"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

Monday, March 24, 2008

Game Plan Week of March 23: Don't get too Excited

Last week was a perfect example on why it makes sense to have a game plan: I anticipated a FED rate cut and envisioned continued strength in the commodities sector. Obviously, the later didn't happen. Prices where not moving the way I wanted them to move, so I just got out of my Gold position to lock in some profits. I've been long of Gold since early January.

Here is what I found remarkable: several writers argued that disappointment about the FED's 75 base point rate cut have triggered the sell-off. I don't buy that. In that case, the stock market should have sold off as well, but we saw a classical post-FED rally so far.

My thesis is (and I can't prove it yet): the big guys are starting to shift their money back to equities. Remember: big (hedge) funds need to sell when they can, not when they want to. I'm watching commodities very closely, we'll see next week how this plays out.

Anyways, let's face it: the US equity market had three problems:

1) Liquidity crises
2) Inflation
3) Housing bust

The FED solved 1), if commodities keep falling, fear because of 2) will diminish, so there is only the housing problem left, which unfortunately is the most difficult one.

Some market observers see a continuation of the rally from last week. I wouldn't be too bullish at this point though. As long as 3) isn't resolved, the market will not recover significantly. The fact that we probably have found a bottom doesn't mean that we are in a new bull market. Key is to see how the market will react on negative news, especially with the financials. So the way to play/trade this is to take profits on long positions earlier than later. Should the S&P end up at the upper boundary of its trading range, I would even consider additional shorting.

Tuesday, March 18, 2008

The Credit Crunch is OVER (for now)

To my surprise, despite all the negativity, the market couldn't break the January lows yesterday. Here is why: the FED actually opened the discount window to all the brokers. That was BIG news. Basically means, the liquidity crisis is over.

In addition, the VIX showed an extreme reading of 32 at a major resistance for the S&P, which is a sign of extreme fear. So from the contrarian standpoint, it is buying time:

The short term catalyst is on the horizon: brokers report this morning and the FED decision in the afternoon. It is likely that they lower rates significantly, which will be taken as a positive by the market.

So here is how to play it:

- buy Goldman Sachs (GS) after earnings if they are positive. (Unfortunately, I don't have the time right now to discuss the chart)

- get into Toll Brothers (TOL). Homebuilders have shown some impressive strength in the last weeks, after taking care of the liquidity crisis, the FED likely will try to solve the housing problem.

- get into Apple (AAPL), if you are not already in. Nice chart, great relative strength in the last weeks. I wouldn't be surprised to see them around 140 by end of the month.

Happy trading

Monday, March 17, 2008

Will We See a Panic Today?

This will be an interesting day. I think it is quite possible that we'll have a panic, triggered by two major events on Sunday:

- the sale of BSC for two bucks per share, which is a joke. The message to the market: things are so bad that Bear has to be given away for free.
- the FED's move to cut the discount rate by 25 base points. Again: how bad are things if they do that two days (on a Sunday!) before a regular meeting? To me a sign that even the FED is panicking.

So how do we play this?

- Let's see if we get a strong down-trending day today. If so, I might be increase my short positions with the goal to close everything down later today or tomorrow.

- The FED has to cut tomorrow. A significant move (100 base points) will send Gold prices to the moon. A lot of traders have sell orders sitting at the $1000 level and will be squeezed out. So I'm adding to my GLD ETF.

- I'm expecting some major POSITIVE news the next days (Government bails out homeowners?
Huge coordinated intervention by various central banks). So even if the DOW plunges 1000 points today, it might run up 500 tomorrow. So take the profits on the SHORTS.

Thursday, March 13, 2008

A little SHORT Swing Trade of the Financials

The chart of the financial sector stock looks ripe for a little swing trade on the short side. The trend turned fairly quickly after Mondays big rally. There seems to be a lot of fear in the market after the Carlyle hedge fund news. Who will be next? Fear fuels decline. I also wouldn't be surprised of a couple of fire sales in the next weeks, which could even accelerate the downtrend.

From a swing trading perspective, we are in the middle of the channel again, with some nice stop criteria. (I keep my stop close due to the increased volatility). I speculate that we will break the January lows. The way to play this is to open a position in the ProShares SKF.

The only issue: there is some negative news this morning and we'll open to the downside big time. Let's wait until the fog has lifted after the open and then pull the trigger.

Tuesday, March 4, 2008

You know what's scary?

It is scary when:
  • Ben Bernanke says "more needs to be done to help troubled homeowners, including a broader effort to write down the principal of some problem loans." Translation: I'm done. I can't help anymore [by lowering interest rates].
  • some Dubai investment dude says that "it'll take more than the petrodollars of the Abu Dhabi and Kuwait sovereign wealth funds, and Saudi investor Prince Alwaleed bin Talal, to save Citigroup". Translation: We're done. We can't help anymore.
Fasten your seat belts. We'll see a market crash soon.

Sunday, March 2, 2008

Game Plan Week of March 2: Anticipation

Speculation in its most basic sense means to anticipate the future: "A speculator is a man who observes the future, and acts before it occurs." - Bernard M. Baruch (1870–1965), financier and political adviser.

I was reminded of that definition when looking at the S&P500 chart this week. A lot of observers (bloggers, analysts) talked about the recent trading range of the S&P and even in Friday's action the index didn't break the lower resistance:

Can we anticipate a breakout to the downside? I argue that the underlying driving sector, the financial one, has already broken out and we therefore will see another bear market leg in the S&P soon. Just check the chart of the IShares Financial ETF (IYF):

From the fundamental point of view, we could be surprised by some positive catalysts this week. What if the AMBAC finally finds some money to keep their rating. What if the FED is doing an emergency rate cut again? So shorting can be risky this week. Nevertheless, I think the downside risk outweighs the upside potential at this point, so I would open some small short positions.

On the long side, I'm looking into Genentech (DNA). The stock broke out after getting approval for their Avastin product for expanded treatment use. I'm waiting for the consolidation of the last days to end to pull the trigger: