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The One Millionth Opinion on Rate Cuts
Rating: 2.22 (23 votes)
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Fed Cuts 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. Also one quick thought on gold. If you are long gold 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. Quick comment on my portfolio As for the strategy lab portfolio, I have opened up several new positions in the last two days and I have explained my positions towards the end. I hope to give as best a return as possible from these new positions. Market Commentary 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 GS - 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. DKS - 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. AGE - AG Edwards has one of the best charts among beaten down financial stocks. The daily, weekly and monthly charts along with half a dozen technical indicators show stars in alignment for this company. This one is for long haul unless a post-rate cut shock really takes it down. XLE - Pick one - Dollar is going lower while Oil is priced in dollars. Hurricane season is not over. Charts point continued upward momentum. Latest Crude data indicate underestimation of global and domestic demands. SDS - A hedge bet. Just in case if markets turn rapidly south without giving enough time to react, this ultrashort ETF that bets on SPX going down and returns twice the number of points lost is a good hedge bet. After couple of weeks, I will in fact increase my position in this stock. In near term, there is a good chance this stock will underperform but that is the price you pay for hedging your bets. I am fine with it. Happy trading | ||
Opinions and Updates
Rating: 2.24 (25 votes)
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Like others, 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. I also placed trades on some stocks that I think would move nicely in the next few months such as AGE, DKS, SLAB, BX. AG Edwards, Dicks Sporting, Silicon Labs all have good charts, great price action and lot of support. In addition, these stocks stand out because the underlying fundamentals remain good. The only one that seems to be really expensive is Dicks Sporting but as I mentioned in my last post, it has a significant percentage of float that is short (17.53%). So we could take advantage of some good short squeeze in days to come. We already witnessed some of it in the last two days. But there is more squeeze left in the sucker. Blackstone is one rate cut sensitive stock that might benefit much longer than the housing stocks. While I believe there are still skeletons in housing companies' closets, Blackstone could benefit more directly and more cleanly from reduced rates in terms of leveraging equity to lap up more companies in days to come. That said, I am keeping a close eye because I am not sure when would that party get over. And that brings me to 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. A funny side story but related to above. I was just chatting with a friend of mine about Ben's actions and he happens to have a fancy for astrology and markets. Pat came his response - "Ben is a fire sign after all. He is not going to sit quiet..he doesn't have patience and he will give a counter attack much sooner than average. (Apparently Ben is a Saggitarius and apparently saggitarius is a "fire" sign)." Then just out of curiosity I looked up Secretary Paulson. Guess what he is too - a fire sign. Before I am dispatched to the dark pits of incredulity by the peanut gallery, as I said, this is just a funny story..nothing more to it. On the other hand, it always helps to be open minded to all ideas...and I mean ALL ideas. New Trades Sell remaining XLE by putting a trailing stop. The reasons to buy this was mentioned in my last post. Those very reasons are now getting used up. Oil prices will go down in weeks to come due to seasonality in oil trading. Besides, the fact that Fed cut the rates deeply inspite of rising oil prices means they probably know something that I don't about oil prices. 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. Sell SDS by putting a trailing stop. I suffered losses on this one. But I expected it since it was a hedge trade to protect just in case the markets went south after the FOMC annoucement. 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 mentioned 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. Finally, if you are interested in more aggressive style trading including options trading and shorts, then you may want to check out my blog site where I am more experimental. Please note I have a full time job so I don't get to post in real time my trades. But I am hoping my posts give you some ideas to consider for your own trading. Good luck | ||
