Doc's Diamonds

Time to "Flip" Financials

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Patience, staying the course and following your plan usually reaps benefits in life. Investing is certainly no different in that regard. I have targeted one weak area in the market and two rapidly rising areas of the market for using ultrashort ETFs. As might be expected, the weak area of the market, financials, has now reached my target for the short ETF. I will be selling out all of my ultrashort financials tomorrow. I will also, if the market starts weak as I expect, add key financial names so that I, in effect, will have "flipped" my financial stock exposure. Be aware, If you try to play "both sides" of a trade, you will usually miss time the "flip" and be too early on the other side of the trade. Because of this, I will not go in full force with financial stocks. I plan to buy a small amount of the four best financial names for this difficult market. In my view, if you would like to START to dip into financials, I recommend BAC (Bank of America), GS (Goldman Saks), JPM (J.P. Morgan/Chase), and WFC (Wells Fargo & Co.). Investing in any financial stock is not for the faint of heart in this "bearish" environment for financials. Still, financials have been beaten up in a major way and will, eventually, turn. When that will happen, I do not know. However, as I have with my other trades, I feel that the risk/reward ratio is now favorable enough to begin dipping in.

As far as my other ultrashorts (Nasdaq and Oil/Gas), they were purchased to take advantage of a trend reversal and not a long-term statement about the Nasdaq or Oil/Gas. I plan to remain patient, stay the course, and follow my plan with those investments as well. I might add to my ultrashort Oil/Gas soon if I get a better price entry point. I am not giving up and expect Oil to correct as the dollar strengthens and demand weakens in the short-term. Once that happens, I will sell my ultrashort. I will not add to the Nasdaq ultrashort unless the price improves considerably. It might be a month or so before I sell those positions as the correction in Oil has certainly not occurred.

Until next time.

Doc

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Oil and Gas ultrashort update

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Here's to the poor rating I will get on this post!

I realize that I continue to ride against the rising tide of oil prices and my ultrashort is getting killed at present. As such, I have been slowly adding to my position as it drops and lowering my basis. This will make a profit from this position much more likely if there is any pullback in oil prices. This is a bit different than "catching a falling knife" which is not a good investment concept. Oil has strong fundamentals for price rise and will, I believe, reach $150 per barrel even if the dollar strengthens.

However, I strongly feel that this rise is too far too fast. I am not alone in this belief. Many analysts are agreeing that a short-term strong correction in oil prices is likely soon. Most now believe that oil will not drop below $100 per barrel though. Some are calling for a fall down to $80 per barrel. I am not one of those. I believe that $100 per barrel of oil is now, unfortunately, almost a certainty. The primary reason is rising demand in the emerging markets (eg China) and very little increase in the supply of oil. The Petrobras find is a great one, but it will take mucho bucks to find a way to extract that oil. This will tend to support prices instead of lowering them as more supply normally would.

This ultrashort on oil and gas is not intended to last for the remainder of the game. I will look for a profit and then close out the short ETF and flip to going long on oil services. This will primarily be deep water drillers and NOV (National Oilwell Varco). NOV, subsequent to the purchase of GRP(Grant Prideco), is a very strong provider of oil well manufacturing and replaceable parts for deep water and offshore drillers. Only time will tell if this gamble on an oil pullback will pay off.

Thanks for listening.

Doc

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Don't get crushed below NASDAQ tumble

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I think that stocks will be THE asset class to be in near the end of 2008. However, we have retraced most of the steps off the pullback since October and I think we are in for a rapid and, maybe unexpected, decline.

Therefore, I think building cash and planning for a short-term pullback is definitely appropriate. Although I know the market has kept going up since I started this call, I look at this very similarly to the way I called the ag. pullback. I think the market will go higher than these levels by the end of the year. In the meantime, I look for a sharp and painful pullback.

I might be wrong, but I will be adding to the ultrashort positions tomorrow.

We will see how all of this goes. So far, my long positions have done well and that has proped up the total account. Now I need to balance my upside further with the ultrashorts.

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An oil and gas ultrashort update

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Man, this trade looks pretty lame!! Oil just can't stop going up, now over $124 per barrell.

I guess I have em just where I want em.

:)

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Market May move is like an October "fake out"

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I have seen this pattern before. We have a decent run and analysts start to relax and explain why it will continue. This is despite the fact that we have seen frequent dips (especially in the NASDAQ) during May and beyond with usual recovery in November. Now, please don't misunderstand, I am a professed Market Bull and always see stocks to buy even in the darkest times. I rarely have tried to "time the market" and usually stay fully invested. However, this is one of those times where I think the market has gotten a little ahead of itself considering the financial mess we still have, the housing slump, high gas prices, high food prices, and company earnings that have done fairly well but are still reduced. Also, consumer credit card debt is still very high. The Fed has helped with significant easing, but that has likely stopped for awhile and might even reverse.

So, if you were to considering timing the market, it depends largely on what you really believe. If you believe that this is a bear market and we have been experiencing a bear market rally, then you will be inclined to think that a large correction is coming soon. If you believe we are still in the middle of a long bull market and have simply corrected, then you will be inclined to think this market could continue to rally into the summer.

Now, being a bull, I would like to believe the latter. Unfortunately, I do not. I think that we are in the middle of a bear market and this is a bear market rally. As such, we are likely to tumble pretty fast from here and might retest the March lows.

With the lower interest rates, stimulus package, and company year over year comparisons becoming easier, I think we can rally effectively near the end of 2008 or early 2009 (given that the market looks 6-9 months ahead.) I even believe that we will be able to climb out of this bear market in 2009.

Short term, I believe we are in for a significant drop back toward the March lows. When that will happen, I cannot really tell. I tend to believe that May is giving us a "fake out" like some early October up moves. When the sentiment turns, I want to be positioned to profit. Thus, my persistence with using ultrashorts along with selective long positions.

We will see fairly soon if I am right. If I am, I might be able to move up the ladder a bit in this round.

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Patience and avoiding greed is essential when shorting stocks

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At the present time I have multiple positions in my portfolio that are "ultrashort" ETFs. These positions seek to return double of the inverse of a stock price change. The three ETF shorts are Proshares ultrashort Nasdaq, Proshares ultrashort financials, and Proshares ultrashort gas and oil. I have built these positions based on stock moves and purchased them in a contrarian fashion. In other words, as they have gone down I have added to my positions. I built up full positions in all three ETFs.

Oil prices moderated slightly last week and the ultrashort oil and gas ETF rose to over $33 per share. I sold some of my DUG position with a gain and held onto the rest. Since then, Oil and Gas have gone back up and I have moved into a losing position. My resolve has not changed with respect to Oil and Gas prices. I expect a significant correction of something in the range of 14 - 20%. When that occurs, I will sell my position and probably not restart it again unless there is another meteor rise in Oil. However, what if Oil continues to rise and reaches rediculous levels before it decides to correct? I will likely "stay the course" and withstand the hit. If oil continues to go up in a rediculous way, I may sell out but that is very unlikely.

The NASDAQ has done very well as I have built my ultrashort position. As with oil and gas, I will exert substantial patience because I believe that there will be a turn in sentiment relatively soon. When that happens, the NASDAQ will likely drop for days or weeks before beginning to recover. Further, the summer is not a good time to be in the NASDAQ historically. I will count on that and that this rally is likely a bear market rally. If I am right, the market will correct and we might retest our March lows. I will profit from my patience. If this does not happen, then I am hoping my long positions will "cover" for a losing ultrashort.

Financials are doing much better recently, but I am confident that more bad news is on the way and financials will correct downward as well.

These ultrashort positions can be very frustrating and require courage and patience. I will report back in a week or so with my progress.

If anyone looked at my account they might have noticed that I now own POT, the very stock I said to "sell" and get out of the way of a correction. I expected a sharp selloff in agricultural commodities (especially fertilizer) and was even quoted on MSN in the strategy lab open report as being bearish at that time. However, I pointed out that it would be a good time to reenter these stocks if they corrected. At the time I posted my decision to sell all POT and MOS, POT was selling at around $215 per share. When POT corrected rapidly down back to $177, I decided to "FLIP" the trade and go back long with POT. Since that time, POT has returned to about $200 per share. When I went long I did not buy a full position but a half position. This was in case POT had further to drop. I waited for a 15 - 20% correction and jumped back in. This move has proven a very positive one and I expect similar success with my ultrashorts.

Time will tell. I will report back soon.

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