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