A Publication of Dent Research The Strategy Report The Secrets to 90-Day Profits with Cycle 9 By Adam O Dell, Editor, Cycle 9 Alert Delray Publishing 55 N.E. 5th Avenue, Suite 200 Delray Beach, FL 33483 USA USA Toll Free Tel: (888) 272-1858 Contact: Cycleninealert@gmail.com
Welcome, investors! I m Adam O Dell Editor of Cycle 9 Alert, and Portfolio Manager for Boom & Bust. I m confident your decision to become a charter member today of Cycle 9 Alert is one of the smartest financial decisions you ll make this year. Our profits are soaring we re smashing average market returns and today, I wanted to take the time to tell you a little more about my service and what you can expect. Harry s work shows that people are the driving force of the economy that demographics allow for predictions about the future and that certain events are preordained. People are creatures of habit and predictable. And because people make the markets, cyclical patterns form all the time. That s what cycles are all about and exactly why I developed Cycle 9 Alert. In fact, the minute you begin following Cycle 9 Alert, you ll likely never trade the same way again. Profiting from short-term cycles has never been easier I ll do much of the work for you. Simply put, I have two objectives: 1. Keep you informed on which sectors and stocks are hot and which are not, and 2. Give easy-to-execute trade recommendations that help you beat the market s average return. Keeping You In the Know I ll work hard to meet my first objective by writing to you on a weekly basis. You ll have an e-mail from me in your inbox every Tuesday. I ll tell you which sectors are outperforming the market, and which are underperforming. I ll do this by ranking the sectors in what I call our Leaders & Laggards Board. You ll be able to see which sectors are gaining strength and which are falling behind. Here s an example of how that will look: Rank Leaders #1 Energy (XLE) #2 Technology (XLK) #3 Materials (XLB) #4 Consumer Discretionary (XLY) #5 Financial (XLF) #6 Industrial (XLI) Laggards #7 Consumer Staples (XLP) #8 Healthcare (XLV) #9 Utilities (XLU) Each week my system ranks the nine sectors on a scale from -3.0 to 3.0. Positive scores mean the sector is outperforming the market. Conversely, negative scores show that an investment opportunity is underperforming the market, so I know to stay away. The magic number I look for is +1.5.When an investment s score hits 1.5 or higher it tells me there s a kinetic cycle developing and a 90-day window of profit opportunity has opened. 2
There s no guess work or emotion involved it s completely formulaic. The weekly dispatch is also my chance to explain the WHY behind a sector s strength or weakness. My system for ranking the sectors is based on proprietary statistical analyses that I ve developed. But I don t blindly follow automated calculations. I m constantly scouring annual reports, independent research and the news (which I always take with a grain of salt, but understand how it influences the markets) to figure out the underlying drivers behind leading and lagging sectors, industries and companies. My goal is to share my insights with you in a way that s easy to digest. An Actionable Investment Strategy In 1597, Sir Francis Bacon said, Knowledge is power. Dale Carnegie later added, Knowledge isn t power until it is applied. In order to be a successful investor, we must know how to leverage our knowledge of the markets for profit. And as most folks that go it alone find out, that s easier said than done. I ve met plenty of smart, informed investors who have lost a lot of money. That s why, in addition to telling you about the WHY behind sector-driven trends in the market, I ll bring you a practical, easy-to-execute investment strategy that will give you an edge over the average investor. This strategy is grounded in statistical analyses and has been tested, back-tested and retested over many years of historical data. I ll spare you the details just know there s a very systematic approach to developing a strategy like this. So here s what we ll be trading State Street Global Advisors has a class of sector-specific ETFs (Exchange Traded Funds), the SPDRs (pronounced spiders ), that you re likely already familiar with. These nine sector ETFs will be our bread and butter trading vehicles. So let s meet them: Consumer Discretionary (XLY), Consumer Staples (XLP), Utilities (XLU), Healthcare (XLV), Energy (XLE), Material (XLB), Industrials (XLI), Financials (XLF) and Technology (XLK). These nine sectors rotate, or cycle, in and out of favor. And the proprietary analytical tools I created exclusively for this service help me do two things: 1. Tell Us When To Get In When I find that a sector is heating up, I ll recommend buying a specific sector ETF. With my system, I m able to do this long before most techniques pick up the signal because I focus on leading, not lagging, indicators. 2. Tell Us When To Get Out I ll tell you exactly when to get out of each trade. Again, my analytical methods help me determine when a sector s run is over. I ve determined, through extensive research and back-testing, that two to three months is the sweet spot holding period for capturing outsized gains. Our aim is to take the meat of the move for ourselves, and to avoid the messy turns where open profits get eroded by pullbacks and underperformance. While the market s nine sectors are the focus of Cycle 9 Alert, I ll also be researching and recommending plays in specific stocks. These will obviously be stocks in hot sectors. My focus on outperforming, above-average sectors and stocks will ensure we stay invested in the hottest spots in the market. After all, what is the likelihood that all nine SPDR Sector ETFs will be underperforming the S&P 500? 3
Zero it s impossible. There s always a bull market somewhere. One quarter it might be the Energy sector, the next quarter maybe it s Consumer Discretionary. These sectors will rotate in and out of favor. They ll swing between periods of underperformance and outperformance. Since we will never be wed to any one sector, we are able to jump from one hot sector to the next. We ll be getting in as the sector starts to heat up and outperforms the broad market we ll get out in two to three months when the run is over then we ll move on to the next hot sector. Keeping Our Options Open While my analysis will focus on sector ETFs and stocks, I won t recommend trading these instruments directly. Instead, to get the most for our money, I ll recommend options on ETFs and stocks. By using options, you ll have less capital invested, and have a defined risk before you enter the trade. You can t get that by trading ETFs or stocks directly. I ll share with you very basic options strategies like buying calls, and give you all the details you need to execute the orders with your broker. In fact, you ll be able to simply call up your broker and read him my instructions. It s that simple. The only decision you ll need to make is how much to invest in each trade. Trading options gives us distinct advantages. More Bang : Options help us get more bang for our buck. We can control more stock, with less money, than if we were to simply buy stocks or ETFs. This is the power of leverage. Of course, leverage is a double-edged sword, as it can also magnify losses. But the great thing is our risk is always strictly limited and known before we even enter the trade. In each alert, I tell you exactly how much risk you re taking with that recommendation. Less Risk: Options help us manage risk. When I recommend buying calls or puts you will know the exact dollar amount that you re risking. Also, since options require much less capital than stock purchases, your money can be spread across more investments. This diversification not putting all your eggs in one basket helps to reduce our overall risk. Flexibility: Options give us the flexibility to take advantage of ALL market conditions. With stocks, you re only working in one dimension you re betting the price will go up or down. By using options, I can fine-tune our strategy to account for volatility, event risk and the like. What s more, options allow us to buy time to allow our investment to move in the direction we expect it to. Ease-of-Use: Many retail investors shy away from options because they seem complicated. I understand that, and it s one of the reasons I m motivated to help you navigate the world of options. There s nothing for you to worry about because I ll be giving you easy-to-follow, step-by-step directions along the way. My trade recommendations will always give you full details on which sector or company I m recommending, along with the exact information you need to execute your orders. 4
Each trade alert will include a line called Action to Take. If you d like, you can simply read this line to your broker when you re ready to make the trade. Here s a sample of what a trade alert will look like: Dear Cycle 9 Alert Subscriber, I realize, given all the election noise, you may have missed the importance of October 31. This is the unofficial start of a very lucrative investment season. Retailers earn an outsized share of their annual revenue between 20% and 40% in November and December alone. Consumers drive this, spending on average 12% more in the fourth quarter than the first. In fact, this consumer spending pattern is so consistent it repeats itself year after year. Take a look for yourself SAMPLE ONLY Consumers Ramp Up Spending into Fourth Quarter This predictability is a gift for investors. As consumers spend more on non-essential purchases, companies like Home Depot (NYSE: HD), Amazon.com (NASD: AMZN) and Starbucks (NASD: SBUX) enjoy a seasonal boost. That s why, hands down, the Consumer Discretionary sector stands to gain the most from consumers seasonal buying patterns into the year s end. This is a pattern I ve watched over the past 10 years. And 2012 is shaping up to be no different. The latest reports show increases in both retail sales and consumer spending (more on these below). And an American Express survey of the country s wealthiest households (top 10%) shows holiday spending is set to increase 20% this year. To invest in the Consumer Discretionary sector I m looking to an ETF, the Consumer Discretionary Select Sector SPDR (NYSE: XLY). SAMPLE ONLY My system for ranking the market s nine sectors showed XLY was clearly outperforming the market average by early October. The Consumer Discretionary sector has remained strong and is currently ranked #1 on our Leaders & Laggards Board. It s the strongest sector of the market. 5
LEADERS #1 Consumer Discretionary (XLY) #2 Financial (XLF) #3 Industrial (XLI) #4 Healthcare (XLV) #5 Materials (XLB) LAGGARDS #6 Utilities (XLU) #7 Consumer Staples (XLP) #8 Technology (XLK) #9 Energy (XLE) History shows that the fourth quarter is a gold mine for investors in the Consumer Discretionary sector. For the past 10 years, buying the Consumer Discretionary sector (XLY) in September, October or November, and selling three months later, gave investors the best odds of making money, generating winners 77% of the time. Just have a look at the last few years SAMPLE ONLY In 2009, XLY triggered my Buy Alert threshold on September 23. Three months later, XLY was up 7.7%. In 2010, XLY hit the threshold on September 27. The sector gained a handsome 11.4% over the following three months. In 2011, XLY was performing only slightly above average and never triggered a Buy Alert. This steered me clear of a messy fourth quarter. So the question is, Will consumers make a strong showing this year, too? Signs of Consumer Strength in 2012 Judging from a slew of recent economic reports, the answer is a resounding YES the consumer is strong this year. Consumer sentiment and spending reports have been overwhelmingly bullish, showing: Consumers are Debt-Free: Ok that s clearly not true. But get this consumers today are carrying less debt, as a ratio to disposable income, than they were nine years ago. More easily managed debt burdens make consumers feel more secure. And there s already evidence of that shift in sentiment Consumers are Confident: The Consumer Confidence Index rose in September and October. It s now at the highest level we ve seen since February of 2008. History has shown when consumers feel confident they spend more. And we re already seeing that, too Consumers are Spending More: U.S. consumers spent 0.4% more in September, according to the Bureau of Economic Analysis (BEA) Personal Income report. That monthly gain is on top of a gain in August, which was on top of a gain in July. This data confirms bullish retail sales figures, which jumped 1.1% in September after a 1.2% gain in August. A clear trend is developing here: Consumers are ramping up spending into the final months of the year just as they do every year. 6
With all signs pointing to a strong, optimistic consumer, it s clear the Consumer Discretionary sector is the place to be as we ride out the rest of 2012. Action to Take: Buy March 16, 2013 $44 Call options on Consumer Discretionary Select Sector SPDR (XLY) paying up to $3.80 per contract. To Good Profits, SAMPLE ONLY Adam O Dell Editor, Cycle 9 Alert Position Sizing Investors often ask: How much should I invest in each position? That question, in industry-speak, refers to Position Sizing. And while there isn t one definitive answer to that question (it s personal only you can decide), investing roughly equal dollar amounts in each position should make for a smoother ride. So consider picking one number YOUR number and invest that amount on each recommendation. Here s some help with getting at YOUR number First, determine the Total Value of your investment account (and plug that number into the worksheet below). Note: this is probably not your total net worth; it s the total amount of capital you want to play with. Next, consider the percentage of that Total Value you re comfortable risking on any one trade (and plug that number in, too). Remember, it s purely up to you. The rest is easy Plug in a third number the approximate price of the contract you re looking to buy (i.e. $2.20) which is included in each Cycle 9 Alert recommendation. Then, just let this Position Sizing Worksheet do the math. The result is the number of contracts you should consider buying if you aim to maintain roughly equal investments in each recommendation. Again, this worksheet does NOT tell you how much to invest, either in total or in each position. Instead, it s an educational tool designed to help you determine roughly equal position sizes. Click here to give it try. Examples: To illustrate what I mean by a smoother ride, here are some examples of how position sizing can impact returns. The lazy man s approach to position sizing often involves buying an arbitrary number of contracts each time a recommendation is acted upon. Often the number of contracts bought is a round number, like 10. While that approach is simple and easy, it can leave you open to widely varying levels of risk. And, it can increase the volatility in your account balance. Here s an example of how buying an arbitrary number of contracts for each position can lead to volatile results: 7
Let s consider just two positions Call A and Call B Call option A costs $2.20 per contract and Call option B costs $5.10 per contract. If you arbitrarily bought 10 contracts of each, you would have invested $2,200 in A and $5,100 in B. Now, let s consider two possible scenarios: 1. Gaining 20% on A and losing 20% on B 2. Losing 20% on A and gaining 20% on B In Scenario #1, a 20% gain on your $2,200 investment in A gives you a profit of $440. Meanwhile, the 20% loss on your $5,100 investment in B gives you a loss of $1,020. On a net basis, you ve lost $580. In Scenario #2, your outcome is reversed. A 20% loss on your $2,200 investment in A gives you a $440 loss, while, the 20% gain on your $5,100 investment in B gives you a gain of $1,020. On a net basis, you ve gained $580. So If you arbitrarily bought 10 contracts of A and B, you ignored the fact that the size of your investment in each is meaningfully different. And while you d be very happy if you were lucky enough to encounter Scenario #2, you d be very frustrated if you encountered Scenario #1. The key point is this: The variability in your results the difference between Scenario #1 and #2 is purely because you didn t invest roughly equal amounts of capital into each position. After all, both scenarios involved making a 20% gain and suffering a 20% loss. But you don t have to leave this variable to chance. You have control over how much capital you invest in each position. Here s how the scenarios above look if you invest roughly equal amounts of capital in each position: Just as before, we ll assume the following outcomes: 1. Gaining 20% on A and losing 20% on B 2. Losing 20% on A and gaining 20% on B But, instead of arbitrarily buying 10 contracts of each, we ll aim to invest about the same dollar amount in each. To do this, first consider the Total Value of your Investment Account. Let s say, for example, you have $100,000 to play with. Next, consider how much of that Total Value you re willing to risk on any one position. It could be 0.5%... or 5%... it s purely up to you and your risk appetite. For this example, let s say we re willing to risk $2,000 (or 2% of our account) on any one position. A little math shows you how many contracts of A and how many contracts of B you can buy, while keeping your investment in each at roughly $2,000. Contract A: 9 contracts (@ $2.20 each) would cost you $1,980 in total just under your $2,000 target. Contract B: 4 contracts (@ $5.10 each) would cost you $2,040 in total just over your $2,000 target. And I ve done the math for you, showing the result of Scenarios #1 and #2: 8
Scenario #1: $396 gain on A and a $408 loss on B, result in a net loss of $12. Scenario #2: $396 loss on A and a $408 gain on B, resulting in a net gain of $12. As you see, the net result isn t very different when comparing Scenarios #1 and #2. The spread between a $12 gain and a $12 loss is just $24. Looking back at the first example, the spread between a $580 gain and a $580 loss is a whopping $1,160. The take-home point is this: Don t try to guess which position will result in a winner and which will be a loser. (And don t invest large sums of money in some positions, while investing small sums in others). Instead, consider using a Position Sizing Worksheet, like the one provided, to help you calculate how many contracts you should buy if you aim to invest roughly equal amounts of capital in each position. Check In with Your Broker It s likely you already have a brokerage account, possibly even one that you already use to trade stock options. But if you don t have your account established, I m providing a list of brokers you can look into. While we have no relationships with any of these brokers, they allow options trading on stocks and ETFs from a common brokerage account. Even if you already have your account established, I d recommend calling your broker and confirming that it s set up to trade options. You may need to fill out a one-or-two-page form indicating what options strategies you d like to trade. I will only recommend basic options strategies: buying calls or buying puts. Broker Contact Information TD Ameritrade www.tdameritrade.com 1-800-454-9272 Interactive Brokers www.interactivebrokers.com 1-877-442-2757 Charles Schwab www.schwab.com 1-800-435-4000 Fidelity www.fidelity.com 1-800-343-3548 e*trade www.etrade.com 1-877-921-2434 Options Xpress www.optionsxpress.com 1-888-280-8020 EverTrade www.evertrade.com 1-866-653-8025 And that s all you need to do! With your stock and options account established, simply watch for my weekly dispatches hitting your inbox every Tuesday. To Good Profits, Adam O Dell Editor, Cycle 9 Alert 9
Glossary Options Terms: 1. Call Options (aka Calls ) An options contract that gives the BUYER the RIGHT to BUY stock (read: option, or choice) at a specified price (the strike price ). 2. Put Options (aka Puts ) An options contract that gives the BUYER the RIGHT to SELL stock at a specified price. 2. Strike Price (aka Strike ) The fixed price at which stock will be bought or sold if the option is exercised. 3. Expiration Date The date on which the options contract expires. For stock options, it is usually the third Friday of the expiration month. Many index options expire the day before, on Thursday. 4. Premium The dollar amount required to purchase a call or put (debit), or the amount received from selling a call or put (credit). The buyer pays the debit; the seller receives the credit. 5. Market Order An order to buy or sell an option at the current price. (You cannot determine the specific price you re willing to pay). The advantage of a market order is that it s guaranteed to execute; the disadvantage is that you don t know the exact price until you receive a confirmation. Use market orders when execution takes priority. 6. Limit Order An order to buy or sell an option that allows you to choose the maximum price you re willing to pay (if buying) or minimum price you re willing to receive (if selling). The advantage of a limit order is that it prevents any unfavorable prices. The disadvantage is that the order may not execute. 10
Publisher...Shannon Sands Editor...Adam O Dell Cycle 9 Alert 55 N.E. 5th Avenue, Suite 200 Delray Beach, FL 33483 USA, USA Toll Free Tel: (888) 272-1858 Contact: Cycleninealert@gmail.com Legal Notice: This work is based on what we ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don t trade in these markets with money you can t afford to lose. Delray Publishing expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, Delray Publishing, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. Also, please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. (c) 2012 Delray Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Delray Publishing. 55 N.E. 5th Ave, Suite 200, Delray Beach FL 33483. TSR.C9A.VIP.07.25.14 11