If There Is A Second Shoe, There Has To Be A Third And A Fourth

Amazing! That is the only way to describe the market activity today. Okay so if you have followed the markets closely I am going to spare you with all the metaphors or worn down phrases like "throwing the baby out with the bath water". I am as bored of them as you probably are. So let me cut to the chase here. Market fall was not a surprise as we surmised in my prior few posts.

It is very simple folks - when it comes to credit issues and subprime mess, if there is a second shoe, there has to be a third and a fourth too. This is exactly what is unfolding. The smart money knew to pay heed to the ominous signs arising from the German bank's announcement of paper mess and the nervous tone from Bank of America's earning conference call. They also knew how over extended we were. Today was a long process that was in making over the last few sessions as the volume kept going anemic. And finally when the volume picked up it was on the other side of most bets. One look at today's declining volume over the upside volume would have painted the picture for you not to mention the extreme NYSE tick reading. It was out and out a clear signal that the big guys were selling into the market.

The big question is will this continue? - You bet. But I think this is extremely healthy. Think of it as detoxification of the markets. For short term, expect the next week to be choppy.

Our portfolio has not had much activity as you can see precisely because i was expecting this chopppiness. And in spite of that we did fairly well. I didn't sell off gold contrary to what I posted in my previous message because the trailing stop didn't trigger. Which actually turned out lucky given the monstrous rise in gold since the last post. Also Intuit Surgical once again gave a blow out quarter and I am thankful that we held off on some ISRG that reaped the gains.

I am going to follow up with a more detailed post sometime next week or this Sunday with my picks as I finally see an opportunity to get back into the market and buy some really good companies at a discount.

In my next post I will also have the updated portfolio holdings or I may revise this one and add the portfolio list by weekend.

take care and hangin there
Krish Rathi

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.

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

The Roller Coaster Has Just Started

Portfolio Performance

The markets swooned but if you were holding the trades from the porfolio of this blog, you would have actually beat the markets big time! Currently the Closed List is standing tall with a gain of 32.7 % and the Open List is at a gain of 79.16 %. As always, the details are tracked and displayed at the bottom of each post.

Market Commentary

Okay so the markets got clobbered. Readers of this blog may not have been completely surprised as I predicted a negative outlook in my last post the week before. Going forward it may be slightly hard to predict short term direction of markets with 100 % confidence or close to that given the uncertaintly and risks. That said, I am more inclined to continue with my neutral to bearish stance on the markets.

Looking at the three indices, the charts paint a similar picture as if there is more short term downfall in the offing even if we see a relief rally on Monday or Tuesday. S&P has couple of supports in 1400-1450 range (currently at 1458.95). Nasdaq has no good support until 2450-2500 (currently at 2562.24). Dow Jones has no good support until 1275-1280 (currently at 13265.47).

All said and done, betting everything you have on the trend of the market would be akin to catching a falling knife or a rising geyser depending on whether you are bullish or bearish. The uncertainty comes from the conflicting messages of various data points such as - you name it - volatility swings (bearish), investor sentiment (bullish), technicals (bullish and bearish), earnings strength (neutral), economy (bullish), energy production issues (bearish), housing data (bearish), lending and leverage issues (bearish). In such cases, the prudent options are - (a) you become very picky and select extremely good stocks and keep tight stops, (b) you start buying on dips your favorite stocks that have been on your radar, be strong as the markets go down further with the hope that you are picking your stocks cheap and that they will eventually rise in the months to come, and (c) stay out of buying long with a protective hedge for your current long positions.

In the weeks to come the portfolio in this blog will attempt to do a mix of the above three options.

The Rathi Portfolio Holdings

Open List

• BZH (Stock) - Sell Short - Opened on 2/14/07 at $41.54. Currently at $15.60 with 62.45% Gain
• ISRG (Option) Jan08 130 Call - Buy Long-Opened on 3/8/07 at $9.60. Current at $79.20 with 725.00% Gain
• GLD (Stock) - Buy Long - Opened on 7/10/07 at $65.61. Currently at $65.41 with 0.30% Loss
• PLUG (Stock) - Buy Long - Opened on 7/16/07 at $3.25. Currently at $2.90 with 10.77% 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