I hate market corrections. But, it is necessary. No meaningful uptrend has ever started without one.
I hear a lot of people blaming CNBC and the media for pumping the '87 crash as the main reason why we went down so much on Friday. But there were warning signs that this might happen along the way. Namely, the Dow and Nasdaq began to diverge with ominous but expected earnings report from the major banks including Citibank (C), Bank of America (BAC),and many investment banks continued to show erosion of earnings due to the credit crunch. The media tries hard to avoid using "subprime" these days. That word is like the plague so now, they use the word credit crunch.
No bull market can continue without the financials, transportation, and technology leading it. So the financials are in shambles with no recovery in the near horizon. The transportation segment is still alive and breathing but continued rise in energy costs will also put a damper in this segment. The only bright spot right now is the technology sector but even there, no amount of robust earnings from Yahoo, Google, and even EBAY has garnered much enthusiasm. In fact, Google retraced most of its gains on Friday on heavy volume into the close, a bearish sign.
We are in a precarious position. The dollar continues to go the way of the toilet paper, down the toilet. The sympathetic rise in oil to dollar decline is a huge concern. The continued erosion of the housing market and its related fall out from the subprime mess is now reverberating louder and louder.
The FED induced rally has now lost steam and it is forcing the investors to take a hard look at the reality of the situation. In truth, we are in a scary place. I fully expect the FED to cut at least 50 basis points when they meet on October 31 at the FOMC meeting. But will that be enough to help steer the economy in the right direction? The answer, sadly, is no.
With continued cut in interest rates, we run the risk of losing control of inflation and continued devaluation of the dollar. We are at a point of no return as the effect of FED induced stimulus will have positive and adverse effects. I for one at this point believe that the FED should continue to aggressively cut rates and worry about the inflation later once the economy has recovered (if it recovers). But at the same time, I grow ever skeptical that the FED is the answer. Perhaps there is no other way than to suffer stagflation to wash out the sins of our past ways.
Never the less, where we go from here nobody knows. It is scary. The media has run with the crash of '87 story. I don't know how Monday will unfold for the traders and investors. But one thing remains true. Thus far, earnings have been solid from the technology sector but that is it. The ominous warning from CAT probably doesn't help either. They put the odds of a recession at 50% but that's like saying the glass if half empty, it doesn't mean a thing.
I am out of Google and was fortunate to escape with a gain. I do have protective puts in place and plan to add more if Monday turns out ugly for a short term trade. But my cash position will allow me to aggressively buy for the reflexive dead cat bounce should the market pick up steam in its selling activity next week.
One thing to remember is that the market got way ahead of itself since breaking out in late August. We have gone parabolic since then and the correction that I anticipate will be sharp and swift. But the greener side of this story is that there will be fresh opportunities at the end.
Saturday, October 20, 2007
Monday, October 15, 2007
My Three Picks for the Fall
Hi, I don't know if anyone is reading my blog anymore. If you are, I am sorry I couldn't post more often. But such is the case of an aspiring full time trader and a full time medical practice...sigh.
But I would like to put on record my three picks for the fall. My so called "Triple Play" and the rationale and where I expect the price to end up. As you all know, I trade options and this time around is no different. I am a high risk high reward type of trader and I like the odds of the "triple play".
My theory is to trade around earnings or events. In this case, I have selected Google, Under Armour, and Cisco to round out my triple play. The commonality is that these stocks, with the exception of Cisco is a fast mover that can move one way or the other rather quickly and violently.
1) Google: I have been long the November call options, pushing out from $590's to the current $650's. I have been long this stock since $545. Despite what you hear in the media regarding issues of how expensive Google is, when you consider its PEG ratio of just under 1.2, it is cheap. I believe the recent run up from its lows near $477 to the current $620.11 is not manipulation. It is valuation catching up to the intrinsic fair value of the stock. In that matter, it still has a bit to go with fair value being calculated to be $777 (no pun intended). Google should command a PEG of at least 1.5 but after earnings, I expect it to go to at least 1.3. Google, is a value play that has some ground to make up. I anticipate that it will hit at least $650 after earnings but may be able to hit $720. I am hedged with 200 contracts of October $620 puts to protect my downside.
2) Under Armour (UA): Go ahead, say what you like about UA. But truth is the retracement to the $60's from the $73 peak after last quarter's earnings really has left this stock in a good position for a robust move. Several things that are going against this stock, and I believe it is wrong, are that it is too expensive at PEG of 2.5, that retail is affected by the credit crunch, and the anemic price movement lately. But when you dig deeply, UA is in the seasonally strong quarter with many avenues to improve margins and sales. Additionally, UA is not a fad but gaining ground quickly on Nike. There is so much pessimism surrounding this stock that most of it is unjustified. Recent downgrade by UBS on weather concerns are nothing but laughable and ridiculous. With the short % above 25% of the float, if they can exceed earnings, we will be able to see at least $78 and possibly $88.
3) Cisco: One word. Weak dollar. With its robust exposure to the outside of USA market place and the world wide expansion of web content, this stock is poised to break out of the $33 range and finally make the transition to the $37 range by the end of the year. The earnings on November 6th will give credence to my theory.
Markets are getting choppy but who would expect anything less when we have virtually gone straight up since the August 25 break out? I think today's pull back is healthy and mostly related to the options expiration manipulation issues than the fundamental break down. The credit worries are nothing new and just presents a new found appreciation for the wall of worry. Is our market perfect? No. They never are, but it would be foolish to fight trend tooth and nail, lest you get toothless. But please protect and respect your capital with some hedging, just in case. You never know.
But I would like to put on record my three picks for the fall. My so called "Triple Play" and the rationale and where I expect the price to end up. As you all know, I trade options and this time around is no different. I am a high risk high reward type of trader and I like the odds of the "triple play".
My theory is to trade around earnings or events. In this case, I have selected Google, Under Armour, and Cisco to round out my triple play. The commonality is that these stocks, with the exception of Cisco is a fast mover that can move one way or the other rather quickly and violently.
1) Google: I have been long the November call options, pushing out from $590's to the current $650's. I have been long this stock since $545. Despite what you hear in the media regarding issues of how expensive Google is, when you consider its PEG ratio of just under 1.2, it is cheap. I believe the recent run up from its lows near $477 to the current $620.11 is not manipulation. It is valuation catching up to the intrinsic fair value of the stock. In that matter, it still has a bit to go with fair value being calculated to be $777 (no pun intended). Google should command a PEG of at least 1.5 but after earnings, I expect it to go to at least 1.3. Google, is a value play that has some ground to make up. I anticipate that it will hit at least $650 after earnings but may be able to hit $720. I am hedged with 200 contracts of October $620 puts to protect my downside.
2) Under Armour (UA): Go ahead, say what you like about UA. But truth is the retracement to the $60's from the $73 peak after last quarter's earnings really has left this stock in a good position for a robust move. Several things that are going against this stock, and I believe it is wrong, are that it is too expensive at PEG of 2.5, that retail is affected by the credit crunch, and the anemic price movement lately. But when you dig deeply, UA is in the seasonally strong quarter with many avenues to improve margins and sales. Additionally, UA is not a fad but gaining ground quickly on Nike. There is so much pessimism surrounding this stock that most of it is unjustified. Recent downgrade by UBS on weather concerns are nothing but laughable and ridiculous. With the short % above 25% of the float, if they can exceed earnings, we will be able to see at least $78 and possibly $88.
3) Cisco: One word. Weak dollar. With its robust exposure to the outside of USA market place and the world wide expansion of web content, this stock is poised to break out of the $33 range and finally make the transition to the $37 range by the end of the year. The earnings on November 6th will give credence to my theory.
Markets are getting choppy but who would expect anything less when we have virtually gone straight up since the August 25 break out? I think today's pull back is healthy and mostly related to the options expiration manipulation issues than the fundamental break down. The credit worries are nothing new and just presents a new found appreciation for the wall of worry. Is our market perfect? No. They never are, but it would be foolish to fight trend tooth and nail, lest you get toothless. But please protect and respect your capital with some hedging, just in case. You never know.
All Comments
