NOT YET! A SHORT STORY

I have been watching this market today in amazement. The differing opinion expressed by various gurus and pundits is amazing. What do I think? First, I am not a pundit or a guru.

I think this is the beginning of the correction that I would consider significant. I do not think that the 3% plus plummet that we experienced on Tuesday was the end all be all. The dead cat bounce today was just that, yet, I find in amazement how many people are stating that this was an aberration or a glitch from computers (read Dow Jones). I think that the “glitch” was due to overwhelming urgent need for the institutional investors to get out of dodge. A market does not plummet 400+ points without panic and some underlying ominous reason. As I posted in my prior posts, signs were there that we may be nearing the end of the rally that began back in July 2006. But even earlier, there have been signs that perhaps our economy is not well. Lest you forget, the impact of any economic event and its expression into an actual event has a lag period of at least 6 months. I believe that the economy will now show the signs of housing bubble that has not yet burst. I believe that the real fall out from housing market is just beginning. The subprime mortgage issue will turn into a crisis. We have not seen the mass hysteria that marks the end of the bubble boom in anything from the dot com busts to Tulip bulbs. Housing is no exception. But I do not think that the housing issue alone is responsible for yesterday’s melt down that showed all the complacent investors (including myself) that market risk is alive and real. The issues associated with yesterday’s global sell off in the equity market are multi factorial. This is because at the heart of the problem is China. China is the sleeping giant that dictates and feeds the world equity markets and to a larger extent the global economy. China is the fastest growing emerging economy and in some cases is already a world economic superpower. The relentless growth, demands for oil, commodities, and fledging equity market has lent a strong hand in yesterday’s sell off world wide. But, I also believe that they will be responsible for the continued correction and possible crash in the world equity markets. It may not happen tomorrow, but we are coming closer to the day of reckoning.

Please heed the siren call of caution as we trudge forward in this renewed market. While the previous rally was gradual and steady, I anticipate this corrective phase to also be gradual and steady but full of volatility. I do not think it is the time to be establishing long positions in hopes of getting “cheap” shares. The doomsday has not yet been declared and there is much more blood letting before this correction has run its course. Do not be suckered into the pundits and gurus who proclaim that yesterday’s sell off was an aberration or is a short term phenomenon. We have not had any significant correction since 2004 of 5% or more. I believe that we will have more harrowing days ahead of us.

The technicality of the market has changed. The character has changed from orderly and benevolent to chaotic and malicious. Please consider what the market is saying and act accordingly. The good thing that will come out of this correction is that it will refresh the market for the next phase up, and it will come sooner or later, but I would venture to guess that it is much later than anyone thinks.

How would I play this market? I would recommend those market players that have less than 2 years of experience trading to go to cash and earn 4.5%+ in the money markets and sit this one out. For the more experienced and adventuresome traders (notice I said traders and not investors) I would have a bias toward shorting the market rather than going long. The probability of success is much higher here as a short. Having said that I think one could increase their margins quite successfully by scalping the markets by employing day trading. I don’t like to day trade but when the volatility is this high sometimes I just have to heed the call of the wild.

I still believe that Google (GOOG), Baidu (BIDU), Research in Motion (RIMM), Akamai (AKAM), and Intuitive Surgical (ISRG) is a short. But I like to use puts dated at least 2 months out until expiration and close to the strike price (no farther out than 10%) to short the market. It limits the downside loss potential while shorting with the common downside risk is unlimited. On the same token, due to volatility, going long by employing quick scalping plays can be done on Google, Baidu, Research in Motion, and Apple. I would not use options while doing this but would favor commons here.

Have a good trading day and please be careful!