"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Sunday, January 27, 2008

Game Plan Week of Jan 27: a Nuclear Time Bomb Ticking?

My last week's game plan played out nicely: a short technical reaction with a resumption of the underlying downtrend on Friday. The only positive aspect was the relatively low volume on the last trading day of the week.

What puzzled me a little bit, though, was the size of the interest rate cut on Tuesday, one week before the regular FED meeting. Did they just want to prevent a market crash or do they see the underlying economic conditions deteriorate faster than originally expected? The nuclear time bomb that actually forced the FED might have been the struggling bond insurers. Should they get downgraded, we really have to fasten our seat belts. We will know more next week. An additional rate cut of 0.5% points seems to be priced into the market: if the FED cuts less, the markets will react negative. But even if they cut more, inflation concerns and uncertainty about the real economic situation might dominate. Remember: we are in a bear market, which means that good news is interpreted as bad news. In any case: I'm 20% long in Gold, which should shine even more after a interest rate cut.

An interesting rally occurred last week in homebuilder stocks. Some of them, such as Pulte or Centex shot up by 60% from their bottom:

Looks like a classical short squeeze. Keep in mind that some of the homebuilders are shorted with 70% of float! It is remarkable that the ones, who reported earnings last week didn't paint a bloomy picture for 2008: Lennar and Ryland don't expect a recovery of home prices until 2009.
Bottom line: think the rally has created some interesting trading opportunity since the move was overdone. One way to play it is to short a homebuilders ETF, such as ITB. A tight stop is recommended.

Thursday, January 24, 2008

Interesting short term opportunities

Yesterday's reversal created some very interesting short term trading opportunities. We can see some bullish intraday price action on quite some charts.

One example is APPL, who reported a bad quarter & negative outlook ("It's the guidance, stupid"). Despite the fact, that Apple lost over 10% of its value yesterday, the intraday price action looks promising for the next days, showing a intraday reversal ("Candlestick hammer", see chart). I'll probably enter a long position on the open to speculate on a reaction back to the 160 level. I'm not too bullish for AAPL for the long term, but right now, a lot of market participant seem to play the oversold game in this stock.

Other stocks I like that show this pattern and might be worth a little reaction trade are for example ABT, FCX, MON, RIG.

BTW: talking about RIG: crude came down to the $86 level and is also ripe for a reaction. Remember: falling interest rates effect the Dollar, which effects crude prices. A slowing economy scenario might be priced into oil prices.

To be clear: I still believe, we are entering a bear market. There will be more negative news in the near future about consumer spending and inflation worries. So I wouldn't be too aggressive going long.

Wednesday, January 23, 2008

That was it ???

We had surprising .75 percent point rate cut yesterday and the markets are heading for a weak open. So that was it? A rate cut rally should have boosted the Dow by 500 points easily. I'm very curious about the market's direction today, but I wouldn't call a bottom yet. We're obviously still in negative sentiment mode: negative reaction on good news (rate cut) and strong negative reaction on negative news (AAPL earnings). I went long on the S&P yesterday, but closed that position again.

Monday, January 21, 2008

Shorting the S&P? Too Late!

TraderMike was analyzing his blog hits the other day and found out that many readers came to his site by googeling "shorting the S&P". He took that as a sign that we are in the final stage of the recent stock market drop.

Well, I don't get as many hits as TraderMike, but experienced the same phenomenon with my blog. So let me express my thoughts on that topic:

If you start shorting the S&P at this point, you have a 50/50 chance to succeed IMO. Sure, we could have another 500 point drop in the Dow this week, but there is also a significant chance for a rebound, maybe due to some surprising FED interaction. I would never enter a trade with a 50/50 chance for success. That is not a trade, it is called a gamble.

If you really feel like shorting, here is my favorite vehicle for retail traders: the ProShares UltraShort S&P500 ETF (SDS). It corresponds to roughly twice the inverse of the daily performance of the S&P. So you are actually shorting by going long in that ETF. The beauty is that you don't need a margin account and could even put the vehicle into your IRA.

Sunday, January 20, 2008

Apple (AAPL): it will be the Guidance, Stupid!

I'm really tempted to write about Apple in the light of next week's earnings report. If you read comments of AAPL fans on Google's financial chat, you get the impression, the stock will go through the roof after earnings. Frankly: I think the opposite will happen.

Basically, all the facts are already well known. Steve Jobs talked about IPod/IPhone sales numbers during his Macword keynote, so it is pretty unlikely that Apple will be able to surprise on that side. The big question is: what is the outlook for 2008? And here, I guess, projected US consumer spending decline will take its toll. Also, Apple has pretty much saturated the market for IPods and it could happen that we finally see that in the 2008 guidance. On the plus side, better than expected international IPhone sales for this year could be the source of positive future earnings.

Take Apple's failure to surprise on the guidance side and the highly negative market sentiment, and I can see the stock down at 140 by the end of this week.

How will I play that? Maybe open a SHORT position after-hours, after earnings on increased downside momentum (which would be against my playbook for this week, though. We'll see).

Game Plan Week of Jan 13 2008: Entering the Panic Zone

Last week's game plan played out nicely in terms of growing profits. I haven't closed down my short positions yet, though. Given the growing momentum, I have to apply one of my rules: "Let the profits run".

So far, the market was driven by FEAR about recession, inflation and deteriorating earnings. Last Thursday, we have officially entered the PANIC ZONE. Market participants started selling even defensive stocks with positive outlook, such as companies in the pharmaceutical or agricultural sector.

Since weeks, I was hoping for panic to develop as a sign of a bottom. Unfortunately, I feel we are just at the beginning. Several posts highlight the notion that oversold, high-momentum bear markets can stay oversold for quite some time:

US Market Gets Even More Oversold

Bear Market Rules Apply

Catalyst for a real panic could be the deteriorating situation of the big bond insurers, such as MBIA. Some articles point out the hope for positive earnings next week. Several banks and tech companies are about to report. I think, it is what it is: just hope. The market takes every positive news (GE, IBM earnings last week; government stimulus) as an opportunity to sell. The real problem of the market are the financials. As long, as
there is no solution for the US credit problems and the FED doesn't show that is "in front of the curve", FEAR will dominate.

So what does that mean for next week: let the profits run (if you have profits on the short side), but scale out of SHORT positions in anticipation of a reaction rally. Of course, I wouldn't open new short trades at this point. I still wouldn't play to much the contrarian in this environment. GO WITH THE FLOW.

Tuesday, January 15, 2008

Current Swing Trade Stocks

Since I would describe my approach as "Holistic Swing Trading", which tries to combine technical, fundamental and sentiment analysis, the stocks that I trade change frequently. I would like to have a story attached to the company, despite the short term nature of the swing trading approach.

So here are some of the stocks/themes that I currently have on my radar (I actually maintain a list of over
100 stocks for swing trading. I update that list during the weekends):

LONG Swing Trades

AAPL - if Steve Jobs presents something cool today, AAPL could be some nice momentum play for the two or so days

GENZ - Biotech play, pretty resilient in the current bear market. Diversified company protects against volatile price swings

CLRW - Clearwire, Wimax play. Speculation that Intel might invest or even take them over. Risky, so keep your stops tight.

APOL - "University of Phoenix". When employees get laid off in a shrinking economy, they start going back to school.

C - If the market reacts positive on the Q4 earnings report, the banks might have found a bottom. Cross fingers.

EDU - Teaching English to the Chinese.

GLD - Gold bullion. I'm waiting for a dip to get in.

SHORT Swing Trades

NILE - Negative reaction of the market on the (positive) earings pre-announcement on Monday. The Internet doesn't protect them from weak consumer spending.

AMD - They just lost the race against Intel. I'll get in after I see some short covering

F - They rely on Trucks. Not quite the place to be in the face of higher gas prices. Increasing competition (Toyota Tundra). IMO the worst of the big 3 automotive OEM's.

NFLX - let's see what Apple presents. Might get hammered if AAPL announces movie rental services

PHM - I would like to short others (HOV/BZH), but I can't get these stocks from my broker for shorting anymore. If one of them runs out of business (which will happen IMO), PHM will be pulled down as well.

Saturday, January 12, 2008

Game Plan Week of Jan 13 2008: Showdown Time

Last week week worked out quite well after gradually closing down my short positions. What surprised me, though, was the weak reaction of the market after the Dow has been down by almost 1000 points during the last weeks. We had quite some potential positive catalysts: Bernanke talk ("we'll probably cut by .5% points) as well as the Bank of America - Countrywide deal. When stocks reacts that way on positive news, it only tells me one thing: we are in a Bear market. There was some interesting positive action in the financials on Friday: speculation of more takeovers to come. Given the fact, that quarterly earnings are due next week, the banks might have started to create a bottom. I wouldn't bet my house on that yet, though. At least, I wouldn't touch them from the short side at this point.

The major indices are at important support levels ("August lows") at this point. So if these levels don't hold, I expect that we'll see a lot of selling. Given the extremely bearish sentiment of last week, I would see that scenario as more likely. On the other hand: the market is VERY oversold, we have a lot of short interest, so on good news we could see some major up move as well. Bottom line: it is showdown time.

So here is how I'll play that: I'm shorting the S&P, but I will quickly reverse that position should the Index break to the upside above 1420. Otherwise, I see a downward potential to the 1320 level. That's thousand points! So the risk/reward ratio of that trade is quite positive.

What could be the negative catalysts? Here's my laundry list:
- earnings & outlook weaker than expected
- Inflation numbers (due mid of the week) worse than expected (expectation isn't high, though)
- Oil breaking the 100 (I don't think so because of weakening economy)
- Drop of international markets (what if China sinks by 10% on Monday?)

Honestly, I hope that scenario will play out, because I kept my powder dry so far and I really would like to go long again big time, which I would of course do after a major sell-off.

Good luck & fasten your seat belts.

Saturday, January 5, 2008

Game Plan Week of Jan 6 2008

As everyone knows, the new year started with a big bang last week. Since I was building SHORT positions in the last 2 weeks, I was able to finish with a slight gain. Unfortunately, my AAPL position dragged down my portfolio and I had to close that trade on Friday. Some stocks showed some very interesting price action so I took the opportunity to open a long position in GENZ, MORN and STP. Going into next week, I'm 50% short. I expect to gradually close down these shorts if momentum should fade. I'll probably don't trade the next upswing too aggressively since I believe that we are just about to enter a bear market.

One interesting trade I took on was to go short with COP. If recession fears will dominate the market in the next weeks and fear of political risks in Pakistan can fade , oil could actually go down. Don't forget that the strong resistance $1oo level for crude. Let's see how this'll work out.

At this point, I don't think there will be too much upside potential until the end of January: the market really doesn't believe in substantial interest rate cuts of the FED and earnings reports will probably not look too good. And BTW: it is time for some more negative subprime news again. The banks still have a lot of skeletons in their closets.