Bear Strikes Back and He Means Business

On 12/10/2007, I liquidated mom’s positions in Google GOOAD January $720 positions in anticipation of the FED announcement, for a nice profit of $3000. I also liquidated all of her positions in CROX, GME, CPLA, CDS, for a profit of $535 which brought mom’s account from $195,000 level to $198,000.

On 12/11/2007, I was growing especially wary of the market’s advance, especially because it was driven by the hope that the FED would cut 50 basis points off the FED FUNDS, which I thought was unrealistic. The market was running on hope and the fundamental macroeconomic conditions have not improved since the snap back rally happened. I reasoned that a 25 basis point cut would be disastrous for the market that has priced in a 50 basis point cut, and hence we got a total sell off today in the markets today, which essentially kills the current rally. I believe we have more downside to come and this next leg down will be more ferocious than the previous one.

I astutely bought mom TWM (Proshares Ultra short Russell 2000 short ETF) for 300 shares at average cost of $69.1399. I probably should have bought more, but I didn’t want to be a pig and I will allow this position to prove itself before I commit more money to this name.

I also bought BIDU January $370 put contracts for a total of 20 contracts at an average price of $20.80. I believe that BIDU is frothy at this level and will not be supported in the economic environment that US is heading into. At best, this stock is a $75 stock trading at the level of $380 level. Additionally, BIDU has a history of seasonal weakness from December through end of February and early March. I anticipate that we will at least test the lows of $298 level before the contract expires. I use options in this instance because the shorting endeavor is risky and the downside is defined in put options whereas if I shorted the common shares, my risk is infinite.

My current positions are:
TWM 300 $69.1399 $70.87 $21,261.00 +$1371.00 (6.89%)
BPJMN 20 $20.80 $25.00 +$5000 (11.11%)
cash: $136,431.06

My plan is to slowly add to the TWM if this break down in the market gains legs. Also, I may want to add an additional 10 contracts to BPJMN if BIDU makes a recovery attempt tomorrow.

We do have positive seasonality of Santa Rally this time of the year so I have to keep my eyes open. However, just like the Turkey rally, I think Santa is not coming to town this year.