Stocks-Rider

Be careful this week

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I want to talk a bit about next week, since it is important. I don't mean to scare you. Market indicators are giving a picture which says that we may jump off a cliff. Okay that may have scared a few. But the matter of fact is if you get a chance Monday morning, please don't get carried away by any sort of bounce..sell all or most of your profitable positions. If you don't then be prepared to ride one of the most volatile weeks we have ever seen. The good news is the conditions that lead to short term capitulation will soon lead to the eventual market rally. But for you to even ride through the down spike, you need to be either extremely brave or loaded or make sure you can cover every single margin or maintenance call with aplomb.

You ask What am I doing? Although the model portfolio of this blog did well last year, I have not bought a single new share or call option in the last few weeks. I have some amount of dry powder. I have couple of shorts open. I will swoop in and buy some good bargain values once the capitulation starts or a convincing rally begins. But until then I am hanging on the sidelines. You know that race they have in Madrid every year where the bulls trample bunches of participants. Well I am standing on the side and watching the blood bath with the only difference being instead of the bull, it is the bear. Hang in tight my buddies. This will be over soon but indicators tell a final blood letting has yet to happen.

There is a very small chance that we may not see the extreme conditions of capitulation and the market may well start rallying for a longer term. How to know if the rally is not a fake bounce or a dead cat bounce. Here are some tell tale signs: (a) Ben announces 75 % rate cut or a combination of 50 % cut and some massive money injecting measures. (b) A few more financial m&a occur signaling the smart money and big guys are seeing the light at the end of tunnel. (c) Earnings week has the CEOs talking beyond their product revenues and describing positive global trends are still here and improving every quarter giving positive guidance for 2008. (d) the CNBC talking heads start questioning the authenticity of the rally :)

Okay the final one was on the lighter side (only slightly though). But you get the picture? If you are more interested in the indicators giving the tell tale sign of why my fear has increased, search any good blog article for lack of VIX spikes, data reflecting commitment of traders released, number of shorts on NYSE, open SPY put interest, pore over the last week's banks' earnings data and comments. We have gone way downhill but it seems we are not there still. And maybe this final downfall will finally trigger Ben to walk his talk. How can he screw up this time? If he cuts 25 or 50 basis points before the Fed meeting and leaves with comments such as "ummmm..yeeeeaaahhhh...inflation is concerning..and my beard needs a trim..and oh..we will take every sustantive action" and then goes to Princeton for an afternoon coffee with his nerdy colleagues. Ben, the futures market has already baked in all of this..so please. I don't know as much as you do but that has nothing to do with how you can screw up more than Alan. And that requires quite a talent my friend.

So Cuts may happen before the meeting and from that point on we have a rally at least for the short term assuming Ben surprises the odd makers who have already baked in at least a 50 % rate cut.

Because of that last point, you have to be very careful if you are considering shorting the markets. Be prepared for a huge rally anytime Ben announces unpredictable measures and unpredictable cut amount. I would be suprised if this would be the first thing Ben does on Tuesday but who knows. Your best bet: keep your powder dry. Be on the sidelines and let the massaccre begin. Then when the blood is flowing everywhere, you go out there and pick your diamonds from the street.

Krish Rathi

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On Sidelines

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I have an update to my post from last night. As expected the massaccre began in the morning. In my last post I surmised if Ben cuts by 75 points, there is a good chance the massaccre shall stop. Well that is what happened. Although we are down for the day so far, Bulls can still claim victory because we have painted a bullish hammer coming at the lows on the daily chart, very similar to August 16th lows. In plain english in the epic battle between the bears and bulls the closing price ended much closer to the highs of the day than the lows of the day. Not to mention the fact that Vix finally obliged us with extreme levels, levels that some experts think are necessary to call at least a tradable bottom if not a long term bottom.

Although in near future we may not likely have the kind of bleeding we had this morning there is absolutely no reason to be a bull right away. I have stepped on the sidelines as I indicated yesterday but I have also closed my short term put positions in my own portfolio (Strategy Lab doesn't allow this but I wanted to point out just in case if anyone dabbles in Options trading). It is difficult to predict if we will still have a further downswing. Signs may point to a short term bounce barring ugly quarters from companies, but the regular certainty is not there. So it is better to keep my powder dry again. Now if you are planning to buy leap options or stocks that you may want to keep for a year or longer, please be my guest and buy those cheap suckers right away!

Hang in there
Krish Rathi

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