Stocks-Rider

The One Millionth Opinion on Rate Cuts

Rating: 2.22 not yet rated(23 votes)    Vote:

You are logged in as | Logout

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. 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
Okay my rank is not that impressive. I had been away. I am back in the last two days. My rank has already jumped from down in the nadir to the middle of the pack. And I hope a continued focus would keep improving it. Secondly, I am still trying to change the components to fit in with the contest's framework. In my regular portfolio that I maintain at my own blog site, I am up by 70 % in the last six months and up by 40% in the last two months, because I have been using options and shorts - something not allowed on this site. I am not complaining. I signed up for it. So I will make necessary changes in days to come. But if you are interested in options and more aggressive style, feel free to check out my site. It carries the same commentary except that I have more options and short trades to align with my market outlook.

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
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 initiated several short term and long trades couple of days ago. Below are the picks and brief reasoning behind them

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
Krish