Thursday, October 9, 2008

What to do if you're invested

In light of the panic occurring in the markets, some have recently asked me for advice in terms of what to do if they've been invested over the last year. The simple answer is, if you haven't sold by now, today is definitely NOT the day to sell. Although as a trader, I understand that nothing is impossible with the market (including a quick drop to 8000), the metrics of this week's fall has reached historic proportions.

If you are an investor, my recommendation is to spend time researching and coming up with your "dream portfolio", if you do not already own it. Which, in my opinion, most people do not own, because most are invested heavily in mutual funds, which basically move with the indexes. I'm a proponent of active investing, as long as you're willing to do the work. In the end, you should have your own personal mutual fund when the dust clears. Owning a handful of fundamentally sound, growth stocks will seriously outperform any mutual fund or market. You may even find yourself ahead of where you were when the market was at the top!

Tips:
1. Avoid commodity related stocks. Oil CAN go back to $30 dollars, and it won't matter what OPEC does.
2. Avoid penny stocks or unknown small cap companies (the ones on sale right now are the names we all know. unprofitable small cap companies will always be around for you to play with later).
3. Buy a couple companies that are most likely to continue paying dividends.
4. I like China - big cap china names. (Notice how EDU has barely budged?)
5. I like Solar (although it remains to be seen whether they are traded as "commodity" related - if they are, then abandon ship)
6. Don't buy stocks just because they are down 80%, in fact, you should be buying stocks that have outperformed this crisis (down 15% for example). There is a reason for it. When the market comes back, they will continue to outperform and be the first to hit new highs.

Wednesday, October 8, 2008

What's going on?

The market appears to be in utter mayhem. As I've repeated time and time again, the more involved our government becomes, the farther we have to go on the downside. Never in history has a single move by the federal government correlated with the bottom of a market. The best way to interpret everything that's happening is: they have completely lost control.

In addition, I felt the short selling ban was probably one of the most foolish moves ever made by the SEC. In my opinion, it only caused the market to drop further. The buyers were basically playing cards with themselves. Short sellers were providing a great deal of stabilization in the market as they fell. And in fact, after tonight (short selling ban is lifted), I will make a near term guess that the market will finally show some signs of stabilization. The financials will remain the single #1 leader for the market at this time (up or down), and with the short selling restrictions lifted, we'll see. In fact, the market has gone nowhere but down since the day of the ban. Did you notice?

As I predicted months ago, Washington Mutual is now off the map (as well as a few others).
We also have some well loved sectors absolutely decimated (ie. solar, commodities). In fact the commodities sector will most likely go much lower from here. They have and always will be cyclical. Although I couldn't help but dabble in some FCX and RTP yesterday and today. It simply looks "too cheap". But always remember, it's not.

As far as the banks go, it's important to note that many of them have written down decades of profits in the recent turmoil. 30 years of earnings have now disappeared in the blink of an eye. When the government starts buying these assets, the losses will be sealed in stone. To be honest, I'm worried about Citibank. Who also happens to be the bank used by my broker. If citibank falls to below 10 dollars, I will most likely wire out my capital that day. Is it possible? YES! Especially with the Wachovia fiasco, citibank basically told the world that they might not be able to survive without Wachovia's deposit base.... scary.

The current fear in the financials resides in the fact that banks need to continue honoring capital withdrawals for daily activities of large corporations. It is entirely possible that a large corporation such as GE or Boeing could basically be unable to withdraw capital. Now imagine that there are tens of thousands of businesses worldwide who rely upon our banks to fund their activities. The commercial paper market has been dead recently, and large companies are not able to sell these short term securities as a means to fund operations. Thus the Fed announced they would begin buying commercial paper. This is simply not a good sign. Basically, if a large bank (ie. Bofa, or Citi) were to show signs of deterioration, and a few large corporations become panicky, we will see a CORPORATE bank run (moving hundred of billions in assets from the weaker institution to the "percieved" stronger), and a resulting failure leading to unimaginable consequences. This is NOT out of the question, given the current state of our financial system.

Notice the asian currencies are currently the strongest. More and more I am convinced that it is time to move assets to China. The RMB will continue to strengthen and earnings in US dollars are going to skyrocket, regardless of any slowdown. The spread between BIDU and GOOG continues to narrow. China's market has officially crashed, what better time to start picking some names?

Thursday, July 24, 2008

Short Selling restrictions by the SEC

This may sound funny but what it worries me greatly that the SEC wants to impose additional restrictions on short selling. It almost confirms to me that the market will go much lower. Nothing can control a market - it moves on its own. All previous attempts to prop a falling market (ie, the fed, the economic stimulus plan) have not been successful.

On an unrelated note:
As I've mentioned before, I'm very wary of Washington Mutual as well, today we saw it go as low at $3.56. We saw IndyMac bank fail last week. The failure of WM will have much more of a profound impact, imo.

This is looking like more of a sharp rally within a major downtrend. I also mentioned in previous posts that we'd fall straight through 11,600 and we definitely did (all the way down to 10,800's). There was simply too much complacency. These rallies only serve to fuel a mindset that "buying the dip" will always be the right thing to do. However, any professional will probably understand how it will bite you in the end.

Right now, BIDU is one of my few points of interest on the long side. Their earnings report was spectacular, and China continues to impress in general during this earnings season. Although it's still important to be wary due to market conditions and also "expectations" for BIDU, i still don't believe it's impossible for BIDU to overtake GOOG soon in stock price (which means a > 150 point move up). GOOG disappointed us this time, yet BIDU impressed.

In addition, I was very impressed by ISRG's report... that company is seriously becoming a niche player with no competition in the robotic surgery market. Amazing uptake and recurring revenues. I can see that going to a new high above $360 a share if market conditions allow.

Monday, July 21, 2008

the BIDU and GOOG legacy continues

As we all know, GOOG missed earnings last week and got pummelled back down to around 470 now. BIDU also got taken down by the rest of the market but is holding up decently well just under 300 dollars a share. BIDU will be announcing earnings on Wednesday and a good report might just be the catalyst to take BIDU above GOOG's share price sometime in the next 3 months. We also have the chinese olympics coming up. But once again, it all depends on the report.

Wednesday, June 11, 2008

Market Troubles - careful now

Looks like we're heading straight back down to the lows of the year, in fact, the financial sector is now trading at the bottom reached on the Bear Stearns day. As mentioned earlier, Oil is going parabolic now, so remember it can go a LOT higher a lot faster than we can imagine in the near term. That also means the market could get rocked as well. Oil is rising even though the Fed has basically signalled that interest rates will probably not go any lower, and in fact, will go higher from here on out (the dollar has been rallying as a result). This is basically more fuel for the fire, that oil can go much higher here. Ouch. Near term, the bulls don't have much to rally on - so be careful out there.... Don't let the memory of a march through may rally cause you to buy, it's usually a trap. Of course, there is a CHANCE we are in a channel between 12,000-13,000 on the dow, but the financials doing so badly kinda makes those chances quite slim.

Washington mutual is trading at $6 a share.... SIX DOLLARS a share. Something is definitely up with WM. Like I've been mentioning repeatedly in the past, I don't believe Bear Stearns was the last casualty in this crisis. If a national consumer bank like WM were to go down, look out. I sure hope the FDIC has enough to cover us (not quite sure though actually).

Wednesday, May 21, 2008

Ok so here's the deal

Oil and commodities are going parabolic. I'm seeing insane moves in smallcap oil and energy names, ie PDO, etc. Usually this kind of stuff happens as we enter the final stages of a momentum group. Oil and energy has been rallying for years now. I don't think we are near the top price wise, but we are near the top time wise (over the next few months). When a sector goes parabolic it can spike higher than anyone can imagine. In fact, the most money can be made actually going long on a parabolic move because prices go vertical.

The broader market is getting hit by these issues but it's important to remember that commodities are always CYCLICAL. Oil going back to $35/barrel is not out of the question. In the near term however, we are going to be plagued by issues of inflation. The Fed simply cannot continue to drop rates in this environment, and will need to actually raise rates soon. The fact that the Fed minutes today showed that rates will most likely not go any lower but did not cause the dollar to rally or oil to fall (it actually dropped, and oil actually rallied) is quite worrisome.

Tomorrow will be a critical day. Sometimes the initial reaction to anything Fed related cannot be trusted, so we'll see if the market can stage a rally.

Friday, May 2, 2008

April Rally

The market has been doing exceptionally well, reacting to both good and bad news by moving higher. In fact, we are now up almost 1500 points on the Dow from the low set by the BSC news. As we now approach the 200 day moving average for all the averages, I expect a pause, as we digest these gains. I received calls from several people asking about the market in general recently, and explained that the market never behaves in an "expected" manner. The credit environment has not changed substantially, but I think the most encouraging factor in this entire ordeal is that our US dollar has actually rallied while the Fed has executed about $200 billion in TSLF's. Dollar stabilization in this type of environment, I believe has provided an underlying bid for the entire market.

Personally, I have been focusing my efforts on trend trading GOOG after the blowout earnings report. Today it finally hit 600.

On a side note, MA and V have been doing very well, which was unexpected for me. The only trading I did in these names was going long MA post earnings, and selling during the same day. MA hit 300 today. Overall, their relative performance to each other has been relatively similar. V is up from approximately 60 to 85, a whopping 41%, while MA has rallied from approximatel 210 to 300, or 45%. I still remain more bullish on MA than V, despite its share price. Ultimately I expect MA to greatly outperform V percentage wise. V is enjoying a great deal of post IPO hype.

For 2008, I still don't have a very optimistic view of our economy as a whole. Future earnings outlook has not been entirely bullish, and I believe we are in a holding pattern for another 3 months, when we get another round of earnings. Without the expectation of near term growth in earnings, i find it hard for institutions to become heavily involved in buying here. Without institutional support, we may see a steady drift lower. However, as a trader, I am always open to any and all scenarios that may occur. The most important thing to do is to recognize a trend and follow it, regardless of what kind of headlines you see out there.

Friday, April 18, 2008

Great Week for the Market

What a great showing for the bulls this week. As more earnings reports came in, they seemed to reaffirm that the end of the world is not at hand. Even with poor earnings from the financials, we're seeing recoveries (as in Merrill Lynch and Citigroup). Most impressive was GOOG, which basically destroyed any bearish thesis by proving that they were not suffering from a slowdown in paid clicks. Yesterday I told a friend when GOOG was at 501 that it could rally 100 points today, and it almost did. Next stop on the upside is in the 560 area.

Next up is BIDU's earnings report next week. The gap between BIDU and GOOG closed to an all time low yesterday, with BIDU at 327 and GOOG in the 440's. Today we are back at a 200 point gap. I still think we're going to see a closure, but not this week as expected. Earnings season continues in full force the next few weeks, we'll continue to see a lot of volatility. Have a great weekend.

Friday, April 11, 2008

GE earnings pulling us down

As mentioned before, no matter how well the market behaves, bad earnings and guidance will drag us lower, and currently the dow is down nearly 200 points on GE's earnings miss/guidance. Next week we have many more reports coming in and quite frankly I don't think they are going to be pretty. Maybe we'll price them in today, but long term I don't see a solid bottom here.

Tuesday, April 8, 2008

Market Consolidation

Looks like over the past few days, the market has been consolidating its gains. This is quite normal considering how volatile the environment has been.

Things to be aware of
1. Oil continues to go higher
2. Wamu raises 7 billion to remain above its required reserve ratio - Moody's upgrades outlook to "stable", for now.
3. Solar is still hot - FSLR just hit a new high yesterday of about 291+
4. BIDU continues to gain on GOOG

Earnings season comes in full swing in the next couple of weeks. I think the we've been in a holding period until we have more indications. If we find that companies reporting less than expected numbers continue to rally higher, it will be a great sign for the market. I expect that we'll see a large move in the market soon, due to the recent limited volatility. Short term, it looks like we want to go higher, but it's important to maintain a balanced perspective.

Personally I continue to be wary of any positive momentum we see here, however. Our financial system remains caught in a liquidity crisis, and I don't believe that recent moves by the Fed can truly repair the damage so quickly (repercussions will follow). Credit has been and will continue to be the lifeblood of today's economy - the rapid loss of credit continues to bear down on every segment of society. Although we're holding up pretty well, the data continues to be bad. Remember that stocks are moved by earnings and guidance. No matter how oversold we might be and no matter how "calm" things seem, bad earnings and guidance WILL drag the market down. What we're seeing here could be a flushing out of short sellers (as an anecdote, I'm seeing that a few unshortable stocks have become shortable, which means supply is back). Markets never bottom out because of short sellers, they bottom out because people truly give up on stocks. I haven't felt any sentiment of this nature since last August yet.

Thursday, April 3, 2008

Back from a break

Apologize for the lack of posts - been very busy with other things lately. Still involved with the market however.

We've been rallying on no news/bad news, which is always a good sign. As mentioned before, the low set by the bear stearns incident and the ensuing rally was a signal for a possible bottom. We also had a couple of huge follow through up days, which is also bullish. Pullbacks have been on low volume. Overall it's "safe"r again to be on the long side in the near term.

We are seeing some major divergence between goog and bidu again, and as earnings approach, i'm becoming more and more convinced we may see share price parity between the two within a couple of months.

Thursday, March 20, 2008

Personal Trading Goals

As this year progresses, a few goals that I hope to achieve include the following:

1. Trade with the trend and increase the time horizon (when we finally find a trend, that is).
2. Cut losses quicker - have a hard stop no matter what
3. Don't let winners turn into losers.
4. Do not allow greater than a 10% drawdown/month

In all this volatility, I've fooled myself several times this year into believing that there is a trend anywhere. As a result, I've turned huge winners into losses. The most important thing in this kind of environment is to truly have no belief as to a general direction, but to take profits when they appear.

My equity is ahead by 42% for the year, but I did scale back my starting cash level on 1/1/2008. However the disappointment is that I was actually up 60% earlier in February, and this kind of drawdown is not acceptable.