Meet Me At The Cross-roads

Technically we are at cross-roads. Wednesday or possibly Thursday may turn out to be an important direction-indicating day from a short term view. Why you may ask? The charts paint the story. The best example is the S&P 500 charts. The daily chart is hitting against the 200 day moving average (MA). The same MA that barely two weeks ago was a major support is now a major resistance. The weekly and monthly charts are slightly encouraging too with some potential upside. But the candles are looking, shall we say highly under-nourished? Bottomline - pay a close eye not only to the close tomorrow but also to the lower and higher end of the candle. If there is a decisive move on either side with sustained action for the following 2-3 days, it could be used with reasonable reliability to portend the short-term action. Note that 1454 is the 200 day MA. My personal bias is towards the upside due to other technical indicators flashing a buy. But I have learnt not to ever take 200 day MA for granted..ever! If there was one single MA that you had to use, it would be 200 day. It is not overused and abused as much as the 10, 20 or even 50 day MAs due to obvious reason that most of the traders don't have patience for it, which makes it all the more meaningful to determine bounces or fall throughs. Also notice how major news events always seem to happen around a 200 day MA. Spooky, isn't it?

Technical speak aside, the markets would finally have gotten time to digest fed actions and fed speak in the last few days. Needless to say, it was a potpourri and media has remain divided as I elaborated in my last post. Not only that, the last few days have also seen institutional buyers gradually step back in as evidenced by the NYSE Tickscore, usage of which was first pioneered by Bret Steenbarger. The rest of the week could tell us if the institutions are finally gonna get off the fences and join the procession with greater numbers.



Finally the Feds are on offensive right now. My experience suggests it is better to align with them on for the short-term as also voiced in my last post.



Note that I am only suggesting betting on short-term direction and not intermediate term direction. For intermediate direction, situation is still murky. And thats true not just from a technical point of view but also fundamentally as more dirt or uncertainty would likely come out from the mortgage muck (Keep in mind we may also see guidance from brokerage houses in the next two weeks who would almost certainly be prudent. And you know what prudence means in the current markets!).

And then there is the whole fed angle and what it means in intermediate term. Lets suppose the Fed actually cuts the rates yadi yada yada, which the futures are betting with a certainty it would. How would the Fed really know by early September, the outcome of something that is still unwinding at that point in time? It would be interesting to understand what happens when the Fed takes action in the midst of a situation that has still not unfolded completely i.e. lack of enough data points. Some argue this may lead to a negative trend. I found one of the better illustration of this hypothesis in this article from Doug Kass in theStreet.com who recently got sorta pooh-poohed for his bearish undertones on a CNBC show.

New Picks


AAPL Long - This is based on technicals and the fact that Apple got dragged down along with other stocks. Redemption trades by the Hedgies may have also taken a bite out of it. At current prices, it looks attractive for a quick trade. Candles are pointing upwards with the rest of the technical indicators. That said, it is hitting against its 10-week resistance and its 20 day MA. Ergo, we are gonna keep a tight stop on it. 5 % decline and we sell the sucker. I will later post a mini-update when I am able to buy it successfully. My entry point is 129 or lower. I am guessing the futures will be higher driving the prices higher in the morning and the best entry point would be during a pull back after an initial surge of the morning, if there is a pull back.

A Stray Thought
How do you know the difference between someone feeling young or old? My answer - If you are young, technology tries to keep up with you and if you are old, you try to keep up with the technology

Stay young :)

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Rathi Portfolio Holdings

Open List

• BZH (Stock) - Sell Short - Opened on 2/14/07 at $41.54. Currently at $11.21 with 73.01% Gain
• ISRG (Option) Jan08 130 Call - Buy Long-Opened on 3/8/07 at $9.60. Current at $79.50 with 728.13% Gain
• GLD (Stock) - Buy Long - Opened on 7/10/07 at $65.61. Currently at $65.07 with 0.82% Loss
• PLUG (Stock) - Buy Long - Opened on 7/16/07 at $3.25. Currently at $2.56 with 21.23% Loss
• SNDK (Option) Jan 08 50 Call - Buy Long - Opened today on 8/20/07 at $9.70. Currently at $9.30 with 4.12% Loss
• ANF (Option) Sep 07 70 Call - Buy Long - Opened today on 8/20/07 at $9.60. Currently at $10.80 with 12.5% Gain
• AAPL (Stock) - Not yet bought.
  

Closed List

• CRDN (Stock) - Buy Long - Opened on 2/14/07 at $56.44. Closed on 07 at $79.37 with 40.63% Gain
• TSO (Option) Jan 50 call - Buy Long-Opened on 7/10/07 at $14.40. Closed on 7/14/07 at $12.70 with 11.81% Loss
• CTXS (Option) Jan 08 30 Call - Buy Long - Opened on 7/18/07 at $6.90. Closed on 7/23/07 at $9.20 with 33.33% gain

Total Percentage Gain/Loss of Closed List Since Inception: 32.7% Gain

Could Someone Please Tell Countrywide and Ditech to stop their TV Ads?

Market Commentary

In a recent businessweek article, the 1920 Economist Knight was aptly referenced for his understanding of the difference between Risk, which the Markets know how to deal with, and Uncertainty, which the Markets don't - "Risk is what you face when you have a basic understanding of how things work but there's a degree of randomness or luck involved. Knightian uncertainty is when you're really just stumbling around in the dark."

I believe we are currently in the latter category. We are stumbling in the dark. It is not often that I have seen the media, be it the veterans in financial journalism or blogs like this one, so divided over the fate of market over the next two to three months. Parallels are being drawn to 98 drawdown and 87 crash. Some examples are here, here, and here. Speculations are being made on either side of actual fed fund rate reduction (the fed fund futures seem to be pricing in at least 50 basis points rate cut by the next FOMC meeting). Some examples are here, here and here.

Everything said and done, what do we need to know in terms of the market direction? My feel is last Thursday or Friday could not be picked as an absolute bottom. How many times have you seen a market stage a V-shaped recovery? The fact that we may revisit the bottoms or close to those levels is also bolstered by the degree of uncertainty as to what is exactly going on. Could we see a short term recovery period? Yes that is highly possible. Would it be sustainable? My answer would be no..not until we get back close to the bottom of last week.

At times like this, it makes sense to also keep an eye on the longer term trend. I would opine that the longer term still remains bullish. Besides I would consider it stupid to ignore a stance by Fed that pretty much says "we will take whatever actions necessary to keep the markets stable" (paraphrasing from here, here and here). Okay so the Fed may not be the best timers in terms of their actions but you at least know that they are not asleep. And that speaks volumes. There are two things you never bet against - the tape and the Feds. Bottomline - I will trade for short term in volatility and good stock picks. I will trade with a bullish intent for the long term.

If you need to understand more on the underpinnings of how the Fed is currently thinking without the interpretations of journalists, a new academic paper has been published on the Fed site on households becoming indebted relative to their assets. I am sure there are going to be lot of interpretations. To me, it seems to indicate Fed's inclination towards further rate cuts. Seems like one of their key objectives is to make access to credit for the little man, easy. Hmmmmm...



New Picks

Finally after a long draught, I have not one but two new picks!

ANF Long - Abercombie reports earnings August 22nd. This is a short term trade by buying September options. I am betting that the earnings report will have a surprise to the upside. Fundamentally, ANF can't seem to stop doing the right things in expanding and honing at the same time, their core competencies in targeting the young demographics. You know what is really interesting about young teenagers? They are likely to spend more money on clothes than their parents. And it is NOT their money! So there is no remorse in buying. Positive vibrations, anyone? And nobody knows better to capitalize this simple fact than ANF. I don't mean to imply every teenager gets a generous allowance from their parents or that ANF is completely banking on reckless spending but then this psychology plays into ANF's hands especially when they are firing on rest of the cylinders so pretty well. For numbers, go to any financial site and you will be impressed. Two things that I would highlight here in favor of ANF are its extremely strong brand and the best profit margins in the Industry (currently at 12.52%). Not to mention a consistent revenue growth that has outpaced the industry average. Because of all this and the past earnings estimates, there is a very good chance the earnings report this week may give a reasonable lift to the stock.

The Trade on ANF - Bought September calls with strike price of 70 at 9.60. You will possibly end up getting the same price if you put in your orders as soon as the day begins since the market action was flat to down towards the close for this stock.

SNDK Long - This is again a short term trade plus the stock has good fundamentals going for it. I will admit though my trade on this one is primarily based on chart patterns. The daily and weekly charts are showing bullish signs along with half a dozen reliable technical indicators.

The Trade on SNDK - Bought January calls with strike price of 50 at 9.70. Again there is a good chance you might get the same trade in the morning since this is where the last price was.

Please note both the above trades are very short term and I wouldn't risk playing them if you are not adept at options trading or not disciplined enough to put tight stops. SNDK is more speculative than ANF.

Some Stray Thoughts
Okay I have to vent but I will keep it brief. If I had to pick my favorite financial publication, it has to be hands down - Barron's. And yet reading the cover of this week's issue made me slightly queasy. To quickly summarize, it blasted Cramer (Jim Cramer of Mad Money, CNBC) and went all out to discredit his stock picking ability. Now I am not a big fan of Cramer and I agree many of his picks stink. But the man has wealth of insider knowledge and a wonderful insight on position and intermediate term trading. He in fact says not to buy his picks the next day due to the fabled "Cramer bounce" and also tells you to do your homework. What made me queasy was not that I feel very bad for Cramer but the fact that a publication that I put on pedestal in terms of credibility had to take a cheap shot when there was absolutely no need to. It was a cheap shot in more ways than one. To a certain extent Cramer may have deserved it because he underplays the role of timing in his stock picks. But he definitely doesn't deserve something like getting anointed with a dunce cap on the cover of a reputable financial publication. Allright I promised to keep this one brief so I will end my rant here. I will continue to be a big fan of Barrons though and I hope such pieces of journalism are far and between. Or wait a second .. Mr. Murdoch, have you already started interfering? :)

Open List

• BZH (Stock) - Sell Short - Opened on 2/14/07 at $41.54. Currently at $11.35 with 72.68% Gain
• ISRG (Option) Jan08 130 Call - Buy Long-Opened on 3/8/07 at $9.60. Current at $66.70 with 594.79% Gain
• GLD (Stock) - Buy Long - Opened on 7/10/07 at $65.61. Currently at $65.12 with 0.75% Loss
• PLUG (Stock) - Buy Long - Opened on 7/16/07 at $3.25. Currently at $2.64 with 18.77% Loss
• SNDK (Option) Jan 08 50 Call - Buy Long - Opened today on 8/20/07 at $9.70
• ANF (Option) Sep 07 70 Call - Buy Long - Opened today on 8/20/07 at $9.60
  

Closed List

• CRDN (Stock) - Buy Long - Opened on 2/14/07 at $56.44. Closed on 07 at $79.37 with 40.63% Gain
• TSO (Option) Jan 50 call - Buy Long-Opened on 7/10/07 at $14.40. Closed on 7/14/07 at $12.70 with 11.81% Loss
• CTXS (Option) Jan 08 30 Call - Buy Long - Opened on 7/18/07 at $6.90. Closed on 7/23/07 at $9.20 with 33.33% gain
  

Total Percentage Gain/Loss of Closed List Since Inception: 32.7% Gain

Volatility Is The New Black

My last post correctly predicted the past week's ebb and flow. It almost seems we had formed a pattern in the last few weeks where the markets would rally in the first half of the week and exhaustion and fear would set in by the end of the week. The bottomline though is predictions aside, the next few weeks consist of wide swings on either side. If you trade in volatility you could mint right now but trading volatility requires nerves of steel.

No new trades for our portfolio for now. I continue to hold my longs. GLD is looking it may continue with its own big swings as it kept demonstrating so in the past couple of weeks. I am long term bullish on gold though. As for our BZH short, many seem to be surprised to see a housing stock rise amid the turmoil. I think this is a fake out rally. BZH could rise more before it soon begins its downtrend again. It helps though to know that we are still up by more than 60 % in BZH in spite of its recent rally.

If I get time from my work on Monday evening, I might be looking to place some new short term trades. I will keep you posted.

Good luck and Hang in there
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Open List

• BZH (Stock) - Sell Short - Opened on 2/14/07 at $41.54. Currently at $11.30 with 63.43% Gain
• ISRG (Option) Jan08 130 Call - Buy Long-Opened on 3/8/07 at $9.60. Current at $72.40 with 654.17% Gain
• GLD (Stock) - Buy Long - Opened on 7/10/07 at $65.61. Currently at $66.57 with 1.46% Gain
• PLUG (Stock) - Buy Long - Opened on 7/16/07 at $3.25. Currently at $2.77 with 14.77% Loss

Closed List

• CRDN (Stock) - Buy Long - Opened on 2/14/07 at $56.44. Closed on 07 at $79.37 with 40.63% Gain
• TSO (Option) Jan 50 call - Buy Long-Opened on 7/10/07 at $14.40. Closed on 7/14/07 at $12.70 with 11.81% Loss
• CTXS (Option) Jan 08 30 Call - Buy Long - Opened on 7/18/07 at $6.90. Closed on 7/23/07 at $9.20 with 33.33% gain

Total Percentage Gain/Loss of Closed List Since Inception: 32.7% Gain

Update - Market Commentary and Open Positions

Market Commentary

It is time to continue to hang tight and place trades accordingly. My past posts have had a bearish stance and sure enough the markets have behaved in line with that expectation. Going forward, I am surely not betting on a bullish trend. Expect Volatility to remain high and expect the market swings to the extreme. My post about last week expected to see a relief rally in the first half of the week. Last week turned out to be just that with the rally in the first half and the sell off happening in the second half. We have turned outlandishly oversold in the short term and there is an inkling that we could see a relief rally again in the first half of the week. There are two other factors that may also support the manifestation of rally and possibly lend credence to it. First the Fed Committee's statements and second, the Cisco earnings. A lot of experts and smart money are betting on the fact that given the wreck in credit markets, it is highly likely the Fed will make a statement to show preparedness to fight further onslaught of credit issues, if not cut the rates immediately. Secondly, the tech bellweather Cisco will report its earnings the same day. Wall Street earnestly listens to John Chambers partially because it believes nobody paints a better picture of tech capex spending as the Cisco earnings and guidance. These two could be another reason of the probability of a rally next week if they indicate preparedness to fight and paint a picture of optimism at the same time.

That said, I would still question the sustainability of this rally. Not because I am intrinsically pessimistic. But simply because it is too early to predict until the drama of credit market unfolds further. We don't need to be heroes trying to pick a bottom right now. We could do short term trading on rallies but that's about it. Or we could pick some really strong stocks on the long side and short some weak links.

A quick note on open ISRG position

In a past post, I mentioned we will keep a close watch on ISRG and pocket some profits by taking half off the table at the right time. The right time is not here yet. In a very encouraging move, ISRG has started forming a base just above 200. This may result in another shot at an upswing. We could potentially see this upswing as early as next week. If ISRG falls below $200 support, I will take half off the table and lock in some profits.

A quick note on open BZH position

I picked BZH short in the first post of this blog back in February 2007. It has gained a whopping 72 %. BZH had to face some ugly rumors this week. While the rumors were unfounded, the fear gripping the markets BZH is in is very real and this stock is in a very precarious position not to mention its consistently unimpressive earnings. We will however soon look for cover if there is what I would call a false buoyancy in the housing market

A quick note on Open PLUG position

PLUG will be closed soon sometime this week given the worsening situation. I will provide more explanation with the trade during that update.

No new trades for now. Hold. We will come back with some trades at a good entry point most likely mid week.

The Rathi Portfolio Holdings

Open List

• BZH (Stock) - Sell Short - Opened on 2/14/07 at $41.54. Currently at $11.30 with 72.80% Gain
• ISRG (Option) Jan08 130 Call - Buy Long-Opened on 3/8/07 at $9.60. Current at $87.50 with 811.00% Gain
• GLD (Stock) - Buy Long - Opened on 7/10/07 at $65.61. Currently at $66.69 with 1.65% Gain
• PLUG (Stock) - Buy Long - Opened on 7/16/07 at $3.25. Currently at $2.76 with 15% Loss
  

Closed List

• CRDN (Stock) - Buy Long - Opened on 2/14/07 at $56.44. Closed on 07 at $79.37 with 40.63% Gain
• TSO (Option) Jan 50 call - Buy Long-Opened on 7/10/07 at $14.40. Closed on 7/14/07 at $12.70 with 11.81% Loss
• CTXS (Option) Jan 08 30 Call - Buy Long - Opened on 7/18/07 at $6.90. Closed on 7/23/07 at $9.20 with 33.33% Gain
  

Total Percentage Gain/Loss of Closed List Since Inception: 32.7% Gain