The Enigma of "Ben"evolence

My portfolio benefited from the cuts. I had bought a few rate cut sensitive positions such as GS and XLE to make a quick profit as mentioned in my last post. Refusing to be a Pig, I have sold half off of the positions that moved higher and monitoring a trailing stop on others such as the Goldman trade I documented in my mini-update post. I also placed trades on some stocks that I think would move nicely in the next few months such as AGE, DKS. AG Edwards and Dicks Sporting both have good charts, great price action and lot of support. In addition, these stocks stand out because the underlying fundamentals remain good. Dicks Sporting seems to be expensive but as I mentioned in my last post, it has a significant percentage of float that is short (17%). So we could take advantage of some good short squeeze in days to come. We already witnessed some of it in the aftermath of cuts. But there is more squeeze left in the sucker. On the short side, it was a very good call to cover the short trade on BZH just before the rate cuts although I think we could reenter the same trade after the initial euphoria dies out. And that brings me to the benevolency of Mr Ben and the cuts.

Some odd observations. First off, I am a tiny tiny creature as compared to the immense analytical prowess, intelligence, and sophistication of the intricately vast machinery at the disposal of federal reserve. Not to mention the horsepower of all the Governers' combined experiences. So it follows there has to be at least some logic behind the rate cut decision, and I don't want to sound I am questioning that. Anybody who does that is trying to show off limited knowledge unless they have the access to the same machinery and data that Ben has.

That said, here is my question - if the Fed thought that we are in such a dire need for a rate cut that made them slash 50 points, why did they wait till the FOMC meeting? The only logical explanation seems to be that from Fed's point of view, 50 points must not be that dire after all in the overall context and in the big scheme of things to come. And if so, I would reason that there may be more to come.

Secondly, isn't it odd that the evening before the fed announcements, E*Trade and Bank of America would come up with announcements (here and here) that could have been made days earlier or days after? It seems it was an obvious overture. Maybe a last ditch effort to sway Fed opinion? In fact, in days leading to FOMC a few other major institutions seem to be releasing bad news too that were in hiatus since end of August. They looked like setting a stage for Fed in a way that when the rate cuts happen, the upward swing of markets continue unabated at least for some time.

Finally will someone tell me if Ben just loves to slaughter the short traders as mercilessly as possible? That was a rhetorical question by the way. Remember the Thursday of August 16th when Fed announced the discount rates slash? That was timed just before the options expiration and just after one of the biggest drops of recent times. Obviously it was designed for maximum effect. The shorts were butchered. Yesterday there was an unusual number of shorts and VIX calls going into September expiration. Coincidentally, maximum effect would not have been 25 points. Maximum effect would be a cut deep and wide. Although I am in awe of Ben taking the bear by its horns (excuse the misplaced pun here) with great timing two consequtive times, the coincidences seem to be building up. Some experts believe it is normal and in the very nature of the rate cuts that they happen not only as a result of analysis of sophisticated data elements but also when the Markets are in deep red to deliver maximum effect. By the way, this also explains why the Market moved up 300 points instead of declining on fears from a 50 basis points. This whole phenomenon of Fed's powers to manipulate the markets may only exist at the beginning of a series of rate cuts though because more and more rate cuts just indicate the Fed is stretched to its limit and that may not be a good thing. My conclusion is it almost seems the Fed is telling us that it is okay to go with what I consider as the grand daddy of all assumptions - that the market is a leading indicator of the overall economy.

And finally if indeed the Fed wants us to believe the Market is a leading indicator, then isn't it at least mildly perverse to think that most of the data that Fed pores over may largely comprise of lagging indicators?

Believe it or not the above rant could translate into an anectodal yet logical strategy to trade. Given the above discussion, it may only seem logical to try to position your bets on the long side just before the FOMC meetings especially if they are close to options expiration days. No guarantees of course because the Fed could cut a rate in between, but this concept is still worth a try.

New Trades
Tomorrow and day after, if the market shakes out some of the euphoria, I will enter some new positions and close some existing ones. Here is what I have on my radar.

Sell remaining GS by putting a trailing stop. For me, GS was a pure trade and given the duration of this contest, didn't make sense to hold it longer. I do thing it is a good long term investment outside of this contest.

HOC: Holly corporation. Sitting and trying to form a weekly base around 65.5. Even one point up on a weekly basis would push it above the middle bollinger band on the weekly charts and that is a very good sign. I may look into buying it between 66 and 67 depending on daily and hourly price action.

CCL: Carnival Corporation. Beautiful chart patterns. It actually works really well with what I think above oil prices eventually finding a ceiling and coming down.

There are couple of technology stocks I am looking at too and will post later in details. I am going to look at how the markets shake out this week and then start placing orders at attractive entries.

Please note due to full time job, some times I announce my trades after I have secured the position but usually the same day. Having said that, I am hoping my posts give you some ideas to consider for your own trading.

(ps no updated portfolio attached tonight due to busy work load at full time job. Will update it soon. In the meantime you can refer the portfolio list's last revision in my prior post.)

Good luck
Krish

Quick Mini Update - Sold Half of GS Calls for 120% Gain

Our position on Goldman Sachs worked like a charm as we picked it up at a perfect time in my last post. We don't know how long the euphoria will last and when will investors start seeing the dark side of the equation. But rest assured the mess is still not over. For now we will joyously sing and dance with the market and take half off the table. So I just sold half of my GS January Calls for a 120% gain at an option price of $24.2 (Initial price $11 as documented in the last post). Most of my detailed commentary from my last post still holds. Check it out for observations and detailed portfolio listing. I will post my usual and more detailed commentary update along with updated portfolio listing by weekend. Oh one more thing - I am letting the rest of the GS positions ride the wave and have put a tight trailing stop. Enjoy.

The One Millionth Opinion on Fed Cuts

Fed Cuts
Much has been said about the Fed cuts. For me, it boils down to two things - (a) Is there something tradable in short term? (b) Is there a significant macroeconomic effect as a result of the single cut?

The answer to (a) is simple - yes. The answer to (b) is not simple but does exist - none.

Lets quickly talk about (a). Yes there are some bold trades. Financials are poised to rise. I am trading till the day of the cut and then selling into the news. But wait, there is more. You remember our gold ETF position that is open in the portfolio? It has risen nicely, hasn't it? Well guess what..next week would be the time to sell! Sounds counter-intuitive given the rates are gonna cut and the dollar is diving but this is the time to sell it! Will we miss a few points up - probably. But you are selling into a rally a metal commodity that has been very volatile and seems to have strong technical resistance in the 710-720 range. At a more fundamental level, the rate cuts would most likely be puny, which means that the hangover effects would drag gold down and it is quite possible that the dollar slide may halt at least temporarily.

Now lets come to (b) i.e. significant economic impacts of a single rate cut. In my recollection of recent history a single rate cut has not done much in terms of making a dent beyond short term moves in the market. Besides, I would argue the effects of a rate cut are not seen until at least a few weeks after, if not months, in terms of impacts to economy. In other words I see no reason to be too scared or too euphoric about the impending rate cut especially if it is only 25 points from a long term perspective. Let the crazy news anchors go ga-ga over it.

On the other hand if this rate cut marks the beginning of additional rate cuts, which even though remote, is a possibility, then the event could be a catalyst to set a ball rolling that we don't know where it would end. The conflicting signals of deflationary and inflationary data make it slightly risky to accurately predict where it all ends should there be successive rate cuts.

Portfolio and Market Commentary
Lets talk about our portfolio standing. If you remember from my past posts, I have been maintaining neutral to bearish trend since July and it has served us well in our stock picking. While individual investor is getting frustrated over the market uncertainty, our portfolio is up by 72.53% in closed positions and up by 26.68% in open positions. Something to feel good about, isn't it?

Next week, I will watch the financial earnings as closely as the fed cuts since I believe the earnings would give me more meat than the Fed.

S&P is still in a range bound mode. The range is getting tighter. In other words, it has to break out one direction or the other. Some chartists may argue they are seeing wedges or triangles in the charts and S&P wants to go higher. That may be so but for the next month or so, we will get out of the business of predicting and focus on short term trades and capital preservation should market head down few days after the cuts.

New Trades

I have closed our oh-so-beautiful BZH short position for a whopping 78% gain. Also closed the SNDK call option when it hit my 25 % trailing stop loss for a 25.77% Loss. I initiated today an agile options trade on couple of financial stocks such as Goldman to leverage off of the rate cut event. I also initiated an agile trade on Apple options. Finally, I opened a stock trade in Dicks Sporting.

GS Long (Oct 185 Call Option) - I am betting on Goldman reporting positive results next week. Once again the idea is to buy now and sell into the news. Keep in mind we don't want to keep anything open precariously long enough, unless it is for a really long haul. Which brings me to my next trade.

AAPL Long (Oct 125 Call Option) - Apple hit support while going down and is rising back up again. Again a short term trade and hence I am using options. Will get out after pocketing upside momentum or stop loss.

DKS Long - Really solid fundamentals. In spite of growing revenues and a good growth story, traders continue to short this stock. They are somewhat justified since the stock price has become expensive with the PE ratios much higher than the industry average. But get this - more than 17 % of float is shorted. This means it will take 7 days to cover. In other words, when the upside happens, it will be a big short squeeze. And that is what we are banking on in this particular trade.

Some of the readers have suggested I use a different way of tracking the portfolio return which would show more realistic and bigger returns than the approach I currently use. I currently use a simplified model where I buy 1000 shares or 10 contracts. I am looking into it and will post something if I am able to find some time to remodel the portfolio.

Speaking of improvements I have now find a way to list the open and closed lists through an online spreadsheet application. This saves me from the hassle of creating and formatting the lists manually on the blog. Unveiling it for the first time in this current blog below. It is still not there in its final form as you have to scroll up and down to see the list in its entirety. I am figuring out how to expand the widths without making it look ugly and will update again later. I hope you find it more readable than the previous format.

Happy trading
Krish

Quick Mini Update - Sold Half ISRG Jan Option for 910% Profits

Just closed half of ISRG position at 910% profit and have put a trailing stop of 20% on the remaining positions for now. I also traded AAPL right after I posted my last update. Made a whopping 20% plus profit on the regular stock position. But because I failed to update my blog when I bought it as per my own rules, I am not going to take the credit for it in this blog's portfolio. I think that is fair. More detailed commentary to follow later this week with an updated open and closed list. Be very careful today as it is the day after Labor holiday and this should give you a good indication of where the market is headed in near term as more traders emerge out of their slumber. Good luck and have a great day.