Friday's Action and Updates on Open Trades

Friday's last five minutes provided a rocket fuel boost to markets going sideways. It was confounding to say the least. If you think those last five or ten minutes smacked of conspiracy theory and a secret cartel trying to prop up the markets, you have a rather large company. The flaw in this theory is that such an action and the immediacy of its effects are too conspicuous and contradict the very definition of how a cartel works. If you want to call the government, the Fed and the treasury as the cartel, then you are right. The actions they are carrying out are really not that clandestine either - whether it is printing money, cutting the rates, tax breaks, triggering spending, launching massive liquidations through treasuries. Which one of this action is truly a secret? None. That is not to say some amount of program trading activity or even government assisted trading activity does not exist. But I feel to attribute all of the weird behaviour of the market to some kind of secret Area-51esque style machinations may be over stretching. Lets wait until more evidence comes through before we declare that everything under the sun is orchestrated and aliens run the US government. In the meantime, you can still find several opportunities to benefit.

Rainsford Yang at MarketTells.com has done an excellent analysis in his latest market commentary on the surges in the final few minutes. He has found that such a surge has actually happened eighteen times in the last nine months so it is not exactly a new phenomenon in recent times. However when you expand your horizon to the last five years, this behavior does appear as new. I asked him if he thought that principal program trading activity was the main culprit behind Friday's activities. His response - "(It is) certainly true that principal program activity (initiated by the likes of GS, etc) has been unusually high recently. But I don't think that's the reason for the last-minute craziness. We saw similarly heavy principal program activity back in 2004 & 2005 - see http://markettells.com/wp-content/chartsO0O/prgtradelt.gif - yet there were never the kind of final-minute moves like we've seen recently."

Updates on Open Positions:

My trades that I post on Twitter are doing well. My current open positions are VIX long, FAF short, CMCSK short, IMAX long. Other than IMAX, the other three trades are short term and I may be looking to get out soon given the continuation of choppiness in the markets.

Let me share my thoughts on IMAX. IMAX is a long term play and I have conviction in their growth story. This is just the beginning of their growth. With the advent of ginormous sized LCD TVs and home theater systems, the incentive to go to a theater can only be provided by something more obscenely ginormous and monstrous. This simple logic has lot of teeth in it and what makes IMAX so lucrative. Sweetening the deal further is the exponential increase in the rate of movies going the IMAX way.

I will be first to admit IMAX is speculative at best. The valuation and debt picture have received bad grades from analysts. But what is not being accounted for is the upside surprise in terms of growth. And that to me has a telling weight that underscores the IMAX story.

Having said all of this if IMAX makes an abnormally large move to the upside, I may not wait and bank some coin.

Good luck

Whipsaws

It's become choppy in the last few days. I am posting my trades on Twitter. So far I am in black thanks to nimble shifts in the outlook as the markets whipsawed.

Admittedly there is confusion because of contradicting economic data, credit crisis still looming large and general lack of consumer confidence. However it is important to differentiate the triggers for short term trading from the indicators that shape the longer term macro economic views. To that end, Dr Brett has written a pithy but wonderful post. Check it out.

Update and Twitter

Folks, I have been gone for a while. Sorry about that. Anyways, a few quick updates. I am on twitter and you can follow me here or you can see the updates on the right hand side on this Blog.

As some of you already know I sat out most of the market rout beginning November of last year (phew!). Am back trading but not so very often. However after becoming reckless with my portfolio last year letting it to rot with no active supervision, I am making the choicest of cuts thus trying to yield more profits.

My call for the Markets: we are seeing a very interesting mix of indicators between sentiment, put-call, weekly charts, options volume and Tick. I am Market neutral. I don't know if you have noticed but since the last three weeks we have had a pattern of up Fridays followed by down Mondays. As long as this continues, you can be assured we will remain in an uptrend purely from a pattern recognition point of view. However, there is a lot going on in the short term that makes it wise to play very safe.

If you read my twitter updates, my last few trades have been decent. I am currently short Nasdaq through QQQQ puts since end of Friday and will remain so until tomorrow or day after. After that I will take them off the table and be on the sidelines unless a clear pattern emerges in either direction.

Market Notes

I covered all my S&P shorts past Friday. Needless to say holding the shorts for the last four weeks turned out to be a profitable venture. Do I think the market is not going down from here? I did not say that. But the degree of confidence in market direction for short term has decreased. Meaning the market could continue its current rally. However for short term, I see some volatile swings in the offing and you have to have nerves to digest them especially if you have position trades open overnight. That said, there is still a good deal of confidence that trend is still down for long term at least for now. Why not take some profits off the table and play with the extras on other trades I feel more confident about? In fact I will cover one such trade in the next post following this one soon.

Going back to market direction, if oil keeps going lower and dollar keeps moving higher or even remains stable, this will add to the impetus the market needs to continue its rally from here on.

Good luck
Krish

Do "Increasing Volume" in Short ETFs Really Justify Lower VIX?

Recently there have been several articles that are trying to justify the relatively lower values in VIX with respect to calling market bottoms. One of the biggest reason thrown out there has been the "surging volume" in index ETF shorts. Examples - short ETFs from the Proshares Funds' ETFs - SDS, QID, SH, etc. aka ultrashort S&P, ultrashort QQQ, short S&P, etc. The argument is because these short ETFs are gaining popularity and volume, they are acting as a more known and well embraced hedge against the broader based portfolio. So far so good. But then it goes on to reason that this phenomenon has resulted in panic mitigation in equity stocks, which is what sentiment indicator like VIX tries to measure in a broader manner. Ergo, VIX is not flying at high values that you typically see at Market bottoms especially in the last one year.

I disagree. Why? The facts don't support the popular hypothesis. I went back to the last two intermediate bottoms (Jan 22 and March 17) and compared the volume of several short and ultra short ETFs with the volume in recent days including today when we saw something of a mini spike in VIX earlier in the morning. Let alone being significantly higher, the volume in these ETFs recently has been generally less than the previous two bottoms! I also looked at the average volume to ensure I was not focusing on too short a window and still it wouldn't confirm the fact that the average volume traded has been consistently increasing as compared to Jan and March bottoms.

Well a picture speaks a thousand words. So lets take the example of Ultrashort and Short ETFs for S&P and DOW offered by Proshares



The first figure above compares the total volume traded for Ultrashorts within three days of January 22 and March 17 with the Mid July timeframe. The blue bars represent SDS (Ultrashort S&P). The red bars represent DXD (Ultrashort Dow 30)

As I said, pictures speak volumes. Example a total of about 145 million SDS shares traded on Jan 18, 22 and 23, with Jan 22 being the midpoint of January bottom in Markets. A total of about 138 million SDS shares traded on March 14, 17, and 18, with March 18 being the midpoint of March bottom in Markets. And get this, a total of only about 127 million SDS shares have traded on July 11,14 and 15 when we saw the biggest spikes in VIX since the March bottom. Shouldn't the volume on July 11, 14 and 15 have traded higher not only because of the first big spike in VIX since March but also because of the claims that the volume in these ETFs is more than the time period around previous bottoms??

Here is another example with the simple (as opposed to ultra) shorts in S&P and DOW (SH and DOG respectively)



Again the figure compares the total volume traded within three days of Market bottoms in January and March with Mid July. The blue bars represent SH (Short S&P). The red bars represent DOG (Short DOW 30)

Again we see a similar picture. Example a total of about 2.68 million SH shares traded on Jan 18, 22 and 23. A total of about 1.96 million SH shares traded on March 14, 17, and 18. A total of 1.90 million SH shares have traded on July 11,14 and 15.

Conclusion: The panic spike is yet to come unless the obscenely ginormous manipulative power of Feds was successful in the last three days. Which wouldn't make sense because the Fed had more tools back in Jan and March and they still could not prevent the VIX spikes.

Keep in mind we may see a spike as early as tomorrow or as late as August. But based on the above analysis, I am inclined to conclude we have yet to see it.

good luck
Krish

Still No Time To Be A Hero

Our strategy to remain on sidelines and short the cheaper index puts or buying index ETF shorts keeps on giving! If it wasn't for the enormous amount of government intervention in the last few days, what transpired with the banks, Freddie and Fannie came very close to getting stripped and receiving a kazillion lashes. And there are people who say we are in a free market country. What a joke! I don't know how many times I have uttered those three words in the last one week. Its not even funny anymore.

Only hindsight will tell if the intervention was a brilliant move or a kick in the face of the already fragile economy. I am one of those who believes we may benefit short term but the inevitable financial massacre has just been pushed to a later date and may contribute to an overall Black Swan incident. I hope I am wrong. But for now I am waiting for a bottom, not anticipating ..just waiting. I will start anticipating when I get my sentiment indicators high enough. With all due respects, am not stupid or stupidly rich enough to be a hero.

As I have said in the previous posts, I have taken half off my index puts or index shorts for profits and am letting the other half ride. I am STILL NOT opening any new long positions. But I will start studying and researching companies for some nice new long positions this week. The source energy aka God aka the Force aka the High aka the Feeling-You-Get-When-You-Put-A-Swab-In-Your-Itchy-Ear orchestrates such boring, mundane, drawling, slow-motion-train-wrecking and gut wrenching times for a reason - So that we can sit back on a lazy Tuesday evening and ask ourselves - while chickens are running with their heads cut off, what sweet stock/option is going to deserve my well deserved mint for the next couple of months?

Good luck
Krish

The Week of Reckoning

I had some market index shorts in the form of S&P puts open since the last few weeks as mentioned before in this blog. I had anticipated the market fall and the strategy worked out well. While my long portfolio was water tortured by Mother Market, thankfully due to the shorts, I didn't fall off the cliff. I will be covering my shorts this week. So that you know. My theory is - although the bloodbath has continued, the final reckoning I am awaiting for should happen this week. Expect major spikes in VIX and/or a panic sell-off this week. There is no other way except for this grand climax. Just in case it doesn't happen due to some stupid reason like interventions, I want to book my profits while I am still very sure about my shorts. Besides, the level of speculation would increase to a degree that would be too uncomfortable for me to continue betting on the short side until the indicators become slightly less oversold or we continue on the next leg down. For now though, I am going in for the kill and I will be ready on the other side.

The google trends indicator mentioned couple of posts ago in combination with the VIX study and other indicators reflecting institutional participation or lack thereof, worked out really well allowing me to not to sway with the talking heads who have been calling a bottom since the last twenty sessions. Yeah..same sessions marking the market's continued obscene decline.

A great post from Dr Bret Steenbarger published today resonated with me. Dr Steenbarger surmises that by tracking certain sectors' ETFs you can get a good idea of whether the market is in a recessionary/risk-averse mode or recovery mode. The former would pursuade the participants to move to defensive stocks like consumer staples. The latter would encourage the participants to move to stocks that have been battered off late such as financial stocks. If my theory about the week of reckoning is correct, then in addition to watching for a panic sell off, I like Doc's idea to study the sectors to understand if we have truly come on the other side. If so, I may be interested in getting long some of the financial stocks later this week or early next week.

Good luck
Krish Rathi

Lack of Fear (you read it here first!)

About a week and a half ago, I surmised how lack of fear is indicating the markets have still ways to go down using Google Trends indicator. While we saw that prediction unfold, many writers in financial publications and blogosphere also started talking about VIX and its inherent complacency off late.

Moving on, the markets remain in extreme oversold condition, and yet VIX remains stubbornly complacent. Even the google trends indicator discussed last week has remained flat to down. However lets not forget the seasonality. With the summer going on and lot of people taking off on vacations, the following of the markets and participation in them tend to thin down a bit. So a skeptic of VIX indicator might argue if there are not enough people, who is going to panic? On the other hand, a record outflow of money from Funds have been reported last week. So there is certain amount of wariness to keep money invested in the Equities.

I remain on sidelines. Anticipating the recent sell off, I had scooped up a few S&P puts in my personal portfolio that kept me from falling off the cliff in the recent bad days. You may want to buy some puts too as a hedge protection should the markets try to make another go at the trajectory down. These usually can be slightly pricier in this kind of a market as opposed to buying slightly out-of-money VIX options one or two months away. If you are not an options trader and more of a stocks investor/trader, then there are several ultra short ETFs to pick from as a good hedge.

Market's Schizophrenia

Sorry for the gap recently. I am back!
The markets continue their Schizophrenia. In the last post I had surmised that March had put in some sort of tradeable bottom. That strategy worked great all the way till Mid May. In my prior posts late last year and earlier this year, I had warned that if there is a second shoe, then there has to be a third and a fourth and more. Well the sound of the falling knife is really the sound of those remaining shoes dropping, with most of the bad news coming from financials. As a result, the worst performing sector this year has been financials followed by housing. As a trader it is my job to identify opportunities where we can still make money with an in and out strategy, but as a long term investor I continue to remain on the sidelines as I had surmised back in January.

Right now my trading bets are small with extreme precision. I am not casting a big wide net because the market fluctuations and less capital don't allow that kind of luxury at least for now. But hey..when did that stop us?

Here is something interesting that I discovered while perusing Google trends. Google trends is a tool publicly available to see how hot is a given search word or a phrase. I put in the words "Stock Markets" in this tool and I got the below chart.


Notice the spikes closely related to the big plunges in the market. For example C is right around the Jan 22 bottom and D is right around the March 17 bottom. I wouldn't call it a 100% reliable indicator but it sure gives an idea of investor sentiment. The bigger the spike, the bigger the fear/concern and hence more chances the market may put some kind of a bottom. Lets see when the next spike comes in.

Speaking of plunges, this coming week is interesting. Expect a blood bath this week possibly earlier than later, but also expect some big swings on the upside as well. You are smiling if you are a day trader. You are cursing if you are an investor or a position trader. Either way, we will keep treading the markets carefully. So caution is still the name of the game. Will send out picks if I pick any interesting scan. But this is it for now. I am glad to be back.

Krish Rathi

(Update to the above post: I got a comment from an "anonymous" reader that my use of the term "Schizophrenia" that seem to imply I was disregarding the real definition of the term and may have been indifferent to the real plight. He also said "two identities" is not a symptom of Schizophrenia, which is what he thinks I was implying in the post above. First off, I apologize if my usage of the term has upset anyone. I have used it pretty much as a metaphor as English speaking journalists the world over use it to describe fairly different situations. I could have done a better job to describe the context. Let me take another shot. My context here refers to that particular symptom of schizophrenia which deals with perceptions of reality that are strikingly different from the reality seen and shared by others around them. Living in a world distorted by hallucinations and delusions, schizophrenia induces fright, anxiety and confusion. In that regards, I feel the markets has come close to demonstrating these features. First off, the credit crisis was completely underplayed, underestimated and as the shoes kept dropping, the markets have panicked when reality collided with the perceived view back in October and even in January, times when the prevailing notion was that all the skeletons are out of the closet, only to be met by surprises. Not only that, every day the economic data gets even superficially better, the market is very eager to forget the underlying bad news and rally on things like a revered talking head thinking we have reached the bottom of a particular sector, the government officials talking up the dollar, so on and so forth. Next day, reality kicks in with some bitter news about a bank restating their write downs, and the market dives down making you wonder why did it even went up in the first place. This to me does sound like a case of living in hallucination with all due respects. I certainly recognize the seriousness of the disease and don't wish to belittle its gravity. Its a metaphor in this context pretty much like "bastardization". I thank the anonymous reader for giving me this opportunity to research more on this disease, clarify and I hope he understands my intention.)

Taking some profits off the table

The Markets did catch a great tradeable bottom! And they are still feeling pretty good. The monthly charts on S&P did a remarkable bullish hammer formation for March. In plain english it means there is a good chance the Market put an intermediate term bottom in March. This could be confirmed if April candles paint a bullish formation as a confirmation to March action.

The VIX trade published here and the ISRG trade published here did par excellence! I am closing my VIX trade for a profit of 94.67% and selling half off on ISRG for a profit of 170.56% today!

Is ISRG still a buy?
I think yes. And that is the reason why I sold only half of ISRG. The charts are quite bullish. What makes it extremely interesting is the earnings events on April 18th. I am betting on the upside.

Trade details

(1) Closed VIX (+VIXPF Option) at $7.30 (Purchase price $3.75)
(2) Closed Half off ISRG (+AXVDA Option) at $48.70 (Purchase price $18)

Good luck
Krish Rathi

Trade Update: Accenture

I am buying Accenture Options. (If you are not an options trader, you could consider buying the stock i.e. ACN). The purchase was May 35 Calls for a price of $2.15. Accenture is reporting earnings tomorrow close of Market. It is not only a play upon Accenture's impressive quarter over quarter positive performance with positive expectations in the last call but also the weak dollar. Its a quick trade. We might get out of it depending on whether we get a lift off the earnings and how big it is.

Good luck
Krish

Quick Update: Market Notes and Couple of Trades

As I had mentioned in my last post, we did get a tradeable bottom. Today's action has been significant in the sense that there was institutional participation and the indices are making a higher low on the charts. It is still early to say whether the rally will go unimpeded because of major resistance in the soon to be higher planes, but as surmised before we had a tradeable bottom and we are continuing to exploit it. The VIX options trade is turning out to be profitable so far. I am keeping my VIX trade open for intermediate term. I have opened two new trades today:



(1) ISRG Call Options (If you are not an options trader, the trade would be ISRG stock): I bought April calls with a strike price of 310 for $18 per contract. I think ISRG has hit some good support area and looks at least until $325 as its next target within a month or two. This is assuming the market volatility won't shake this stock down. Remember when the indices suffer a lot, ISRG suffers simply because it is a member of NASDAQ 100, unless it is close to its earnings period, which is nowhere near. So I am also going to put a tight stop to take into account any unexpected volatile move down by the indices.



(2) POT Put Options (If you are not an options trader, the trade would be sell short POT stock): I bought April puts with a strike price of 145 for $10.40 per contract. Potash has had a very good run and in my opinion is nearing exhaustion. Couple that with the hit on commodities. I think commodities still have some way to go down. Many offer the argument that because India and China is still strong, commodities and ag stocks in general would do very well. Whether I agree with that argument or not, one thing is clear: nothing goes up in straight line. Besides the rich valuation of the stock worries me. Also take a look at the weekly charts. We have reached a double top on MACD with bearish downtrend initiating and Williams %R, one of my favorite momentum indicators has a downtrending slope that has still some room to go. Once again I will putting a tight stop to counter any major moves in unexpected direction.



Just like last year, I will soon be entering all my 2008 trades into a table and provide that hyper link for performance tracking.



Good luck

Krish

(ps would love to hear from readers on the comments section provided here)

Quick Update on a Quick Trade

As I speculated in my last post, we saw lot of volatility but VIX is settling down to lower levels after spiking up to 36. Given that this was the last time VIX spiked up to and the FOMC meeting happening tomorrow sure to deliver some more positive news to market (they really don't have any other option), I am dipping slightly into some VIX trades as the market is forming a short term bottom here. Please remember this is not yet a complete confidence in Market hitting the long term bottom. But I think we have a tradeable bottom here. I might close this trade as soon as I realize profits of 30% or better which is quite likely as early as tomorrow or by end of this week. I will also put a close stop on this trade so that I don't take a negative hit by more than 20 %.

Here is the trade (please enter this only if you are an options trader. If you are not an options trader, you could bet on index ETFs such as IWW or IWM to play the Russell 2000 index on the long side)

$VIX.X April 30 Put options - Purchase price 3.75 or better (My purchase price as of now is 3.65)

Good luck
Krish

Truly Unprecedented

Folks, its been a while since I last posted. But believe it or not all you missed was a roller coaster ride that would have left you nauseated had you participated in the market actively. In keeping with my message in January to remain on the sidelines, I truly benefitted by not losing more money..phew!

Today I am writing or rather I am inspired to write because of a significant event that has unfolded over the business wires this afternoon. Unless you were living in Mars or had your tv switched off thinking nothing important happens on Sunday afternoon, you probably know that JP Morgan is buying Bear Stearns. That is not the shocking part. It is buying for $2 a share! No that was not a typo. That is not the shocking part either. The shocking part is Bear Stearns seems to be going ahead with it and the transaction would go through. In my books that doesn't sound like a rescue unless Bear Stearns knows where all the yogurt is going to spread after hitting the fan and we don't. This is truly unprecedented! Back in October, it was surmised that if credit problems were truly as bad as some had thought, we would see at least one major investment bank and one mortgage company go belly up or sell themselves at a flea market. With the Countrywide and the Bear Stearns transactions, we finally have a confirmation on those ominous predictions.

By any means or by any measures, the Bear Stearns collapse is not only stunning but also too rapid. It happened before I could blink my eyes and say "buy 10,000 BSC puts!"

Big daddy Ben shares the emotion of the significance of this event. Fed just announced a discount cut and made borrowing available to primary dealers. And they are doing this just two days before the regularly scheduled FOMC meeting. If this doesn't spell the sense of urgency I don't know what does. This is most likely going to cause a havoc in the markets on Monday instead of actually helping it to bounce. Do not be surprise with more emergency actions and even a concerted action globally by central banks of other countries on Monday and Tuesday. (The dollar has already plunged to a 12 year low against yen.)

I just checked out the monthly charts of XLF, an ETF that tracks the major financial institutions. It is obviously no secret that XLF has been in a downtrend and its been a while since it already broke its 200 day moving average and even 200 week moving average. It has also recently broken down its 200 month moving average on the monthly chart, which stands currently at 25.6.

You would either have balls of steel, or you are a genius long term investor with no worries for margin calls because you are loaded, or you are plain stupid to actually put some money in financial stocks on Monday.

That said, if you still have an itch to put money in financial stocks, the safer bet is asian banks who have ADRs listed here. The reason is simply that the asian banks, especially Indian banks have different liability structure compared to US and European banks. Unless the contagion spreads into other areas and generally sags the global economy, these banks will most likely not face the lack of confidence or stress tests that the US banks are facing left and right. One such star is IBN (ICICI Bank Ltd). My strategy would be to allow it to fall a little more as it will in sympathy with what would happen in US markets and especially financial stocks in the next 48 hours. There will come a point then when IBN could become a great bargain once again.

So what should be the general strategy in terms of handling your portfolio you ask? I think what I said back in January still holds unfortunately. Lets watch the blood bath from the sidelines. Do not be surprised if there is a hard rally within 48 hours of market eventually finding a bottom. But you should participate in it only if you are a day trader or an active trader. Otherwise given the general downtrend, the market could still fall down until we see a convincing confirmation and those rallies could be used as an excuse to sell some of your profitable positions.

Fundamentally though, it would be senseless to predict anything for intermediate term after what transpired today. What we know is there are uncertainties and based on the purchase price of BSC, we don't even know the depth of uncertainties. The positive side is that such kind of events usually indicate a market bottom over a longer term horizon.

Hang in there, folks and yes, no new trades for now.

Good Luck
Krish

2007 Performance

Although I am slightly late on my 2007 wrap up and I have already started posting for 2008 Markets, I thought I should share my 2007 performance.

I am glad to present the results of my 2007 portfolio after completing an audit and documentation. From its inception on 2/14/07 through 12/31/07, the portfolio yielded a 90% gain! Compare that with S&P's performance's of 0.8%, Nasdaq's 6.6% and Dow's 4.1% during the same time period. That makes me a happy camper. The portfolio closed list can be viewed by clicking this link*

What worked? - Stock picks, Timing, Exit Strategy Discipline and Lack of intense activity between October and December when the stocks suffered the most. I have also provided my thoughts in a slightly more informative manner that I think may benefit the beginner traders and investors alike. I had originally written it for a different portfolio I maintained at the Strategy Lab Board contest. The context is different but the lessons are similar. If you are a beginner trader or beginner to intermediate investor, I recommend to check it out.

I expect this year to be great too if we build on the lessons learned and always remain agile. Remember no matter what you can always make money!

Happy trading
Krish Rathi

Completely on the sidelines

I have an update to my post from last night. As expected the massaccre began in the morning. In my last post I surmised if Ben cuts by 75 points, there is a good chance the massaccre shall stop. Well that is what happened. Although we are down for the day so far, Bulls can still claim victory because we have painted a bullish hammer coming at the lows on the daily chart, very similar to August 16th lows. In plain english in the epic battle between the bears and bulls the closing price ended much closer to the highs of the day than the lows of the day. Not to mention the fact that VIX finally obliged us with extreme levels, levels that some experts think are necessary to call at least a tradable bottom if not a long term bottom.

As a result of these developments, I took my opportunity and covered my put options I had opened on SPY selling at 5.15 (purchase price was 4.05) a 27 % profit.

Although in near future we may not likely have the kind of bleeding we had this morning there is absolutely no reason to be a bull right away. I have stepped on the sidelines as I indicated yesterday. I have also covered my short term positions. It is difficult to predict if we will still have a further downswing. Signs point to a short term bounce, but the regular certainty is not there. So it is better to keep my powder dry again. Now if you are planning to buy leap options or stocks that you may want to keep for a year or longer, please be my guest and buy those cheap suckers right away!

Hang in there
Krish Rathi

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

Hindsight is a B****!

This is the final blog from the Strategy Lab Open Contest I am participating in. I thought that you will find it useful too. (At the end of this contest, I will be returning to more frequent blogging on this website. I will also be closing out most of my positions for the year 2007 today and tomorrow and document the final portfolio standing for 2007 right after that):

Its fitting we come to the end of the contest in the heart of the winter season. It is time to reflect. What went right. What went wrong. And what went sideways. Most importantly, I believe it is the lesson learnt from each trade and carried over to the next one, that makes you a better investor or a trader.

I would like to hit you with my bullet "isms" that I have learnt from this contest and in general investing and trading

(1) In the End, Agility Wins - I have learnt that if you don't change your strategy with changing times, you will become irrelevant. The contest offered an excellent microcosm of this often overlooked investing philosophy. At the beginning of the contest, the market was in a general uptrend. What would have paid off most would have been to bet on reliable up-trending horsemen like high beta stocks and commodity stocks. Then by the middle of the contest, the market got into this ominous downswing first and remained fairly volatile. What would have paid off most during this phase of the market was risk management. Not knowing the eventual direction of the market, it was important to book your profits on your highly profitable positions and let a small portion ride just in case the market would trend back up. Also it would have helped to identify the failing sectors (finance, for example) and bet against them or pull them out of your portfolio. Towards the end of the contest, we swung to a definitive downswing. What would have paid off most would have been to turn bearish along with selective stock picking and risk management. More specifically, it would have helped to protect your profits, purchase index ultrashorts and still up-trending stocks like solar companies.
In other words you needed to be a trend trader in the beginning of the contest, a risk managing trader during the middle of contest and a stock picker towards the end of the contest to have finished in one of the top slots.
Isn't that amazing? One short contest taught us to adopt different avatars during the different stages of this market. In other words, you had to be agile and you had to be on top of everything. The market's swings worked in favor of providing us with this wonderful opportunity to learn about the importance of the agility I am talking above.
I believe that most of us who came in the top 50 or even top 100 were able to exhibit the above characteristics of agility. This disciplined and flexible behavior allowed us to successfully perform and even handily beat the indices. It is a great feat indeed and while not all of us can be on top, I would like to personally congratulate each and every one of these successful contestants. Hats off to you, my friends

(2) Complacency Is Fatal - Personally my biggest failure in this contest was I let it slip from my attention during the middle phase of the contest as I juggled my priorities with a full time job. Although it seems I will end up finishing in the top 50 or top 75, had I shown the same alertness throughout the contest as in the last thirty days, I would have been far ahead. (side note - curiously though in the last two days my rank is not even visible although marketocracy's percentage gain clearly shows I am in the top 50 with full compliance. I have followed up with the help desk at Strategy Lab Open). I offer no excuses of course. The moral of the story is - you signed up for it. You better show a commitment. Now that I have more confidence in my trading skills and if the strategy lab open board allows me to, I would like to enter their round 2, apply my lessons with full vigor and win.

(3) General Sense Of Sector Behavior Is As Important As Picking Stocks - Many experts offer the advice that if you have picked your stocks right, you don't have to worry about the direction of the market. I have a problem with this theory and the contest offered great examples in that respect. First, it is a vague and general advice that can only be proved, but never disproved. I get scared of such pieces of advice just like a non-practical Zen saying. Second, most of the time the stocks that fall in this category usually happen to be story stocks or biotech stocks. Third, during the duration of the contest when the markets tanked more than once, it also took down with it the stocks of exceptionally well run companies. Example - Goldman Sachs was the best run financial company in the face of turmoil the markets faced during the last few months. Yet it was punished alongside the likes of companies like Morgan Stanley and Bear Stearns that were far less impressively managing the whole sub-prime mess. Granted, it didn't tank as much but its stock was relegated to macro-event trading by active traders who knew how to take advantage of the stock channeling between its support and resistance with the directions being triggered by the sub-prime events that Goldman wasn't as major a contributor to. This and several other examples clearly crystallize a trading strategy - when you buy the stock of a company, also study the trend of the sector it belongs to.

(4) Intuition Should Be Listened To- This may be slightly more controversial as there is no definite logic to it, but I believe in it. At the end of the day after doing your research and due diligence before you execute the trade, I have learnt that it helps to ask yourself - "What is my gut telling me about this trade? Am I feeling uneasy? Am I feeling good?" I believe that your intuition is your biggest "finishing" weapon before you actually execute a trade. This is something that may take a life time to perfect but I think as you keep fine tuning it you start reaping advantages along your way.

(5) Say No To Trading When You Are Desperate or Frustrated- This is almost another version of point 4 but I felt to split it out just in case you find the above point not too practical to follow. Very simply, if you are feeling icky or if you are desperately trading because you just had a major loss and if you think you are looking like someone chasing the big bad truck of momentum, that is a fairly reliable sign to really take a pause before hitting the Enter button.

(6) Best Way To Make Money Is To Actually Sell Some Of Your Profitable Stocks- I feel this maxim is much talked about but least paid attention to. If you have made profits, I have learnt that it helps to book them. It is understandable that you don't want to miss out on a great uptrend. So how do you get the best of both the worlds? Most of successful traders follow the half off strategy that has helped me too - they set a certain profit goal on each stock. When the stock reaches that goal and if the trader feels it still has a potential to go a long way, they sell half of the position and let the other half ride with a stop loss. This is helpful in two ways - it allows you to book profits and make money as a result of the discipline. At the same time you don't feel left out because you are riding the uptrend wave on the remaining half of your position.

(7) Investing And Trading Are As Similar To Each Other As A Chinese Solar Stock And A Muni Bond - I have learnt that it helps to know the difference between investing or trading and what is it that you are personally good at. It doesn't matter what your style is ..what matters is you don't pretend it to be otherwise. Both of them require different strategies and different discipline. Sometimes you can learn about the investing philosophy while being a trader and vice versa. But the bottom-line is your blueprint has to match with your investment philosophy. This contest was more about trading. That said, the contest was unique in the sense that it did offer some wonderful insights into investment side as it provided people a platform to make a case of well run companies through the blogging platform.

(8) There is no such thing as a lost opportunity - During our lifetime we should be getting plentiful of opportunities to exercise our strategies. So there is no hurry as there is no such thing as a lost opportunity. There is such a thing as lost money though. The worst feeling is when you suddenly realize a golden opportunity but you don't have enough money to play it because you put it all on a less researched trade just because you wanted to catch it before the trend was over. I have learnt that the house always wins except in one case - when you can manage your risks and still make confident bets. Its smooth sailing from that point on.

Here is to success, good luck and a great new 2008 to all you wonderful people!

Krish Rathi

After the Cuts - The Story Isn't Over

The following is excerpted from my blog posted yesterday at the Strategy Lab Open Contest I am participating in:

I had been postulating that the Feds would certainly cut and they may use shock and awe again. The Fed did cut but didn't go with the shock and awe immediately. However, the story is far from over. I had also mentioned that the Fed could induce the shock and awe in a different way this time - doing some more radical moves in the coming days such as bigger liquidity injections into the markets or another surprise cut before the January announcement. The latter may sound outlandish while the former is very very possible. But the fact is both of these remain possibilities along with any kind of a measure where the Fed could show some nimbleness just to let the markets know they are still in control. And if it doesn't, you can start counting Ben's last few days.

Now what after the cuts? - The markets tanked because it wasn't an immediate shock and awe. Unfortunately the deep plunge didn't give me enough chance to place all the ultra shorts trades I was fantasizing about. But I chased the momentum before it was too late, and immediately added the ultra shorts on Russell 2000. Other than that, I have kept all other positions unchanged. I will sell these shorts in a day or two and here is why.

I still believe we have more of upside left than downside beyond a 1-2 day horizon as I mentioned in the post just before the cuts. One thing is for sure - as the market digests the Fed speak, they will realize that hey that wicked "uncertainty" phrase leaves the possibility for more rate cuts. Meaning the easing will continue. This along with lot of money on the sidelines will have to play together and create a positive atmosphere as we go into the year end.
In one of my prior posts I had also mentioned that 1475 is the key level for S&P 500. We are very close to that at the Market's close (1477 and change). Not to mention there is lot of support at 1460 and 1440 levels too.

Finally, notice how the markets behaved after the last two cuts. It surged and then tanked in the coming weeks. We are to a certain extent seeing the reversal today. And the only way for the reversal to play is to eventually surge in intermediate term. The big question is - will it be soon enough so that some of us strategy lab contestants can recover on their existing positions? I say yes.

And one last thought. Hey Ben, if you are reading this, two things - (a) it is spelled as a "cut" not with a silent 0.25 but a loud "0.5", and (b) all along I was thinking you knew something that I didn't. Your notes with a generous usage of the word "uncertainty" makes me think I was wrong. And that is scary, Mr Chairman.

Krish Rathi

The "Ben"evolence continues

The fed cuts are still days away (no..that wasn't a freudian slip). But you should have listened to Ben today in the first part of his speech. It seemed like he wouldn't even wait for December 11th! The guy reminds me of a lean, mean hunter on a prowl. In a tip of a hat to his colleague's speech from yesterday, Ben confirmed the credit situation is deteriorating and almost trying to whisper in your ears - "we will do whatever it takes and oh yeah (pointing at a slippery rat called rate with a ginsu knife)..that too!". He seemed to be overflowing with emotions. Okay okay his face that looks mega botoxed didn't give much away. But what did you think? We are talking about a guy whose expressions are flatter than a flitter! Anyways, he later contained the "help we are all screwed!" emotion by adding that the fed will be looking at the new data that will be released before 12/11. Really, Mr Ben? Please explain to me if that was so, why would you stick your neck so far out with the whole doom and gloom portrayal. You could have just said "a lot depends - and I mean a lot, you crazy econ perves! - on the labor report and PCE report before we can truly say what we need to do in short term". Instead Mr Ben chose to paint a very grim picture of the economy first as if almost to get his excuse / alibi ready in case of a shock and awe on 12/11. We live in such exciting times! Anyways, the words that stood out most were "alert", "turmoil", "reversal from September" and "flexible". And no I am not really taking them out of context. The words were the context! So the bottom line to me was the gist of the speech didn't just translate into a single rate cut but - surprise! - it sounded like more cuts than what the fed fund futures are predicting right now. This means Ben wants to give us a shock and awe which sounds increasingly characteristic of the new fed. 25 points is not shock and awe. Think 50..heck think 75! Yes you know what I am talking about.

Okay so how are you gonna play this? I will tell you how I am playing it.

First nothing is guaranteed. So it is important that I remain agile and make some solid picks after a lot of research with a slight bias towards the conclusions made in this post. This is what I am trying to follow. I also explained some basic tenets of this strategy in a prior post in the strategy lab contest I am participating. (More about this contest later but needless to say it has taken my time away to post in my regular blogs. Wherever I can I try to put the same posts here but my trade picks are different there).

If you put the essence of the above speech in combination with the generally bullish move in the markets since the last three days, you would feel there are a few more solid uptrend days fairly soon. My overall sense has also turned slightly bullish albeit for a short time. While I can't predict the intermediate term direction, I do feel that 1475 in S&P seems to be the key level. I will be carefully watching that level and based on which way we turn, adjust my trades accordingly. I am planning to keep my hedge bets intact but reduce position sizes. Bottom line - even after all the bullish events with my own bias towards a short term upside, unless we go farther away from 1475 regardless of the direction, we cannot be too complacent about the direction of the market. So be careful out there. you never know when and where is the next sharp turn. And Mr Market doesn't even put a sign on the road.