Need to be very careful this week!

I know I have to still post my 2007 portfolio results, which by the way beat all the indices handily and extremely positive, but I am going to jump the gun and talk a bit about next week, since it is very important. I don't mean to scare you. Market indicators are giving a picture which says that we may jump off a cliff. Okay that may have scared a few. But the matter of fact is if you get a chance Monday morning, please don't get carried away by any sort of bounce..sell all or most of your profitable positions. If you don't then be prepared to ride one of the most volatile weeks we have ever seen. The good news is the conditions that lead to short term capitulation will soon lead to the eventual market rally. But for you to even ride through the down spike, you need to be either extremely brave or loaded or make sure you can cover every single margin or maintenance call with aplomb.

You ask What am I doing? Although the model portfolio of this blog did exceptional last year, a yet another portfolio that mirrors close my own portfolio and which is slightly more experimental has suffered. So I have not bought a single new share or call option in the last few weeks. I have some amount of dry powder. I have couple of shorts open. I will swoop in and buy some good bargain values once the capitulation starts or a convincing rally begins. But until then I am hanging on the sidelines. You know that race they have in Madrid every year where the bulls trample bunches of participants. Well I am standing on the side and watching the blood bath with the only difference being instead of the bull, it is the bear. Hang in tight my buddies. This will be over soon but indicators tell a final blood letting has yet to happen.

There is a very small chance that we may not see the extreme conditions of capitulation and the market may well start rallying for a longer term. How to know if the rally is not a fake bounce or a dead cat bounce. Here are some tell tale signs: (a) Ben announces 75 % rate cut or a combination of 50 % cut and some massive money injecting measures. (b) A few more financial m&a occur signaling the smart money and big guys are seeing the light at the end of tunnel. (c) Earnings week has the CEOs talking beyond their product revenues and describing positive global trends are still here and improving every quarter giving positive guidance for 2008. (d) the CNBC talking heads start questioning the authenticity of the rally :)

Okay the final one was on the lighter side (only slightly though). But you get the picture? If you are more interested in the indicators giving the tell tale sign of why my fear has increased, here are some key factors - lack of VIX spikes and finally spikes begin last Thursday/Friday, data reflecting commitment of traders showing bearing undertones about professional money investment, open SPY put interest in tandem with options expiration last week giving a seasonal negative signal that occurs only during bear markets, last week's banks' earnings data and comments. We have gone way downhill but it seems we are not there still. And maybe this final downfall will finally trigger Ben to walk his talk. So you ask how can he screw up this time? If he cuts 25 or 50 basis points before the Fed meeting and leaves with comments such as "ummmm..yeeeeaaahhhh...inflation is concerning..and my beard needs a trim..and oh..we will take every sustantive action" and then goes to Princeton for an afternoon coffee with his nerdy colleagues. Ben, the futures market has already baked in all of this..so please. I don't know as much as you do but that has nothing to do with how you can screw up more than Alan. And that requires quite a talent my friend.

So Cuts may happen before the meeting and from that point on we have a rally at least for the short term assuming Ben surprises the odd makers who have already baked in at least a 50 % rate cut.

Because of that last point, you have to be very careful if you are considering shorting the markets. Be prepared for a huge rally anytime Ben announces unpredictable measures and unpredictable cut amount. I would be suprised if this would be the first thing Ben does on Tuesday but who knows. Your best bet: keep your powder dry. Be on the sidelines and let the massaccre begin. Then when the blood is flowing everywhere, you go out there and pick your diamonds from the street.

Krish Rathi

New positions
SPY Feb Put 133 Strike Price: Purchased for $4.05