The Status Quo-The Best of All Worlds

In my recent posts I reiterated my view that we are pretty close to the levels where I expect the market to finish the year. Barring a major geopolitical shock, I don’t expect a major selloff, nor do I see a significant upside for the markets. At the same time, I am beginning to look ahead to 2010 and what to expect from the markets over the next few months.

Recently, I also made a point that the first quarter (actually February and March) will once again be a trying time for the market. Here are a few points that explain my position. The last few weeks of the year we will likely chug along fine, partially due to the positive seasonality bias combined with unwillingness of money managers and the sellsiders to rock the boat and finally get paid this year. There are still few attractive alternatives to equities, and the Fed policies and weak US dollar continue to encourage risk taking. At the same time, the charts are extended, and the buyers are fatigued. So we will see a narrow band trading for the rest of the year. Volume will likely remain low, driven by traders' day-to-day biases.

The best thing for the market in my opinion, is status quo (SQ). I define SQ as mild economic recovery with slightly improving jobs data, low rates, and stable US dollar, slighly above the the present levels. Of course, status quo also implies NO political shocks, NO economic shocks, NO corporate scandals, and NO emerging markets meltdowns. Wishful thinking?

Other scenarios that I considered could all potentially be negative for US equities. Higher unemployment and weak US dollar will be a major drag on the economy. Strong employment and sharp recovery, combined with rebounding US$ and rising interest rates - will also be bad for the market. So, any significant changes will initially be perceived as negative and therefore will require a correction to adjust to the new set of variables.

We will likely get through January OK with the help of seasonality and a New Year optimism. The greed of sellsiders and buysiders, having their comp reset back to zero will carry the bullish tone for a little bit. Keep in mind, analysts are now starting to move to 2011 earnings forecasts, making valuations more reasonable.
But as we get deeper into the first quarter, I really don’t see the SQ scenario holding. Admittedly, the timing is very difficult to nail, but I expect it to come in the second half of the first quarter.

Although I generally consider multiple potential scenarios, I think the following one is most likely. I broke it down into three layers, all basically leading to the same path.

1) Economic: Recovery continues to accelerate, both globally and in US. Eurozone, which generally lags US by 7-9 months, begins to shorten the distance. US GDP registers 3%-3.5%, while unemployment declines to below 10%. Emerging markets heat up, as exports begin to come back. No one questions recovery anymore, although it still remains shallow and spotty. Fed finally decides to pull the artificial stimulators and starts to reconsider its zero rate policy. The FOMC languages changes, implying the inevitable changes to the interest rate policy much sooner that most economists and investors expected. The carry trade begins to unwind and the US dollar starts making a come back.

2) Political - as world economies begin to recover, the foreign Central Banks begin to tighten money (effectively raising rates), putting real pressure on the White House to support the US dollar. Political pressure from both allies and the likes of Russia and China, begin to force the government's hand. Politicians no longer preoccupied with Healthcare reform wake up to the potential of escalating trade wars. One of very few tools the Fed has in its bag to help the dollar is to raise rates.

3)Corporate: It was obvious, looking at the November's 8% increase in productivity, (which is by the way one of the largest % increases in the last several decades) that businesses squeezed their operating budgets and reigned in SG&A expenses very effectively. This, of course, was the right strategy during recession and in a period of declining revenues. If we assume that recovery continues to take hold, the strategy will need to change. To retain market share and start growing revenues again, the companies would need to spend. This would cause an increase in expenses, which will typically precede an offsetting revenue growth by a few quarters, depressing earnings. Analysts will have to adjust their earnings forecasts down, making valuations less attractive. This will spook the investors.

So to summarize, the above developments will likely result in the following - higher interest rates, somewhat stronger US$, lower unemployment (but still in high single digits, as some jobs are lost if not forever, than for a very extended period of time), residential real estate prices improve, while inventory still remains high. Commercial real estate will benefit in some regions (mostly in New York and California) as foreigners use their strong currencies to take advantage. Lower than forecasted corporate earnings will hit stock prices effectively making it more difficult to raise equity to grow or acquire.

Here how I see the above impacting various markets:

US Equities - negative, especially as we get into the mid February.
European Equities - neutral, markets remain mostly range bound through the first few months of 2010, supported by capital flowing to Europe instead of US.
Emerging markets exchanges are leading the way, Asia (China, HK, Singapore, Malaysia, Taiwan, Korea),Brazil, and some of the laggards - Turkey and Thailand.
Commodities (basic materials and energy) finally decouple from the US currency and rally despite stronger dollar, as demand improves, fueling inflationary fears. Gold doesn't benefit as much, given already its bubble level achieved in 2009. Natural Gas rebounds strongly, given an unusually cold winter in US, but still continues to lag other energy commodities, given more and more of cheap supply coming from shales, despite cuts in production.

So be careful what you wish for. Sometimes the best of all worlds is no change at all.

Taking a quick look at technicals

I have decided to take a closer look at the market technicals in light of Friday's selloff.

For some time now, we have been in an upwardly sloping 10% (or so) trading range. This is true for all equity indexes, although there have been some variation as of late. The long term trends are still intact, making the bull bets profitable, but one can certainly make money by trading against the main trend, as it approaches extremes. All indexes are overbought now and are trading near the top of the their respective channels. This usually warrants caution, especially with Dubai’s headlines dominating the news. Although, its not a reason I consider fundamentally meaningful for the long term market trend, over the near term, the nervousness and stretched technicals may present a delcine of a few percentage ponts. I would use to very very selectively add on a shallow pullback, but not really looking to short here, unless you want to just hit and run using leveraged short ETFs.




Russell 2000 index – continues to be the biggest underachiever lately, down 6.5% from recent highs of 623. The range is well defined by 560-620 channel. There is some support near current prices, at around 580, a near term support you should be watching. If we hold it, then you could conceivably add to IWM. A break below could mean a pullback of another 20 points, to the bottom of this channel. This pullback would translate into roughly a 10% decline from the double top that was formed in September/October. The underperformance should not be surprising, given the index is up 82.4% since March lows, more than any other broad based equity index. I am not yet sure, it means that the bull run is over.




SP500 – the cash index has been struggling to move above 1100, while holding 1030 lows quite well. I think we are likely to stay in this range through the end of the year. The index is currently overbought and should not surprise anyone if we give back some. There is some support at 1080, which should hold, but Monday will be a good test.


Finally, a quick look at Nasdaq and the Dow. The Comp has support near 2025, where we were just a few weeks ago. The 2200 seems to be the lid, for now. The Dow, is comfortably above 10,000, with decent support at 10100. At the same time, we need to break above the 10,500 level in order to continue its bullish march. Frankly, I don’t see this as a likely scenario until well into next year.

So with all the major indexes near the channel highs and overbought momentum indicators beginning to decline, I see an organized pullback and pause to near term support levels, where we would need to reassess the situation. Today’s action is constructive, as we rebound from the lows of this morning, but you can never draw meaningful conclusions based on holiday market action.

Black Friday – Time to go shopping?

I’d say buy this dip, especially, if you have been sidelined. Forget Walmart's and Best Buys’ door busters, power on your computers and take advantage of some real bargains out there.

The geopolitical headline is pressuring the risk trade this morning, with Dubai sovereign fund requesting to restructure its debt. The markets in US are down, following the selloff in Asia and Europe, while we were feasting on turkeys yesterday.

So is this another markdown opportunity and should we get involved? It depends. It is not a time to buy indiscriminately. I will explain a bit later.

I truly believe the headline itself is not a significant catalyst to bring the market to its knees. Geopolitical events, generally speaking, are short term, flash in the pan events, with 8 out of 10 times presenting an attractive opportunity to add to portfolios. Nothing will likely change. Dubai’s lenders will figure out a way to restructure its debt. It’s in no one’s interest to let them default. Also, despite the scary headlines that Dubai has $80-$90 billion in debt, only a few billion is due in the next 12 months. A drop in a bucket. So by itself, the event is insignificant. But, one should not forget a ‘butterfly effect’, as economists would point out. History buffs would also remind us that many of the world's cataclysms started with small and unimportant events. At least, viewed as unimportant at that time. Recall how the WWI started with the Sarajevo assassination of a relatively unknown political figure, Archduke Franz Ferdinand, heir to the Astro-Hungarian throne. The history is full of such examples, but I digress.


At first blush, a worldwide selloff is likely just an excuse to take some profits, as nervous investors have already been uncomfortable with levels of certain assets. Typically, in times of uncertainly and fear the US currency gets a bid and as we have witnessed many times over the past few months, strong dollar sends the equity markets and commodities in the opposite direction. Not what we learned in business school, but once again, I digress.

So I am expecting a fairly typical selloff, with commodities and financials leading the way down. It is hard to say whether this would shift the sentiment scale into the fear camp and cause irrational selling. Watch for bear gurus, to come out of the woodwork to rehash once again their bearish arguements.




What am I looking to do? I think I will take advantage of this light volume selloff and selectively add to my portfolio. I will focus on stocks that have ran away from me, and buy back some December calls I wrote over the last few weeks. I am not buying financials as it is not really known at the moment who might be on a hook for Dubai’s debt. Even with restructuring, these assets may take a pounding. It is also unknown what ridiculous assets are backing up these loans – anyone wants to buy an indoor ski resort? I am not planning to add to my emerging market exposure – as it will likely be the most volatile sector. If the risk trade gets reassessed, the first exodus of money will impact the emerging markets.


I am not buying gold either. Gold has been clearly acting differently than one would expect today. Instead of attracting money flows, as typically happens in times of uncertainly, it is for sale today, behaving just like other risky assets. Take mental notes, goldbugs.

My quick and dirty Buy list: APC, NKTR, MWA, ANR, XTO, CELG, AKS

A Pause is Likely. Selloff? Naah!

Once again the market touched 1100 on the SP, hitting my year-end target (+/- 25 points). This has proved to be a very clear technical barrier which also represents a fairly valued market territory at roughly 15x forward earnings, especially given the early stage of economic recovery.

Contrary to many skeptics out there, I don’t expect a major selloff after hitting this target. A pause and consolidation are likely and would be a typical market reaction before we can overtake such a tough overhead resistance and move higher. I don’t expect the market to move much above 1125-1150 either, and as I have been saying for months now we are sort of in a 10%-15% trading range. The best strategy in this type of market is to buy aggressively oversold high beta stocks, with decent fundamentals, on pullbacks to bottom of the range and to sell calls or partial positions as we get near the upper boundaries, like we are now. Shorting indexes in this tape is just not a smart strategy, you will be better off shorting very overbought individual stocks to exploit the volatility.

I see the fear of underperformance and greed of money managers that have not been paid in over a year as a powerful combination to support the market in the final two months. The recent data should provide enough confidence that we ARE in the early stages of economic recovery. Even the housing is beginning to show signs of stabilization and improvement. The next leg up would likely be a reaction to a more robust economic improvement. We would need to see the topline-driven margin expansion, and sustainability of cost cutting efforts, as productivity remains a real engine of earnings growth. However, I continue to be highly mindful of any changes in sentiment, as the medium term expectations about the robustness of this recovery are getting a bit on a high side. Unless it continues to be balanced by the same degree of pessimism that provides a nice wall of worry for the market to climb, we may be setting ourselves up for some disappointment.

There is a real possibility that we might see negative returns in the first quarter of 2010, with some down drifting lasting through the end of February/early March 2010. This could be the last real opportunity to get in for yet another leg up in the market, as analysts start moving their forward estimates to 2011, making the valuations seem more attractive. Then watch for the likes of Roubini and Kass (and other vocal bearish prognosticators) to throw in a towel or become irrelevant, in the next few months. They will likely cause an army of ‘glass-half-empties’ to finally enter the market.

The main threat I see for a real selloff (not just a small dip as we have been seeing over the last few months) next year is the Fed. The Fed has been a non-risk factor thus far the investment process, but it will likely to change next year, as the unemployment stabilizes and the need to support the crashing US currency becomes a matter of national priority for politicians as they no longer debate the merits of nationalized healthcare. We are already seeing other Central Banks’ interventions to prop up the green back, but the Fed could do it easily if they chose to by just raising rates. And since no one right now believe that they will be raising rates anytime soon, this could potentially be a pretty nasty catalyst for a market selloff. I do hope that they will take their time and will slowly articulate the conditions that would necessitate the change in the interest rate policy, telegraphing their intentions well in advance.

So to summarize, I see opportunities on the long side for the rest of the year and remain firmly in the dip buyer camp. I see no real negative catalysts and completely disagree with those still clamoring for a substantial selloff. At the same time, I am not complacent and remain vigilant about managing my risk, especially as we get near critical technical levels as we are now. I continue to watch the US dollar and commodities for direction of the market on a daily basis, but see this more as a trading and tactical weapon. As long as the sentiment remains in check and Fed behaves the only place to be is equities. Additionally, the 25bps return on cash and the overcrowded bond trade is not likely to attract any real capital.

The Line in the Sand - 1050, The Battle Between Dip Buyers and Bounce Sellers is On

So my strategy paid off, as I used the 1100 level on SPX to raise cash and reduce beta last week. Still, it hurt like hell yesterday, and I did take a few positions down a bit and bought a small piece of TWM insurance, in case the GDP numbers were ugly. Prudency is a virtue.

Having said that, it was clear to me that yesterday’s selling was irrational, but not unexpected. My two or three previous posts provided specific reasons why the odds of a selloff have risen dramatically over the past few weeks.

Contrary to many other bloggers and posters, I DO NOT BELIEVE THIS IS THE BEGINNING OF MAJOR SELLOFF. I am sticking to my earlier prediction that the rally will continue through the end of the year, although a correction/pullback right now is perfectly normal market reaction. Let me say it again - NORMAL REACTION.

As the title of this post says, I think the battle around the 1050 level on the SP will determine the extent of the pullback. I would not be surprised to see it get taken out and the index to revisit the 1020-1030 level, but I do believe we will be marginally higher by the end of the year. I expect to end 2009 near 1100 level.

My focus is not really to figure out what happens to the SPX. Although I use it as an overall market barometer, I think the research focus should be on stock and sector specific dynamics. This will be the key to outperformance in the next 6-12 months. If you spend your energy on trying to guess where the market is going - you will realize that it is futile. The long term economic picture will remain murky for some time and it will keep enough pessimists out of the market, so there is no complacency among investors that we witnessed in the past.

Today I am doing some trading. I am not really establishing new positions, but revisiting some of my old favorites and either reestablishing recently sold positions or adding to some of the existing ones that got crushed in the 'beta' trashing of the past few days.

Stay cautious as NOBODY really knows how violent the correction is going to be if we break below 1050. The battle between dip buyers and bounce sellers is on. Take advantage and use the overreaction to add to your high conviction ideas when they get oversold. This is the best advice I can give you.

My trades: Sold AMSC for a nice trade. Bought DVN. Added to SNDA, DNDN, NE, ANR, JRCC. Looking to buy SWN, SLB.

Thoughts On The Recent Market Action, part II

I wanted to add, to my fundamental rationale stated in earlier post, that the technicals are also indicating that the odds of a pullback now exceed the odds of continued rally. The short term indicators are both ovebought and show divergence with momentum indicators like RSI and Stochastics. While we witnessed a 52 week highs on the broader indicies, these indicators clearly failed to confirm.

Additionally, the last few days, we have seen a lot of rotation and on UP days (some stocks were up, while others were down), while on DOWN days,it seems to be more uniformly red.

Lastly, the intraday volatility has picked up, which is indicative of a nervous market. More reason to be cautious.

Don't panic. Stay long your high conviction ideas, sell covered calls, but dont short this market. Not yet. There is still a wall of worry and plenty of pessimism out there.

Thoughts On The Recent Market Action

My intermediate SPX target has been achieved as the index touched 1100. Although, I can make a case for it to move higher to 1150-1200 by year end, I think the risk reward of this scenario is not very attractive. We are now more likely to see an organized pullback, perhaps back to 1050 or even 1030 level.

While the earnings continue to surprise both on the EPS as well as the revenue line, the clear pattern is emerging. The sellers are moving out post the earnings surprise. Nothing to do with fundamental prospects, but traders are not sticking around to find out how the long term thesis will play out. With oil also reaching the top of my near term $80 range and the US$ attempting to rebound, the easy money has been made. The strategy now is to tread water, wait for the pullback or the sideways action to come down the nerves and get the overbought readings reset. We will see how willing and courageous are the buy the dip guys. I am not shorting the market, but it’s clearly saying: “Don’t chase, stay nimble, don’t speculate without having a very strong conviction in the trade”. I am listening, since I learned a long time ago to respect it. I will let the amateurs chase it here…but will remain vigilant in case I think it gets overdone in some of the names I don’t mind holding through even a more serious correction.

A few weeks ago, I started implementing my 'barbell' rotation strategy. Basically, reducing risk by lowering beta and selling some of the extended commodity, materials, china, and energy holdings. See the post here: 'Barbell' Your Portfolio to Reduce Risk.

My net cash is higher this week than it has been in the last 3-4weeks (~65% net long), but more importantly, the aggregate portfolio beta is now .55,following the aggressive rotation into Healthcare. I am also layering some shorts positions, but most are earnings specific or company specific ideas, and not a bet on the market weakness.

Main recent portfolio changes: Sold/Reduced - ANR,SWN,CELG,NE, IPI,MWE,DVN
Bought/Added - ALGN, OMPI,SNDA.

Intermidiate/longer term I remain bullish on multinationals (US$ play), agriculture, healthcare, and select energy, materials, industrials and infrastructure.

A few thoughts on a first week of earnings results

As the third quarter earnings reports are rolling in, I feel vindicated. My scenario for jobless recovery seems to be playing out. The tech sector is reporting very sold numbers, not only on the bottom line, but revenue as well. AMD, GOOG, IBM - all seem to be living up to lofty expectations. The bottom line continues to benefit from cost cutting, efficiencies and productivity gains (yes, productivity gains). The revenues are benefitting from pent up demand, depleted inventories, and improving fundamentals. Now let's hope that the stocks can continue to perform, as expectations are racing to even loftier levels.

The main themes that I outlined in my post a few weeks ago
http://themrktmaven.blogspot.com/2009/10/what-to-expect-from-third-quarter.html

are working out: semis (SMH), apparel manufacturers, oil/gas, china, multinationals. I have been adding some more exposure to other Asian emerging markets with ETFs: Malaysia (EWM), Hong Kong (EWH) and Singapore (EWS). Lastly, have been adding some of the best of breed biotechs: CELG, GILD, CEPH, more for risk diversification. See this post for more details: http://themrktmaven.blogspot.com/2009/10/barbell-your-portfolio-to-reduce-risk.html

Lastly, I wanted to comment on two stocks in my portfolio. I am taking a beating in SNDA and AMED, and usually, I sell my losers once the loss threshold is achieved (7%-10%). I am sticking with both for now. The reason I am is because I clearly understand why these stocks are down and I am comfortable with this risk. SNDA is a victim of two China's regulatory agencies infighting and potentially new restrictions that can somewhat change the landscape for the Chinese online games. I am sticking with this trade, because the stock is cheap, generates tons of cash, has $43 in cash + recently spun off GAME equity on the balance sheet, and a total control over GAME. AMED is a victim of a short seller newsletter (that in my opinion is basing their short thesis on highly questionable information) and the HC reform overhang. At 10x 2010 PE, I think I am fairly compensated for this risk.

Please send me a message on marketguru.com or use comments on my blog to contact me with questions.

'Barbell' Your Portfolio to Reduce Risk

So we have been here before..in 1999, then again at the end of 2003 and now once again. Dow at 10,000.

The prognostications of Tice, Farber, Roubini, back in March and April about Dow heading to 3,000-5,000 are no longer a very realistic scenario...although some hard core bears may disagree. Personally, I never dismiss any scenario, to me it’s just a matter of odds and probabilities. These odds and probabilities are always shifting, depending on what I see, read, hear and feel. At Dow 10,000 and with SPX approaching 1100/1150 we are near the upper end of the trading range. Although we can clearly get a breakout-fueled rally as more towels get thrown in, the risk is also increasing.

I am dealing with this risk by creating a Barbell Portfolio. It is a technique borrowed from bond managers, to create a portfolio using bonds with short term and long term duration. In simple terms, it reduces bond portfolio risk in an uncertain interest rate environment. Similarly, I am rebalancing my portfolio by adding some of the ‘safer’, lower beta healthcare stocks, while also keeping some of high beta, volatile materials, industrials, energy, and emerging markets stocks.

I think this is a sane approach given where we are and how far we come from. Here is my thought process.

If the market tanks from here, the healthcare holdings in my portfolio should outperform. Yes, they may still decline in absolute terms, but given that most of them lagged the market because of the HC reform overhang, it remains one of the least overbought sectors.

Conversely, if the market keeps going, my high octane stocks should continue do well, and hopefully outperform the market, while the resolution of the Obama's HC plan (whatever the final outcome) should drive stocks higher as well. Despite a defensive nature of this group, we may see a pretty rapid ‘catching up’ as investors bid up the shares of the best of the breed biotechs, managed care, and hospital stocks. I am not including smaller, riskier, biotechs with binary outcomes as part of this strategy, but will add them on a case by case basis to the “risky” part of the barbell.

The barbell portfolio will allow you to still participate in the market advance, while protecting you on the downside, should momentum turn. Of course, as any insurance/protection, it has it cost. Should the market move aggressively from here, the healthcare will continue to lag.

My top picks for the HC are : AET, UNH, CEPH, CELG, GILD, AMGN. Another name that I like and have a lot of confidence in is DNDN.

5 reasons Why The Rally Could Continue Through the End of the Year

In response to lot of financial blogs calling for a market top, I wanted to offer some of rationale why I think its not likely to happen until the end of the year.
So here are my five simple reasons.

1) Last week, we could not take this market down more that 3.5%. I recently read that someone called this decline horrendous. I can't help but laugh. C'mon now, 3.5% after a 55%rally, is not really horrendous. This 3.5% ‘horrendous’ decline was in a face of one the worst weeks in terms of economic headlines (recall- weaker ISM data, higher non farm unemployment, bad auto sales, bad housing data...etc) and just ahead of unpredictable 3Q earnings season. Still - only down 3.5%. Let’s not get overly dramatic here people.

2)The fundamentals are getting better, slowly. Sure, bring on the boos...Recovery, has been a dirty word lately and a source of heated discussions on financial blogs. well, yesterday AA had decent numbers and retail sales came in better. Jobless claims - again better. Are these numbers good? Not really. But they are better than expected. Perception is what drives the markets. Always. Don't ignore it.

3) I can't argue, however, that we seem to be clearly ahead of fundamentals now as far as the stock market is concerned, but if we get a 10% sell-off to the bottom of the range,(950/1000 on the SP)the market will be trading at below 13x 2010.....and guess what, in a few months the analysts will unveil their 2011 estimates, making the market look even cheaper. And the smarter guys understand it.

4) We are through the worst of seasonality - a spooky September and the first half of October. Thus far, anyone betting on seasonal weakness, was proven wrong. Again, we had plenty of excuses to push this market through support and toward the lower end of the trading range last week, but thus far - another victory for the dip buyers. Viva la dip buyers.

5) Finally, don't forget, most of the money managers didn't get paid last year..not the traders, nor the investment managers. The HF guys are finally sitting on some profits, but many are still below the water mark (the level they need to achieve in order to get paid). Getting killed last year and in Q1 was bad, but they had a lot company. Not showing anything better than 10% YTD return -that's horrible. Try to explain this under-performance to your institutional clients that stuck with you when you lost 30% last year. My point is that unless they are sitting on a 25% gain, they will stay long and will participate in this momentum driven market. Every pullback will likely be bought through the end of the year. And yeah...the shorts are exasperated...just ask them.

I do not advocate chasing this momentum unless you have very good discipline and can trade quickly with tight stops. We are just at the beginning of the earnings season, and more volatility is expected, so stay nimble and patient. My take is that this market remains in a 15% trading range with an upward bias and my strategy remains to be a swing trader through the end of the year and to rotate into weaker, underperforming sectors as the market approaches the top of the trading range and becomes overbought. We are still 30-60 points away on SPX from there, so there is some room.

Struggling with Myself

I struggle with myself on days like today..as every bone in my body tells me to sell and not chase this momentum. So I am not chasing, but I am not convinced that shorting this market is the right strategy and has been pretty vocal about the reasons why on a number of financial sites and in my blog.

Unfortunately, this also precludes me from being involved in some very interesting situations, as they all moved without getting down to entry points that I identified as low risk. So alas, I am watching some of my favorite names soar today…without me. As luck has it, I was travelling yesterday, otherwise I probably would have taken the advantage of yesterday’s rally, but over the two days the move is just above my threshold. So I will have to be patient. This market will continue to be volatile and over the next few weeks we will be rewarded with a better entry point.

So for now, the strategy that worked for me is to rotate constantly from overbought to oversold sectors, especially those that got crushed for reasons I don’t agree with fundamentally. My techno-fundamental discipline is paying dividends in this market…and I feel comfortable with my risk adjusted performance. I will never be the highest return guru, as my risk discipline will not allow me to pyramid my trades, chase latest M&A rumors, or do smilar things that amateurs do.

To revisit some of the areas I am focusing on right now, as we get ready to kick off the earnings season:

1) Oil at $65 a few days ago, was pretty close to the bottom of $60-$80 band that I believe to be a decent and realistic range for crude over the next 6 months. My US$ bear bet continues to play out, although I am long oil/nat gas and other commodities as a proxy for the US$ short.
2) I continue to believe that the right way to play Nat Gas rebound, is via exposure to Coal and Nat Gas E&P companies, rather than commodity itself, but one could take a small position in natty straight up.
3) Looking to take a few positions in semis and apparel manufacturers ahead of earnings (see my post from last weekend What To Expect From Third Quarter Earnings ). Semis is now becoming a bit of a consensus trade, so be careful!
4) I am seriously looking at Healthcare today, and over the next few days, I will be making a number of trades...I am going to overweight HC, and plan to dedicate a separate post to it later this week.
5) China and Brazil – again, in the next week or so I will outline my favorite picks.

What To Expect From Third Quarter Earnings

Next week the third quarter earnings reports will start in earnest, as Alcoa (AA), kicks it off on Wednesday. Before we focus on Q3, let us quickly recall the Q1 and Q2 results.

The first quarter was all about very low expectations as the "sell-siders" and corporate CFOs have really reigned in their forecasts and it took just a small marginal improvement from a horrendous Q408, to beat the numbers. The Q2 was a bit more challenging, as both investor expectations and market dynamics have changed. Investors were looking to see a bit more than just 'small beats' we saw in April. The skeptics among us in July (myself including), were prepared for at least weak guidance, if not outright missed estimates. We were once again proven wrong. Well, not really wrong - most reports came above still pretty conservative earnings projections, but many companies did miss the topline expectations.

Now we wait with anticipation for what the third quarter results will bring. So if the Q1 was all about earnings and Q2 was all about future guidance, than what should we be looking for in Q3? In one word - topline growth.

Topline, also known as revenue or sales, is what the companies lacked during the last several quarters and investors gave them a pass. Now we expect a lot more. We want to see still strong margins that resulted from almost twelve months of aggressive purging of any excess expenses(bonuses and salary cuts, delaying maintenance and equipment upgrades, personnel, T&A, productivity improvements etc, etc, etc). This was how they made Q1 and Q2 numbers. Now, we expect to see the businesses to show an ability to generate sales. Those that did, will have not only see their revenues expand, but the leverage in the business models should deliver very strong operating results.

Is this even a possibility? I think so. Not for all companies of course. But lets take a look at a few places where we might see some surprises.

I think apparel manufacturers can do well, for example. Like everyone else they had a very difficult year, but the retailers are beginning to place orders again. Department stores have reduced their inventories by 12% YoY. Many retailers are beginning to sell full price items again, and not only sale items. The apparel manufacturers will not only enjoy savings from becoming mean and lean over the past several quarters by getting better sourcing from their own suppliers, cheaper cost of raw materials, etc, but potentially stronger orders from retailers. And I don't really want to hear that consumer is not shopping. After almost a year of being very prudent, we are clearly seeing traffic improve and shoppers are coming back. Maybe not the 10% that are now unemployed, but the other 90% that are still working, like yours truly.

Another example - semiconductors. The overcapacity in the industry has hurt many of the semi and semi cap companies. Many have rationalized their production and many have merged or just out of business. At the same time, we are nearing the upgrade cycle for many PC and laptops. Many are still running on 1 GB or 2GB of RAM. With $400-$500 machines that can have 3x as much power and hard disk space, we should see stronger consumers demand not only in US, but also in emerging markets. And don't forget Windows 7, that comes out at the end of the month. How about other electronics that now require more and better and faster chips? Even printers are now wireless. What about Netbooks and digital picture frames? Soon we will have chips in our new set of kitchen knives.

One of my favorite industries is Oil and Gas. This one is a bit trickier to call. I think we may see a mixed bag of results. Generally, I would expect to see production cuts to continue to pressure results. Having said that, I am looking for those that were able to hedge their production at higher prices, paid down their debt (reducing interest expense) and Capex (capital expenditure). As the prices of Oil and Nat Gas continue to recover, we should see them beat results, as most analysts and investors are basing their forecasts on $60-65 oil and $3.50 natty. This will not last much longer, as I am a firm believer that these prices are much closer to the bottom than to the top.

Lastly, a few select Chinese companies should have decent top- and bottom-line results. Chinese economy has really led the global recovery. Their domestic consumption is at levels that exceed 2007. They have access to cheap labor, tons of government subsidies, and cheap and abundant access to loans (this door is now getting somewhat closed, as Chinese govt decided to limit lending, and cool things off a bit as well as to prevent bad debt from becoming a real problem). At the same time, the several hundred Chinese companies listed in US, can still access fairly cheap equity capital. And lets not forget the $586 billion in government stimulus, which was not wasted on transfer payments or bailouts. It was focused on key strategic industries and had a much better impact than the ones in US or European Union. Expect to see much better topline and bottom line results from some of these companies. I have done a lot of work on some of them, and would urge you to do the same before investing. Emerging markets are not for lazy or complacent investors.

Finally, I would look for US multinationals that have a large part of their revenues coming from Europe or China. A combination of a weak US currency and demand coming from still growing Chinese economy could really help these companies deliver solid Q3 results.

On Economic Recovery and More Frustrated Mavening

There are plenty of reasons now for a pullback..as economic recovery and green shoots are finally being questioned. Meredith Whitney, a self professed market guru, credited with predicting financial meltdown, is once again in WSJ. She writes "Anyone counting on a meaningful economic recovery will be greatly disappointed...SHOCKER!!!! Are you serious, woman? WHO IS STILL EXPECTING A ROBUST ECONOMIC RECOVERY?. C'mon...anyone that still does, is not likely to be a WSJ reader, so perhaps she should really Op-Ed in New York Post instead. She should get a bit more ‘shock’ capital that way. Dougie Kass is also rehashing his 10 bearish points….again and again. And did Goldman Sachs had the actual foresight to increase their jobless claims estimate by 25%, on Thursday afternoon, a day before the release? Not sure how tough of a stretch it was in light of all the negative economic data we saw over the past week or so. And yes, having Mr. Paulson on a speed dial helps.

So, October started with a bang. BANG BANG, that is. Hey, why should anyone be surprised? Plenty of excuses for a sell off, just pick one, or two, or three. But let’s get real people! Let’s stop the nonsense of arguing if we are in recovery. This is not a question anymore. We have recovered greatly from the abyss of 2008.

Why should anyone expect anything more than a subdued, shallow slope improvement? The weekly/monthly data will be mixed and volatile. You can bet on it. No V-shape, baby. Think about it. We are attempting to dig ourselves out of the worst economic and financial crisis in modern history, of course it will be choppy! Unemployment will continue to rise for at least 6 more months – deal with it and don’t act all shocked when it gets above 10%. I see absolutely no way for the job growth to come back, until the revenue growth resumes. So let’s get real. Let’s not expect miracles. Let’s not confuse hope with reality. Let’s be patient. But there is no reason, really, to be a doomsayer either, even though fear mongering has become quite fashionable now days. And yes, let stop freaking out, every time the market goes down 3% and we get an ugly economic stat. Unless there is a trend developing, don’t use one month’s data to justify your bullish or bearish stance. Yes, Meredith and Dougie, you said your piece, now shut the hell up and let see what happens.

Diatribe aside, the market held up OK again, after a scary day or two. Will the slide continue, I really can’t tell. The issue is whether the greed (of dip buyers) and sidelined cash, can overcome the bearish arguments. Will the sentiment turn completely negative? I don't know. But the fact that the cash and bond yields are still crappy, there is little reason for institutional money managers to dump their equities. This was once again pretty obvious on Friday, as we witnessed outflows from bonds into equities, providing an army of dip buyers with some aerial support. And as I discussed in my previous post, the technicals suffered some damage, but overall held up OK, bouncing from a 50 day ma.

For now, I am comfortable with my long positions, beta exposure , and cash levels. Perhaps we can finally get the correction out of the way, in a more meaningful way that the last few we had (ranged 3%-4%). For now, I am still operating under scenario that the market will remain range bound between 950/1000 and 1100/1150. But let see what the next few weeks of earnings will bring. More on earnings and what to look for in my next post.

Quick take on today's action

Let’s take a quick look at the recent market action . Overall, the as I am writing this on Friday, midday, the indexes are holding up OK. Although some technical damage was done as we broke below 1040, we are holding the 50 day moving average. Given a plethora of excuses to take profits, including bad economic headlines and obsession with October's reputation for market weakness...the markets seems to be taking it all in stride. Even the morning choppy trading, right after the jobless numbers came out, seemed pretty organized and panic-free. The breadth seems pretty narrow. If we close this week in a positive territory, give the dip buyers yet another victory to celebrate.

Although the market averages appear to stabilize, be careful…watch for signs of rotation out of cyclicals into defensives. This rotation could kill your portfolio, even with only a mild pullback in the indexes. This is an important point for a casual market observer, as averages often obscure this little, ugly reality.

Spooky Halloween or Opportunity Knocking?

As we approach the end of September, the spooky month thus far has not lived up to some investors fears. Of course, we still have a week before it actually ends, and to be honest, October's reputation is not much better. Having said that, when examined closer, there is no empirical evidence that unequivocally confirms that either month significantly deviates from the normalized returns over time. But if psychology comes into play, this Halloween could be scary in more ways than one. The action yesterday and the follow through today is not surprising, given that the last few days the market has shown very little desire to push higher, especially as we approach many analysts’ target of 1100 and a psychologically tough level of 10,000 on the Dow. The leadership has changed over the last few month or two, from Financials to Energy and Commodities, which are supported mostly by the weakness in US dollar. Today, we are likely get some rebound in the US dollar as we have a typical official speak of needing a strong US currency, blah, blah, blah. Well, nothing too surprising. RIMM blew up after the close, reporting OK earnings, but clearly disappoint investors with its outlook. I have not been a fan of RIMM for some time, as it should have been obvious even to a 3-year old that a combined competition from Apple’s new iPhone and PALMs new smartphone, plus a crappy Blackberry Storm would not amount to anything heroic. Duh! For the record I was not short RIMM, as it's not really one of the stocks I’ve been following too closely lately. Well, RIMM is one of the bellwether Nasdaq stocks and QQQQ’s so I think it may spill over into other tech and consumer stocks, pressuring the markets tomorrow. But let’s put tomorrow aside for a moment.

So once again, as I do every once in a while I ask myself – where do we go from here? What are we NOT pricing in at current levels?

Looking at major indices, let's examine what the current level is pricing in. At 1050-1100, we are clearly more than adequately discounting the end of recession, a mild economic recovery, and some sequential earnings growth for the next two quarters (seasonally adjusted). To quantify, the market is priced for a 3-5% sequential earnings improvement in each of the next two quarters. For FY09, most estimates are for $50-$55 for SPX and $74-$75 for 2010. This yields 14x-15x forward PE on the index. Certainly it’s no longer cheap, but from a long term perspective, it’s not exorbitant. Investors also seem to be comfortable with $70 oil and USD scrapping the bottom of the barrel. I guess we have also come to accept a looming double digit unemployment, at some not too distant future. So this is status quo for the markets or the base case. The status quo, would like have the market stuck in a narrow trading range, with a slight upward bias. I see a 20% chance of this market just humming along between 1000 and 1100 on the SPX for the next 12 months.

What market is NOT pricing in is a double dip. But the chances of the economy falling back into recession, in my opinion, are not great. If it happens, we would likely see a pullback of roughly 150-200 points in the SPX or roughly a 20% percent correction from this level. I assume there is a 10% chance of a double dip. The government has already demonstrated that it will save the economy at ALL costs, so they will just throw more money at it, if necessary. Stimulus 1-100 will be deployed. Obama to the rescue. Print the money until we run of trees.

The market is also NOT pricing anything more than just a mild recovery. The sentiment is only looking for cost savings driven earnings recovery. A pleasant surprise may come if we actually get sales to recover, as companies with good leverage will get tremendous operating margin expansion. If you believe this may happen, than 2010 estimates of $75 might be a bit on the conservative side. I believe that global economic recovery is on its way, and with a pause here and there the engine will keep going. In my assessment, I assign this scenario a 60% chance. If I am right, I can see the market getting to 1200 over the next 12 months. My confidence also stems from the simple fact that unlike debt-ridden consumer, corporations for the most part did a god job righting their balance sheets, paying down debt, and taking advantage, especially recently to refinance high coupon debt with equity or lower coupon debt. Many have cash-rich balance sheet and guess what, you will see a lot more M&A activity over the next 12 months. This alone could give this market a 3-5% boost.

Finally, the market is NOT pricing in a V-shaped recovery. I am not a buyer of this theory and only give it a 10% probability. However, I am beginning to hear at least a small contingent of people starting to raise a possibility of a strong economic rebound. Well, if they are right, we may actually get another 30%+ from here, as the euphoria will suck even the most cautious investors back into the market. Greed will rule the world once again, ladies and gentlemen!

In my analysis I am not focusing on anything beyond 12 months. I am also operating under the assumptions that the “buy the dip” mentality dominates the investor sentiment. The last three feeble pullback attempts yielded 3.8%, 6.5% and 9.1% respectively. As I am writing this, we are down about 3% from yesterday's high. The ideal pullback would get us down to around 1010-1015, a decent 6.5% selloff. I think the bulls would be aggressively buying this level. But who knows if we even get it down that much. You may disagree with the bulls, and bring forth powerful economic arguments to support your view, but keep in mind that being intellectually right doesn’t amount to being rich. Most sane economic views do reflect a rather difficult economic, fiscal, and political future for US. But to traders, this is purely academic, as one just can’t ignore the real power that moves the market - fear and greed. Well, the fear is all but a distant memory now. The caution is still there, but definitely not fear. The only fear that is still here, is the fear of underperformance. No other major (investible) asset class can even remotely compete with equities. The cash is trash. The move in bonds, for the most part appears to be over, gold seems to be going up on pure speculation (as inflation appears to be less imminent) and real estate..well, you know. With liquidity abound (Thank You Uncle Sam!), it seems to be finding its way into the capital markets, and not to where it should really flow – the real economy. But, I am not an economist, and there are plenty of other posts that address this issue in a lot more detail.

One should understand that there will certainly be bumps along the road. The volatility will most certainly pick up, as the economic and earnings data will be mixed. It’s almost an unwritten law of the markets – the periods of low volatility are followed by the periods of explosive volatility. Use Bollinger bands to help you gauge volatility over time. VIX is another decent proxy that I use. The volatility can kill your portfolio, even though the end target is 15% higher. The sooner you really understand this, the less inclined you will be to only follow gurus with the highest returns. You need to pay attention to how much risk they take to produce these outsized returns. One needs to be especially vigilant during pullbacks. Focus on your portfolios, as concentration in the wrong sector or being caught with too many high beta stocks could bring losses much more severe than the overall market.

Based on the very rudimentary assumptions laid out above, I use a blended probability approach to arrive at the expected outcome of about 14%-14.5% gain, or roughly 1,200 level on SPX by the end of next year. That is my macro anchor and the rest of my work focuses more on fundamentals, technicals, and portfolio management. It is becoming more clear to me every day, that the day of ‘easy’ macro trading are over for now. What I mean is that the individual sector and stock selection will be a lot more important now than during the last 12-15 months, when one could short anything or go long anything and it was only important to get the market direction right. I don’t see these ‘market’ gurus being very successful over the next 12 months.

To that extent, I believe I will be focusing more of my time on what I do best - picking investible themes, and individual winners and losers.

I remain an opportunistic buyer of certain materials, energy, healthcare and emerging markets (mostly Chinese, Brazilian and other Asian equities/ETFs). I try to stay true to my risk management discipline and blow my losses out when they exceed 7%, adjust beta up or down, and double and triple my bets when the risk/reward becomes highly attractive. This happens when several of the Major Market Moving Factors I monitor are lining up in the same direction.

I wanted to share my favorite dozen names, that I would love to buy/add on a pullback. Here is the Maven’s Dozen (not in any order): ANR – best coal play, highly leveraged to metallurgical coal, cheaper than comps; BHI – driller/oil services company, recently acquired BJ Services, making it one of the best offshore, deepwater drillers with international order book. DNDN- the only prostate cancer vaccine that’s hit the phase 3 trial endpoints out of the park, likely to be approved in mid 2010, RINO – a Chinese company focused on pollution removal and wastewater treatment and cheap multiple, REXX – very cheap way to play Marcellus Shale with $6 in proven reserves, all hedged for the next three years. SLB – best way to play oilfield services and rebound in Russian investment in oil exploration. FWLT – infrastructure play, great mgmt and reputation, solid backlog and balance sheet, play on recovery in oil and gas investments. CYNO – bellwether in aesthetics lasers, with $7 in net cash, just waiting for some sort of recovery in vanity spending and easier credit; XTO – my favorite E&P company, 79% of its gas production hedged for 2009 and 29% hedged in 2010, locking in more than $2 billion in free cash flow this year to reduce net debt. STEC - has tremendous market opportunity in enterprise SSDs, strong backlog and visibility, although competitive concerns are a real risk. PWRD – one of the strongest games pipelines, generates tons of CF, cheaper than other major Chinese online game companies, a way to play the growth in broadband penetration and consumer spending in China. APC – another excellent way to play a recovery in nat gas prices. MOS – a potash and fertilizer play, while this year is a throw away, the inflection point is in sight, and 2010 should be significantly better.

As always, do your own due diligence and research. Use technicals to help you determine attractive entry points, have and exit strategy WRITTEN down with both gain and loss in mind.

Apologies for a very long post (I really didn’t post in a few weeks, so have a lot to say). Your comments, as always, would be much appreciated.


Good Luck!

Portfolio Update and Some Random Mavening

Over the past few weeks I wrote several pretty eloborate posts dealing with different issues ranging from risk management to defensive positioning. I decided not to publish them in my blog and instead just updated my portfolio and put a few random thoughts together. I amy still publish them at some point but for now, here is what I am focusing on.

September - I am concerned that media is putting too much focus on September being an ugly month. I examined some research that actually shows that there is no conclusive proof that Spetmeber has to be a selloff month. Over the past 12 years, 5 Septembers have booked gains and 7 had losses. Yes, losses were greater than gains, but one can't say every September will bring a loss. More importantly, if you look at it at on the quarterly basis, Q4 was positive 75% of time over the past 12 years. In case you want to start worrying about October - only 3 of the past 12 years, October booked a loss. But, again, if the media and every financial pundit on CNBC and Bloomberg continue to talk about it - we may get the proverbial sell fulfillment.

I am clearly defensively positioned in my real portfolio, with 50% of my trading and investing accounts being in cash. I was recently almost 70% invested. Taking some money off the table is not a bad idea. I want some dry powder and I know how I will use it.

It seems that every pullback I predicted happened, but the magnitude was never significant enough for me to go much more aggressive into equities. I still see some upside from here for major indices, but I see 950-1100 on the SPX as a difficult range to break out, barring major unforeseen shocks (positive or negative) to the economy. So my strategy reflects this though process.

If we do get a selloff to or near 950, I will continue to stay true to what works in this market and this economic cycle: mostly cyclical, such as energy, industrials, and select emerging markets exposure, mostly China and Brazil, with a few other emerging Asia markets.

My current defensive exposure is confirmed by three of the four MMMFs (Major Market Moving Factors) that I usually monitor. The Macroeconomic factor is currently neutral, given a progression of the better economic readings, but still volatility of these statistics can not be totally ignored. The Technicals, Fundamentals and the Sentiment factors have turned a bit more negative over past few weeks. This makes me cautious, but I am not ready to turn bearish.

My portflio is now fully updated as of September 3rd. You can see it by clicking on the "Maven's Portfolio" in my blog. Good Luck next week!

Market Pullback - Its all Good

With a long awaited pullback upon us, I am not panicking but looking for an opportunity to slightly increase my total equity exposure to 60-70% up from 50%. With most of the important earnings reports pretty much done, and no really critical economic data to hot the tape for a few weeks, the market used Japan's slightly slower pace of economic recovery as an excuse to take profits and force this expected selloff. If it wasn't Japan, it would have been something else. FOR THE FORESEEABLE FUTURE, THIS MARKET WILL HAVE NO SHORTAGE OF EXCUSES, LIMITING AND INTERRUPTING RALLIES. Just like in in July, we have been trading just under a number of tough technical price levels while technicals got pretty overbought. To move further required a lot more firepower. But the investors were reluctant to put new money to work at this level, and rightly so. We just ran out of steam ...it was pretty obvious last week, as the US dollar began to get stronger and oil weakened.

Why do I think this is just a pullback as opposed to major correction? Here is why. Most violent corrections happen when no one expects them. Not the case now. Thus far this has been pretty organized selling, no real panic, just people working out of some crowded situations...e.g. energy, commodities, material, financials etc. We are still seeing some money rotating into defensives like Healthcare, rather than just exiting. we are not likely to see irrational selling in my opinion. For a major correction (10%+ move) we would need to start pricing the odds of a economic double dip. I don't have a crystal ball, but nothing I have seen thus far makes think we are going to double dip. Sorry, bears.

For now I am still watching and not playing as I think we have a bit more downside before the technicals get attractive again. But this could change pretty quickly if we keep having days like today.

Speaking of technicals...the damage is still pretty much contained. We did break below 995 on the SPX, but this was not really a key support. The level I continue to watch is 950. I was pretty neutral as we climbed above 1000...but as we get closer to 950, I will get more interested. A 5-7% move from the recent highs would not constitute a correction, but a pause and a pullback that you should take advantage off to buy the stocks that are now on sale. I am on the road today, so don't have access to all my charts and spreadsheets, but I will likely start adding to some of my existing positions as they get to my predefined levels. My favorite ideas remain XTO, SLB, RIG, SVR, NKTR, TSYS and half dozen others. I will update my portfolio and Maven's 50 on my blog later this week.

Quick Look at the Market and Some Portfolio Changes

I continue to watch in amazement how far the market has marched since March (the pun is intended). My expectations of a challenging July, proved completely unfounded. The earnings results were better for a significant number of companies, but more importantly, the outlook has also improved. At the same time we continue to see better economic stats pretty much across the board. Of coarse we are not out of the woods by any means, but the marktet seems to appreciate it.

More significantly, we have broken out of a very strong trading channel 875-950 on the SPX. The index cleared a 50% Fib retracement on a daily chart and held support at the 200 day MA. It bounced from there with authority, after a brief pullback, which seemed to have satisfied the bulls that waited for a better entry price.

So what do we do now? I think the risk reward is pretty neutral. We are now approaching another Fib resistance (32%) on a weekly chart. The fundamental and technical analysts seem to agree that we will hit 1100-1150. This level corresponds to about 15x 2010 projected earnings. Although I am not a big fan of the consensus opinions, I tend to agree. I am watching the 1100 level as my possible exit point (which is also a 50% weekly Fib retracement), where I will mostly likely take my equity exposure way down. It would be pretty tough to suggest the market is undervalued at this level. The support levels remain very solid at 950 and 875. So the risk reward is 100 points up vs 50-125 points down. As I said, its pretty even.

Below is a weekly SPX chart with Fib levels, trading channel and my support lines that illustrates my point.



For now, I am keeping the allocation pretty much the same, around 55-60% Equity, 10% Fixed Income, 25% cash.

I am also fine tuning my portfolio. I am establishing a new position in AMGN (expect Dmab approval with a clean label very soon) and COMV, a play on intelligent power grid. I am also adding a little SVR, despite a disappointing qtr, the stock is cheap. I am selling SHW, which reached my price objective, generating a nice 12.25% in a few weeks. I am also trimming my MOS, which is only 3% below my target. Ditto VIP, sold calls and I am effectively out. I am also putting some money in US Dollar. I think we may be forming a bottom here. I am buying UUP, but if breaks below 22, I will punt it.

As promised, over the next week, I will attempt to bring my actual and MG portfolios in line, but for more accurate data, use Maven's Short Term Portfolio link on my blog site.

Good Trading!

Portfolio Update

First of all - apologies for not posting lately. Some things are just more important - like a summer vacation. I have done very little work over the last few weeks, by design. We all need some time away from the market to regain perspective. Having said that, over the past few days I have fine tuned my portfolio and listed my ACTUAL positions on my blog, under the Maven's Short Term Portfolio link, on the right sidebar. Please feel free to visit and leave comments.

You may notice that my MG portfolio is a just a subset of my actual portfolio, and to be honest, there will definitely be inconsistencies between the two. Some of my ACTUAL positions are legacy, core positions, while MG may have some of my more recent ideas. The opposite is true as well, as I may be trading in and out of a position in my real account, but never get a chance to update the MG.

One of my goals is to bring my MG portfolio in line with my actual.

Again, I will resume my regular and more frequent posting as soon as I get my bearings.

Closing Portfolio Insurance Bets at a Small Loss

I decided not to fight the tape. Yesterday, after the market closed, seeing a lot of ugly reports and selling in the after market, I put on some portfolio insurance bets. I bot SDS and QID, effectively shorting 2x SP500 and Nasdaq. I was very surprised that despite the disappointing results from bellwether stocks like MSFT, AXP, AMZN, and a slew of others, and overdue profit taking that is typical on summer Fridays after a nice run up, the tape more than held its own. On the other hand, we just witnessed a significant range breakout and cut through a very difficult psychological barrier on the Dow, 9000. Clearly this has brought in

I am closing SDS and QID positions at a small loss and consider this a good trade, despite losing money. Thankfully, the longs have more than offset this loss. It was the right trade and under the same circumstances, I would do it every time. Having said that, I am not turning this trade into an investment. Easy enough to put it back on when I need to.

Get Ready for a Red Day on Friday

The after hours picture looks ugly. MSFT, AMZN, JNPR, AXP, RVBD and many other stocks are getting hit in the after hours. Some missed on expectations, others provided weak guidance, yet others are already getting hit in sympathy or on profit taking.

Just when it started to look like we may get through this earnings season unscathed, BOOM, goes the dynamite.

I had a very good day in the market this week, correctly predicting a break out. I sold some calls, but not enough, and really didn't do any trimming, really waiting for tomorrow, so I can square off some positions before I take the next week off.

Early look, it seems we will open 120-150 points down on the Dow. Summer Fridays are also known for reversal of the trend of the previous few days. Many will be taking profits tomorrow. Either way, barring something unknowable at the moment (4.30pm EST), I am expecting a pullback.

To protect my portfolio, I am buying SDS and QID after market. I entered positions at QID - $27.68; SDS - $48.90. although it is not a 100% hedge, it will get me down to 60% Net Long.

Can Market Momo Continue? Watching for Breakout this Week

GS, multiple analyst upgrades, and little economic news to spoil the party. Are we ready to break out?

This morning GS is out with a bullish call on SPX, raising the end of the year target to 1,060, based on the ~14x forward P/E. Goldman’s strategists also raised their expectations for 2009 SP earnings, boosting them to $52, mostly a result of lower financial losses and higher operating leverage.

In its usual sellside double-speak, they also acknowledged that there is still some risk of a ‘double-dip’, so either way GS will prove to be correct.

Why should we care? Well, we are approaching the upper end of the up trending trading channel. With little economic news coming this week and no major policy changes to come out of the White House (fingers crossed), I think the momentum we are seeing in the market will likely continue. The successful resolution of CIT clusterf$&#!, several key upgrades from on the Street(CAT, DIS, CSCO,) should also give the market some boost.
We are seeing better than expected earnings thus far this July, with analysts clearly underestimating the operating leverage resulting from significant cost cutting, and revising up up their models that they severely ratcheted down just a few months ago. So the beat goes on.

As we have postulated in the past, there is still plenty of cash on the sidelines. As VIX continues to decline and remain at multi-month lows, the 'fear' trade is no longer a way to make money. Cash, bonds and other ‘’safer havens’ are going to continue to see outflows, especially as the market continues to move higher.
Generally, chasing momentum is not my game, I much more prefer to buy on a pullback (see my previous post), but one can make some decent money, playing range breakout. If you are planning to chase this rally, raise your portfolio beta (go to more volatile, higher risk positions) and continue to rotate into energy, materials, industrials, etc. The same rotation was also suggested by Goldman.

Maven's 50 Focus List and Portflio Methodology

I finally compiled my current focus list that contains approximately 50 stocks I follow pretty closely. These stocks I know fairly well from the fundamental perspective, since I either presently own them, owned them in the past, or monitoring, so I can take a position at a more attractive price.

Fundamental Criteria: For each of these stocks, I listed some of the fundamental criteria, such as forward PE, 5-year earnings growth rates, current and next year's consensus earnings estimates, average price targets from Wall Street analysts, etc. This is just some of the information that I monitor. I also pay close attention to their balance sheets, insider trading patterns, and most recent earnings transcripts.

Entry/Exit Prices: The spreadsheet also provides my "ideal" entry price and exit price for each of the 50 stocks. I use a variety of technical tools to identify support/resistance levels for each, and remain disciplined about both the entry and exit. Generally, I'd like to see a pullback to my 'ideal' entry price or just below it in order to initiate a small position. I would add on a bounce from there. The near term price target/objective is a level where I generally sell either most or some of the position. The balance of the position would then be hedged with at-the-money calls.

Risk/Reward and Portfolio Beta: I calculate the risk/reward of entering a position frequently, using a very simple, but effective calculation. If I decide to buy into a position right there and then, I need to see at least a 2:1 reward-to-risk ratio. This is only one of several criteria which comes into play. Other factors include my expectations for the overall market, portfolio's concentration in a particular sector/theme, and portfolio beta. Speaking of beta, I use it to decide how much risk exposure I want to have in a portfolio at any given time. When the market is oversold, I increase my weighted beta by loading up with high beta stocks. When I believe the market is vulnerable to a pullback, I 'lose' risk by decreasing my portfolio beta. I accomplish this by either rotating from higher beta to lower beta sectors like utilities and healthcare, going to cash, writing covered calls or frequently all of the above.

Here is the first installment of Maven's 50.

And the beat goes on..and the trading range market continues

Give the masses what they want. The masses were looking for a summer pullback, with consensus expecting 10% selloff on the average, and we actually witnessed an intraday 9% high-to-low move on the SPX (from a high of 945 on 6/11 to the last Wednesday's intraday low of 869 on 7/8). In our previous posts, we repeatedly mentioned that investors we were looking for a 5-10% pullback before committing new funds. It appears that the recent selloff may have satisfied them. We would've preferred to see, a less volatile selloff, taking at least a few weeks to complete, but this was more of a wishful thinking on our part.
The short term technicals have improved, Stochastics and RSI were both oversold last week. We are encouraged that the trading range held the 870 support. Despite testing the level several times and briefly violating it intraday on 7/8, buyers managed to hold off the onslaught of bears at this important and highly watched level. VIX remains subdued, hitting a 10 month low yesterday. The 'fear' and risk aversion trade worked well when the indices were close to the resistance, but the trading range trading continues - and we gingerly bounced from 870, feeding off the optimism from better than expected INTC, GS, and a number of other companies. We sort of expected the actual results to come in line or above expectations, but the positive outlook and improved visibility provided by some of the CEO's caught us a bit by surprise. The combination of solid headline results a number of somewhat more positive economic headlines, boosted investor confidence, translating into short covering frenzy we are seeing this week. Well, we were correct, thus far, not to short them market for more than a quick trade.
Yes, we seem to have dodged an economic collapse, and we are definitely seeing signs of improvement in the economic environment. Having said that, our belief is that the improved fundamentals and corporate results have pretty much been priced it in at the current level. For forward valuations to take a step up, we would require to see more consistent and broader recovery, not only in China and US, but in Europe and the ROW. Thus we are most likely remain stuck in a trading range ~870-950, at least until we see a decisive move above 950 (or a breakdown below 870). We may have our answer in the next few days. Until then, there is no reason to load up, as we are within a stone throw of the upper end of this range. The breakout will put two additional price objectives in play for the SPX: 1st - 1010, and 2nd - 1070.

See the S&P chart below.



Consistent with our theory, that we are still in a trading range market, we continue to favor a strategy that uses a combination of swing trading, beta leveraging/deleveraging, and sector rotation. In my next post, I will provide additional information on this strategy, and finally, (yes, finally!) publish the Maven Top 50 Focus List.

Good Trading!

Shorting Oil Services (OIH) and Hedging with US Dollar (UUP)

My previous post detailed the 10 reasons to be cautious going into July. As the matter of fact, after being bullish roughly since the rally started, I put the brakes on in Mid May, and have been taking beta out my portfolio. In a nutshell, I am all about risk and reward and I use a number of different indicators technical, fundamental and sentiment based to estimate the potential outcome of specific trades. I have been in neutral (basically long/short mode for the past few weeks), trying to slightly outperform the market without high risk exposure.


Earlier this week, I have sold all of my energy positions (except for XTO) and put on a Long Dollar and Short oil Services. You can replicate this trade by buying UUP and shorting OIH or XOP.

Why? In the beginning of the oil rally, Oil Services lead the Oil trade. For every 1 or 2% move in underlying commodity, the services group (which was extremely oversold and cheap on every metric, would go up 2x)would usually move up BEFORE the oil moved. The last few weeks the group was less 'vigorous' and this week, the move up in oil totally decoupled. The geopolitical situation (attacks in Nigeria, Iran, etc) were helping support oil prices, but the services and E&P companies were not following through.

Oil Services fundamentals have improved slightly, but most have already priced it in. From a long term perspective I totally love this space, but near term, the Head & Shoulders pattern signals technical weakness. Given that high beta nature of these stocks (largest positions in OIH are RIG, SLB, HAL, etc) I would expect them to significantly underperform the market on the downside.

Lastly, I expect US Dollar to get stronger from here - many factors in play. Mostly, I expect US dollar to move inversely to the market and commodities, so I am going long dollar to hedge my short of OIH.

Why hedge with US Dollar? Since early May, the major stock market averages have been trading in a range with few deviations to either side. A key during that time has been the reflation trade - strength in commodities and commodities stocks on a persistently weak dollar. Naturally, the reflation trade is only plausible in this market on a weak dollar, and a weak dollar is only plausible during periods of increasing risk acceptance. This has broadly been the trade in play over the past couple of months. Now we are going the other way, in my opinion, as risk averse invetors are taking profits and moving to the safety of US Dollar and US deniminated short term money market instruments.

Getting Serious and Getting Seriously Defensive - 10 Reasons To Be Seriously Concerned

Today's action underscores our near term concerns about the impending market selloff. We are finally beginning to see some fear in the marker, as VIX has moved above 30, which in the past had signaled a difficult period for the equities. Although we can easily make a bullish case for staying long, simply put, the risk reward of being in equities is no longer attractive at the moment. Period.


Having correctly positioned our portfolios in March, we took full advantage of the oversold markets and what appears to be generational lows on some of the high quality stocks being dumped by liquidating hedge funds and scared retail investors. We remained long, completely unperturbed by a debate of whether this was a bear or bull market rally, and only turned mildly cautious at the end of May, mostly because of somewhat overextended indexes and approaching seasonally weak time for the markets. With a week to go in May, while heading out of the country on vacation and unable to monitor the market, we sold marginal and low conviction positions and wrote June calls on just about everything else, with few exceptions.

Today's action continues to ring some serious warning bells. Here is a summary of what we have been posting for the last few weeks and how we currently view the market. We doubt anyone will find any of these 10 revelations shocking, but would hope that most investors and traders would agree with us that these are really valid reasons for near term concern.

1)Every child knows by now that major indexes moved too much too fast, up 40-50%, clearly outpacing economic progress, which has only shown a few sparse "green shoots". The recent economic data remains subdued and recent testimony from the FED about economic recovery is very sobering.

2)During the same time, investor expectations have risen dramatically, making it much more difficult to deliver any kind of upside surprises.

3)Technical picture has become very troublesome with divergences galore; many individual stock charts continue to make new highs, while momentum indicators such as stochastic and RSI are not confirming the continuation of the up move. Additionally, last week we hit technical resistance on SPX at 950 and NDX at 1506 (50% Fib retracement) and COMP 1875 (50% Fib retracement)and were unable to break out. SPX continued to churn around its 200 day ma, but failed to repeat the heroics of Nasdaq which earned the "Golden Cross" (50 day moving average crossing above 200 day moving average). This is generally considered a bullish sign, but it requires for other indexes to follow suit.

4)The approaching second quarter earnings will likely be uninspiring. With most of the cost cutting already done and less of an impact from lower energy costs, margins are not likely to continue the same degree of improvement we saw in Q1. In some cases such expectations are now embedded in Q2 guidance or street consensus. Even if Q2 earnings will be OK, the Q3 visibility remains cloudy, so we are not likely to hear many upbeat conference calls with management sticking their necks out.

5)Consumer confidence and spending will likely take another dive; consistent with higher gasoline prices and higher mortgage rates - two recent sources of an increase in disposable income. This could very well start a negative feedback loop with markets declining on a sentiment turning negative and sentiment turning even more negative from declining equity markets.

6) Investors are not going to get any help from Obama and his administration - only promises of higher taxes, mounting pile of debt, skyrocketing deficit and more and more government running interference in every aspect of the American enterprise. This is hardly a confidence builder for investors to put more money into markets.

7) Seasonality - everyone who reads our blog should be aware by now that July-Sept has been historically a very difficult period for the equities. I recently saw some research that this negative market performance is exacerbated during the 1st Presidential year.

8)Everyone is expecting a pullback. This has been almost a 100% consensus view from bulls and bears, from professional investors to speculating dentists and landscapers. As much as we like to fade consensus trades, we have to admit that the new money is very reluctant to make its way into the market right now, making it much more difficult to move it higher. This sentiment is not lost on short sellers that are becoming more active and less fearful every day the market is failing to decisively move ahead.

9)Recent leadership from commodities and materials stocks looks to be tested here, as US dollar continues to strengthen (most recently due to comments from Russian Finance Minister Alexei Kudrin, who said that he has confidence in the dollar and no immediate plans to switch reserve currencies). With Tech investors having second thoughts after QCOM lowered its guidance last week and the Healthcare still under pressure, there are very few places to rotate into. Utilities?? Maybe. Mortgage Backed securities and Munis?. Possibly.

10) Lastly, with high hopes that the world has placed on China to lead us out of this recession, we should not forget that once China is done stockpiling commodities (that have become dirt cheap)it has very few means to stimulate the economic growth outside of its own borders. Chinese domestic consumption will not be enough to generate global economic revival, since most of China's economy still depends on the export trade. There have been few, if any signs, that this part of their economy is getting any traction. Having said that I still feel investors should allocate part of their risk capital to China.

So what does our portfolio look like now?

Maven's 10 largest positions, by market value(excluding positions completely hedged with in-the-money or at-the-money June calls, which expire this Friday): DNDN,WH,ATN, DZZ,RIG,UNG,USB,NE,SDTH,SLB.

So we maintain a few positions, but continue to raise cash over the past few weeks. At this point, we are looking for 5-10% pullback. which could take a few days or a few weeks. Frankly we have no idea if this pullback will happen this week, next week or over the next few months. But we do believe, as we stated above, that the risk/reward of being in equities right now is no longer attractive. While we are waiting for the pullback to run its coarse, we will be busy finalizing our buy "wish" list and will scale in aggressively when the time is right. As long as the primary uptrend remains intact, we will likely have a lot of company buying the dip.

WH- Top Pick, Up 25%

WH-one of my top picks finished up 25% today. I believe the stock was recommended by Robert Hsu, a publisher of a well-regarded china focused investment strategy service. Although, I generally tend to ignore slef promoting stock pickers, I do know WH pretty well, and happy that it was profiled. If you want to catch up on this pick, see my post here:

http://themrktma​ven.blogspot.com/​2009/05/wh-remain​s-my-top-pick.html

Since I first profiled WH this post on May 14th, the stock is up more than 75%.
Over the past few days the volume has been very strong, exceeding a million shares in three of the last four days. Today, the stock traded over 2.5 million.

Although, these recommendations always present a great opportunity to take some profits, I will likely hold on a bit longer, in order to capture a special $.45/adr dividend, payable to holders of stock as of June 30th.

The Impending Earnings Season

AA generally kicks off the earnings season. They report on July 8th. As I have posted several times in the past few weeks, I see Q2 earnings seasonas a possible catalyst for a market selloff. It could start a bit earlier, if we get some negative preannouncements (or nervous investors selling ahaed of actual results). Over the next few weeks we will likely continue to churn here, but be CAREFUL going into the July 4th weekend.

I still believe the earnings will be generally OK, but the EXPECTATIONS have risen dramatically. What was viewed as positive (meeting lowered guidance and severely cut selllside estimates) in Q1, will be a huge dissappointment to impatient investors expecting a real and not just second derivative improvement. Most management teams will provide mildly upbeat outlook, but visibility still remains very cloudy into 2H. Historically, the second part of the summer is when the pain of "Sell in May" adage becomes painfully obvious.

So what if we do get the pullback off of the earnings disappointment?
I still think investors should buy the pulback, as long as the pirmary upternd remains intact. Potentially, some sector rotation could soften the overall market decline, as cash will flow from overbought sectors such as energy, commodities and tech into some of the underperforming secotrs such as Healthcare (still pressured by impending HC reform), utilities and some other defensive consumer staples. You can rotate as well, but I would also watch for opportunities to reenter trades in your favorite Energy, Commodities, Emerging Markets and Tech stocks. Stock picking and not broad based bets on the market will be key to the successful 2H performance. Easy rewards from shorting the market (that worked in Jan - March) or buying the market (that worked in March-May) will likely dissappear.

Closing my Oil short position, for now

In my rush to judgement, I shorted some oil, via DUG. I am now closing my position. My reasons for shoting oil were straightforward and still stand: 1) hedging my long UNG position 2) staying with a long US dollar trend which is pputting pressure on all dollar-denominated commodities, 3) USO chart, a proxy for OIL looks overbought and vulnerable to pullback, and 4) recently widening contanga ha been putting some pressure on the spot oil prices.

The main reason I decided to go to the sidelines here and clsoe my short is the unstability in Nigeria, one of the main oil producing countries. Unrest in the Niger Delta has reduced the country's daily oil output to 1.76 million barrels compared with 2.6 million barrels in January 2006. Nigeria's main armed group on Sunday intensified its threat to attack the oil industry in the coming days, warning that it will stand firm on a 72-hour ultimatum issued earlier. "The ultimatum (to local and foreign oil workers) expires about midnight (Monday).

Although, there should be no problems increasing supply from other places, given the luckluster demand, I still don't want to be exposed to the headline risk over the next few days. Stay tuned.

Trading US dollar, Gold, Bonds and Energy

TBT has reached my secondary objective of 56, and I would recommend to take some prfits on this trade. The run was spectacular, but with stronger US dollar, I would wait for a better entry point into TBT, perhaps around 51-52. I closed my UDN position, and going long US dollar via UUP. I am also shorting gold via DZZ, which is one of the most overbought commodities at the moment. Lastly, I am going neutral on energy, by selling calls against my every energy position, with the exception of a few coal names.

My longer term views are pretty much just the opposite of the trades I listed above, but for now, I feel, that the path of least resitance is in the direction of these trades.

Market Outlook and Portfolio Strategy For the Next Few Weeks

After a two week hiatus (travelling in India and Nepal) and not having a luxury of watching this market on a tick by tick basis as I normally do, I finally had a few minutes to put some my thoughts together. As usual, I try to examine the market action trough a prism of sentiment, fundamentals, and technicals.

Sentiment: Money inflows continue at a decent pace.

The rally has propelled the markets to a very interesting inflection point. Fueled by 'green shoots' and improving sentiment among the investors, mainstream media, and blogosphere - what started as a traders’ rally has now a potential to mature into a broader, investors' rally. For the second month in the row, the latest data shows continuation of the flow of money into stock funds, showing the biggest sequential inflow of funds into mutual funds assets on a percentage basis and on an absolute basis since at least February 1998. I have repeatedly made this point over the past few weeks, that with trillions of idle cash ($3.8T by some estimates) on the sidelines, the underperformance anxiety will eventually cause a buying panic. The bears and skeptics will throw in the towel and will join the rally, providing the second phase thrust to this bullish move. Even a small portion of this money finding its way into the market, let say $400-$500 billion, could be the catalyst to start a buying frenzy.

Technicals: Consolidation near key resistance levels, but the uptrends are all intact.

During the last few days the market's advance have stalled near the key levels (see more on this below) and we will likely see buyers and sellers duke it out here prior to seeing any kind of resolution. The major indexes reached their respective resistance levels, pinning the action right below these levels, as the market consolidates and digest its recent gains. Volume is still pretty average, despite the additional inflows, although Nasdaq outperformance signals wider participation. However, in the absence of fundamental or major economic catalysts over the next few weeks, we should pay attention to technical’s, since a breakout above key levels may be the start of another leg. But for now, ah, we are stuck in the good old trading range.

So let's examine the charts on the two key indexes DOW and SPX.

The Dow, after replacing two of its underperforming components C and GM, with CSCO and TRV, now has the weapons to push through a major resistance at 200 MA on a monthly chart (~8756). At the same time the 200 day MA, is in the sights, at 8817, but it has some major work to do here, especially considering that the near term indicators are overbought. The monthly stochastic, however, is in a great shape, just crossing from the severely oversold levels. On a down drift, we can lose 400-500 points on the Dow without causing a major technical damage. For the

The key levels for DOW: Support - 8225-8275. Resistance - 8817-8850


The SPX, has already poked its head above the 200 day ma, and seems to be in a well defined daily channel. But it too, is approaching a lot of overhead resistance at around 940, so expect a battle here with at least a few attempts to tag this level before a real breakout. The near term momentum indicators are also losing steam and no surprise if we see some more consolidation before a breakout.

The key levels for SPX: Support - 900-910 , Resistance- 940-950


Fundamentals: Maintain caution as we approach the Independence Day!

From the fundamental perspective, as I posted before, we are approaching a seasonally difficult time for the market. I am concerned that the Q2 results and Q3 guidance will be disappointing, given higher expectations of economic recovery and lack of favorable factors that helped Q1 results. The positive reactions to Q1 results were all about low expectations, contributions from lower energy and raw materials costs, plus the impact of significantly lower SG&A expenses. With rising energy costs and investor expectations that are now discounting some topline growth driven by economic recovery, we could see some disappointment following the Q2 results. Also, many companies have already severely reduced their operating expenses, so broadly speaking, we should not expect much more in terms of operating leverage from additional SG&A cuts. Smarter investors will likely start bailing ahead of the results, so ideally you want to be careful going into the July 4th holiday weekend.

Portfolio Moves and Strategy:


Currently, I maintain positions in a number of commodities and energy stocks, all of which have been hedged by selling June calls. If my stocks don’t get called away on the 18th, I will likely start selling at the end of June and to reenter sometime in September or October. In the mean time I will maintain a few long term positions and trade around some of the positions I know well.

TBT – will be adding additional short Treasuries position on a pullback, as concerns about fiscal deficit, never-ending supply of paper dwarfing any purchases by the FED, and re-allocation into riskier assets all putting pressure on the bonds. I am not chasing the move now, as I do hope to see bonds bounce during a market pullback, providing a better entry point. At $50-$52, I will put a much larger position.

KEY- bought shares of KEY, although I am not really focusing on financials, I wanted to pick up some shares here for a trade. Trading at less than 1/2 its book value, the valuation more than compensates for deteriorating credit quality and capital raise concerns. Stock is oversold and was upgraded by RBC today, which is helping my cause.

UDN – reluctantly added a little more to short US dollar position, I think there may be better levels to enter this trade.

BTU, WLT, CNX – put small coal position back on. China has been buying record levels of met coal from Australia. Given how much production has been take out lately, this should provide some pricing support to major US met coal companies.

OIL – I am not chasing oil here, and turning a bit cautious as contango has widened again. I think after Goldman’s $85 oil forecast is digested the shorts that scrambled to cover today will put it on again. I am an OIL bull, and would look for a pullback to add aggressively, but for now, most of my positions have June calls written against them.

GOLD – I maintain CEF, and the only exposure both gold and silver. I continue to favor Silver, because of much cheaper valuation, but Gold seems to have more interest here. I think gold is overbought and will crack if the USD moves gets stronger.

SVR – sold position, as the stock has lost momentum and seems a bit ahead of itself.

Final thought: My portfolio is prepared for a pullback and although I still maintain a decent exposure to equities, I am compiling a list of top ideas that I want to aggressively add on weakness, as long as we don’t violate the uptrend. I will be publishing my Buy Wish List later this week.

Happy Trading!