stock Trading Techniques nor its owners are registered as a securities broker-dealer or investment adviser with the U.S. Securities and Exchange Commission or any state securities regulatory authority. Read the full disclaimer for complete details.

Earlier today I did write a post relating to FXI (click here to see the post).

On July 2 we were stopped out of GEX. our alternate energy ETF.

However, our other positions are doing well with Constitution Mining hitting a series of all-time highs and Crocs moving up along with FXI and PRW. Our only loser (besides being stopped out of GEX) since our last review is DBA, our PowerShares Agricultural Fund.

Overall, however, in this tumultuous bear market our portfolio is in positive territory, up over 1%, while the average Dow Jones Industrial Average is down 15% during the same period.

I am working on some exciting research that will allow us to make money regardless of the direction of the stock market, so please stay tuned.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

What China Wants, China Gets!
by Tony Sagami

For thousands of years, China was ruled by dynasty after dynasty before finally becoming a republic in 1912. In 1949, the Communist People’s Republic of China was formed after the defeat of the Nationalist forces. And in 1978, Deng Xiaoping ascended to power and began a series of economic reforms.

Since then, China’s economic years have been impressive, but I think the most amazing thing is that this economic miracle happened under a Communist regime.

Even though the Communist Party regulates practically every aspect of both public and private life in China, capitalism has flourished without democracy for one simple reason: The Chinese leaders want it.

You see, the Chinese government gets what it wants because that is what happens under a totalitarian regime with $1.8 trillion in its pocket.

Let me give you three recent examples:

Cut the air pollution in Beijing. Starting last Sunday, cars with license plates that end in an odd number are banned from the roads every other day, alternating with cars that have even-numbered plates. The Chinese government estimates that this will take one million cars off the road each day.

Chinese drivers may not like it, but they don’t have any choice and to dull the inconvenience, car owners won’t have to pay road and vehicle taxes for three months.

No Fido on menus. You and I may consider it horrific to eat dog, but to millions of Chinese, dog is considered delicious as well as nutritious. The Chinese have eaten dog for 7,000 years and it is widely believed to lower blood pressure as well as boost virility.

But out of concern that dog dishes might offend animal rights groups and Western visitors, the Beijing Food Safety Office ordered official Olympic hotels and restaurants that are popular to foreign visitors to stop serving dog meat “to respect the dining customs of different countries.”

The meat of Saint Bernards, by the way, is considered the most flavorful.

Don’t break the law in China. The Chinese government does not release the numbers, but according to Amnesty International, China is the world’s leader in state-sanctioned executions. The death penalty is applied to more than 60 crimes including corruption, drug trafficking, embezzlement, and even tax evasion!

Amnesty International estimated that China executed 470 people in the month of April and believes that the annual number is around 10,000. As you can see, the cost of crime in China is extremely high.

Communist Party Control Extends
To Almost Every Aspect Of Personal,
Political, And Especially Economic Life

The Chinese government has figured out that the fastest way to eradicate poverty and increase its standard of living is by growing its economy. China has successfully reduced the number of its citizens living below the poverty line from 200 million in 1981 to less than 30 million today.

One of the biggest threats to China’s economic prosperity today is the country’s stumbling stock market. The mainland stock market (which is closed to foreign investors like you and me) has lost more than 50% of its value from its November high and millions of Chinese investors are stinging from the losses.

And the Chinese government has flat out vowed that it will make sure the stock market doesn’t fall any further. Shang Fulin, chairman of the market watchdog China Securities Regulatory Commission, has reportedly said “total efforts” must be made to preserve the stability of the capital market.

That comment was followed by an article in the government-controlled Beijing People’s Daily that recommended 10 government measures to revive the stock market. Some of these include:

• Stricter standards to regulate non-tradable share conversions …
• Controlling large-scale new share issues …
• Establishing a timetable for the launch of index futures to stabilize prices …
• Encouraging stock repurchase by listed companies …
• And setting up a special government fund to help shore up share prices.

Did that last one perk up your ears? It should have! A senior Chinese securities official, Jiang Lianhai, is in favor of setting up a fund to help stabilize the stock market, the first time a government official has openly suggested direct government support of the stock market.

As Lianhai recently told the China Daily,

“It’s necessary and urgent to set up buffer funds to confront big speculators and stabilize the mainland market. The government had no reason to stay on the sidelines of the troubled stock market and its intervention could help stem destabilization.”

Let me tell you, you won’t find mid-level officials making public comments that are not part of a well-orchestrated government plan.

So Make No Mistake: The Chinese
Government Wants the Stock Market to
Bottom … And What They Want, They Get!

Look, I can’t guarantee that this is the absolute bottom of the Chinese stock market’s decline. But I sure think it is. With the Olympics right around the corner, the last thing Chinese officials want is the country’s stock market taking anything away from China’s new status as a modern, prosperous country.

I believe that any dollars you put to work in China today should be the most productive investment you’ll make this year.

Where should you look? I’ve mentioned these names several times in the past, but I think it’s worth looking into companies like China Mobile (CHL), E-House (EJ), and New Oriental Education (EDU).

Or, if you’re more of an ETF investor, check out either iShares FTSE/Xinhua China 25 Index (FXI), SPDR S&P China (GXC), or PowerShares Golden Dragon Halter USX China (PGJ).

Because as I told you earlier, what China wants … China gets … and what it wants now is for the stock market to move higher.

Best wishes,

Tony

As I review our portfolio, I believe we should stick with our current selections. Our covered call play (CROX) has been hit hard, with the stock losing $880, but the call we sold has increased in value by $425 offsetting some of this loss. Still, CROX was cheap when we bought it and it’s cheaper now. Not long ago (November 2007), it was priced at over 100 times earnings at $75/share. Crocs recently reaffirmed 2008 earnings guidance of $1.50 to $1.70 per share. So, at Friday’s closing price of $9.17 per share, CROX trades somewhere between 5 and 6 times forecasted earnings. The company also has no debt and trades at just one times revenue. It is now a value stock.

As for our other stocks, the portfolio review I did on May 31 still applies. To see it, click here.

Remember, news does not dictate the major trends in any market or security. Rather, news flows from the trends! For instance, how often has a stock reported better-than-expected earnings, and its share price tanks? Or it announces worse-than-expected earnings, like Citibank did recently, and the share price soars?

The same holds true when economic stats are released by Washington like unemployment numbers, CPI, trade deficit numbers, you name it — they are all backward-looking statistics and do not create or change trends. Rather, the statistics are the result of trends already in motion, and if you follow them, or rely on them to trade, as I said previously, you are virtually guaranteed to lose money.

The bottom line is that you have to rely on your own homework on the markets, whether it’s based on fundamental or technical analysis. Develop a set of trading rules and follow them. Never bet too much on any trade, cut your losses and let your profits run. Do all these things and you WILL be a profitable trader.

If CROX is selling for less than $12.50 on that date, we get to keep our CROX shares and also the premium we received from selling the call contracts. Each call contract is equal to 100 shares, so we received $650 ($1.35 * 500 = 675 - 25 commission = $650). After that September date we can sell our calls again (although they may not be $12.50 calls, depending on the price of CROX at the time), if we still have the shares. We can do this over and over until eventually our CROX shares get called away.

If CROX is selling for $12.50 or more, our shares will be called away, but we then make a profit on our shares (the difference between $12.50 and our buy price of $10.88 or $1.62 per share * 500 shares - $810) plus the premium from selling the calls ($650). That’s the good news. the bad news is that if CROX is selling for $50.00 at the time, we still only get $12.50. But we knew that going into this trade and the fact is that 85% of all options expire worthless, so this strategy is a way to generate income into our portfolio. If you think a stock is going to rise rapidly in the near future, you would never sell calls against it until it hit what you considered a peak, then you could sell calls to protect against a sell-off (but if its a volatile stock I’d just as soon enter a trailing stop).

Speaking of trailing stops, with a covered call strategy, you cannot use trailing stops because if your shares get stopped out, you now have a “naked” call sale. This is not allowed in an IRA and it is dangerous as your potential losses are unlimited. If CORX would reverse after you got stopped out and did go to $50, when the purchaser of the call contracts demands you sell them CROX for $12.50, you must buy them on the open market and deliver them (or go to jail). Since yu no longer own CROX, you will pay $50/share. Do not use sell stop orders with covered call strategies.

You can buy back your contracts then sell the stock. If a stock takes a temporary hit and the calls drop way down in value, I sometimes buy them back and wait for the stock to go back up, then sell the same calls again for a higher price than I paid to buy them back.

Moving on, CMIN is our gold play and has gone nowhere with the weakness in the price of gold recently. However, I expect gold to hit at least $1,200 this year, so CMIN should be OK.

DBA, our agricultural commodities play, will be a winner over time as agricultural prices continue to climb many fold over the coming years. the same holds true for GEX, our alternative energy ETF, which was discussed in the same article with DBA.

FXI is our China play and it’s had some highs and lows lately, running up into the $170s then falling into the $140s until finally moving back into the $150s. As China goes, so goes FXI. This is a good long-term play. FXI has had a 3-year average return of over 37% and I’ve seen projections of $300/share so we’ll stay with this one and see what happens.

PRW is our “story” stock. It’s up, but only slightly. This is a long-term speculation that will either go bust or return obscene rewards (I had two very wealthy individuals who have over 7,000,000 shares, bought at much higher prices, between them say they feel this could be a $100/share stock, but that was a few years ago). Only time will tell.

Remember, this is a “paper” portfolio and all information given is for educational purposes only. The author is not an investment advisor nor a stock broker-dealer. Any decisions you make based on information you read on this blog are strictly your responsibility.

Your trading strategy might well turn an initial stream of profits into a flood of wealth for generations to come, so exiting with a small loss — the 2% rule —is critical. But knowing how and when to exit with profits is equally as critical. After all, what good is it if you give back a majority of your profits before getting out?
Or, what good is it if you get out of a winning trade prematurely, when a big trend is about to emerge, and you caught it early on?

So how do you exit a trade with locked-in profits? By always using a trailing stop to reduce both the risk and the odds — as well as the amount — of profits that you can potentially give back. It is critical that when your trailing stop is hit to immediately get out of the trade.

Discipline makes money: discipline in predetermining your risk and putting as much emphasis on when to exit a trade as you do on when to enter a trade. There are myriad types of exit strategies designed to maximize profits, and I’ll go into them in future post. Suffice it to say for the purpose of today’s post that:

• Knowing how and when to exit a market is as important, and often more important, than knowing when to enter. Always remember that.
• For a good, general, exit strategy always use a protective sell stop that starts at a 2% loss level and always move the stop in favor of your position to reduce risk of loss, or risk of a setback in profits.

As a corollary, never move the stop in a way that increases your risk of loss or gives back a greater portion of your open profits!

And to maximize your success, please stay tuned for the final installment of this series, to be published at some random time in the future.

When the former stars of Wall Street crash and burn it creates a buying opportunity. Right now we have that opportunity with Crocs (Nasdaq: CROX), the former highflying maker of brightly colored plastic shoes. This stock, which once traded north of 100 times earnings, is now a value stock.

Crocs recently reaffirmed 2008 earnings guidance of $1.50 to $1.70 per share. So, at its Friday closing price of $11.01 per share, CROX trades somewhere between 6.5 and eight times forecasted earnings. The company also has no debt and trades at just one times revenue.

Here’s the deal. CROX is CHEAP! Growth-stock investors have tossed the shares out the window and the chart has all the looks of a selling capitulation:

You can see the peak last October at nearly $75, followed by a dramatic falling-star decline that pushed the shares below $10 last month. This is an amazing buying opportunity for value investors.

Here’s how I’d play it. I’d buy CROX for about $11.00 per share (I actually did buy it and got it for $10.88) and I’d sell the CROX September 12.50 covered calls (CZLIV) for about $1.40 (I actually got $1.35).

So, with this trade, I bought CROX for $10.88, giving someone else the right to buy it from me any time between now and option-expiration day in September for $12.50. I collected a $1.35 premium up front, so I’m really getting into this trade for $9.53 per share ($10.88 for the stock minus the $1.35 received from selling the call).

As long as CROX is trading for more than $9.53 on option-expiration day in September, I’ll make money on this trade. In other words, the only way I’ll lose money here is if CROX declines another 12% from its already depressed price. Even then, I can simply sell another series of calls and  receive an additional premium to offset any loss.

On the other hand, I’ll do quite well if the stock stays the same, and I’ll do even better if it rallies a bit (which is what I expect to happen).

If CROX stays at $11.00 per share by option-expiration day in September, then the calls will expire worthless and I’ll record the entire premium as a gain. So, I’ll make $1.35 off of a net investment  of $9.53. That’s a 15% gain in a little more than four months on a stock that goes nowhere.

If the stock goes up, then I can earn an extra $1.62 per share if it gets called away from me at $12.50. That’s a gain of $2.97 per share, or just more than 27% of the net amount invested.

To recap, here’s what I did. I bought 500 shares of Crocs (CROX) at $10.88 and did a Sell to Open of 5 contracts of the CROX September 12.50 calls (CZLIV), covered, for $1.35.

You can do this trade in an IRA, but you must first be apporved for COVERED CALL writing. You MUST own the stock in even 100-share lots for each COVERED CALL contract you sell (each contract  represents 100 shares). You cannot sell any shares of the stock unless you buy back the equivalent number of contracts.

To profit from this type of trade, the trick is to buy hugely under-valued stocks and sell the calls (when you sell something you receive the cash so your portfolio immediately increases by the value of the contracts - minus commissions - you sold) then if the options you sold expire worthless (80% of the time they do), you can sell them again. I know of a fellow in Sun City, Arizona, who makes over $100,000/year doing this.

This trade is still viable as of Friday’s close.

Please note that the author is not an investment advisor nor a broker-dealer. Any actions you take as a result of this the information posted on thi web site is strictly your responsibility.

You can always get back in. You can always trade another market. There is always another opportunity. But if you don’t religiously use stops to limit your risk to 2%, it is almost a certainty that you will never make any money on a consistent basis.

You might get lucky once in a while by not using stops. But be assured, without a hard and fast rule of using stops, you will give back any “lucky” profits you make in no time, guaranteed. I have experienced this myself many times (OK, so I’m a slow learner). Back in the 2000 tech stock crash, I let the biggest profit I ever had to that point become my biggest loss ever when I removed a stop from Cisco. It was at $76 or so and started dropping. I had a stop at $66. As Cisco’s price approached $66, I decided I didn’t want to sell it so I removed the stop (and, afterall, this was a “healthy correction” as Cisco could never go anywhere but up over the long run, right?).

If I remember correctly, the price dropped to about $65 then reversed and headed back up to $73. I congratulated myself for such a “smart” trading move. I eventually sold Cisco for around $10/share three years after the crash (and, of course, that was about the bottom and a year or so later Cisco was at $25, but that’s the way it goes when you ignore the rules and try to outsmart the market).

The above information applies to stock trades. If you are trading options, using stops (and the 2% rule) is not practical. But as long as you are only purchasing calls or puts, you can implement similar risk-controlling measures by never buying an option position that equates to more than 2% of your account’s total equity.

There is another important factor to remember. To learn what it is, tune in at some randomly selected time in the future for “Profitable Trading - Part 4 of 5″.

Make this a “golden rule” for any trading you do on your own. The only exceptions to this would be long-term core positions where you are not using any kind of leverage or margin.

However, for short-term investing like day-trading or swing/position trading, you should never risk more than 2% of your account equity on any one trade.

Let’s look at some examples. Let’s say you have $100,000 to trade with. If you risk 10% of your equity on every trade and you experience 10 losers in a row, you’re wiped out. You are out of capital, and out of the game. Even if you lose nine in a row, you’ve lost 90% of your equity and you then have only one chance left to be right. In that case, just to make back all the losses and break even you have to hit one heck of a windfall profit on that 10th trade.

On the other hand, if you risk only 2% on each trade, you have five times as many opportunities to be right. You have 50 opportunities instead of 10. And with 50 opportunities, the probability of you being right on any one trade goes up dramatically as does the probability of a winner that will run to full profit potential, helping to not only wipe out any losses you incurred, but to also push your account firmly into positive territory.

So how do you control risk so consistently? Tune in at some randomly selected time in the future for “Profitable Trading - Part 3 of 5″.