Searching for Easter Eggs in the Market...?

Wishing everyone a happy Easter. This is my favorite holiday of the year. Less commercialism, more genuine, more life. And the weather is beautiful. Oh, and by the way, if you are a Christian as I am, it happens to be the Holiest Day of the Year... ;)

And I have always had fantastic early childhood memories of the Easter Bunny and the variegated assortment of colored candy eggs...

Happy Easter everyone!!!


Now for a look at markets,'
*****Note: I do not give stock recommendations. Everyone is on their own. I may or may not post every day and the purpose of my posts is to inform myself and produce a record of my thoughts. If it helps others great. If not ok too. Feel free to post comments on my blog if you wish.

Please be respectful. It's all I ask...


Here is my "insightful" theory for the day:
The markets went up on Friday largely for the same reason that markets generally go down on Friday before a holiday during a bull market. People wanted to take their positions off the table so they can enjoy the weekend and not worry about the risk of Monday's open. In this case this meant that people covered their stocks, particularly financials and real estate stocks. In addition people that exercised their puts had to buy the stocks on these puts (albeit at a profit). This, in combination with people wanting to close out positions, and some short squeezes, created a general upward swing in the market.

Since when do reports of job losses and economic weakening cause the stock market to go up?
Especially in stocks that are most likely to be affected by the economy?

I am currently in DUG and TWM. The market is on a downward trend and conditions are such that a cleansing over time, the restoration of trust and transparency, and most likely a cathartic hard and fast downswing will be necessary to flush out the garbage of this mess and allow Spring (metaphorically speaking) to come again to the market. This will not likely happen this Spring and it is much more probable imo that markets will head lower over time. Still markets never go down all at once and the Fed and election year politicians are doing everything to try to at least forestall the problems and in the short run this creates enormous upswings and greedy bear short coverings and therefore I recommend taking profits when stocks go too far both on short and long positions and never getting too comfortable. "Nobody ever had to sit down with their friends and family and try to explain to them why oh why they took profits".

I like the DUG very much because there are several ways this could do well. First and foremost the bubble formed by traders trying to hedge against the dollar. At first it made sense but like everything people saw the price of oil go up and up and speculators got in and drove the price of oil beyond its value in a short period of time. As the price of oil went up so too did the belief that oil stocks would follow and remain immune to the financial credit mess affecting the other sectors of the economy. It is true that the oil companies will make a handsome profit right now but as inventories go up and the price of oil declines the sector that has refused to go down will come down hard. Lots of fat here. This is a BEAR MARKET and areas where people are still holding a lot of profit will be sold off just like the other areas already have. As oil comes down in price the oil stocks will also until they come to a point where it is overdone near-term and they become dangerous to short. Just like SKF at 150 and SRS at 140. Now that the Fed has stood up for the dollar a bit with the lower rate cut and the tougher rhetoric the catalyst has come to drop kick these stocks. I expect that companies like XOM will be trading closer to 70 than to 80 and perhaps lower before all of this is said and done. Also the smaller companies that depend on high oil prices for high profits will see their stocks go down with the Bear market.

To reiterate there are 3 reasons I like the DUG:
1. Speculative bubble was primed to burst at some point
2. In a bear market stocks that still hold much of their gains and are trading as if there were no bear market are primed to get mauled.
3. The catalyst of slowing interest rate cuts, allowing markets to correct themselves for a bit, and concomitant commodities' drops, has finally arrived.

The risks here are:
1. Further, unexpected upswings from unpredictable government moves and short covering
2. Solid earnings quarters that beat expectations in the short-run.

For the other short instruments a significant rise from the lows has already occurred and it is imperative to define a price at which the risk reward ratio is favorable. For example, I used to like the TWM under 80 but not above 90. As the bear market extends these numbers will move up. I just bought some TWM at the end of the day on Friday at 84. I think that 82 is the new 80, which is to say any moves under 82 are strong buys (barring unexpected changes) and 84 is the new 82 (an ok place to buy some shares, but leave the option open to buy more if it drops lower).
Over time I expect that 86 or 88 may become the new 84 and so on.

For the QID I like it under 52, I used to like it under 50. I don't like betting against Microsoft and AAPL as much as I do against smaller, unproven companies in TWM though this must be counterbalanced with how far each has already fallen and how far it may be expected to still go. I did buy QID when the P/E ratios were excessive for a Bear market i.e. when the QID was under 45. Again as time goes on the 52 may have already become the new 45 and so on. It is likely that the QID will end up in the 60s. However generally I like to look for opportunities by setting alerts for short instruments hitting certain price areas (i.e. 52 on the QID, 82 on TWM, and so on).

Which brings me to the two ETFs I am most nervous about yet can't be ignored: SKF and SRS. SRS just went under 100 which to me is a strong signal to watch it closely. Especially because I think the selling starts again soon this week and that people who sold puts and now hold the stock on exercised puts are going to want to get rid of it as soon as they can. The Fed's moves may cause the nervous investors to stay away from shorting for a little while but the mortgage problems are not anywhere near done yet and when prime mortgages continue to default and it is clear to everyone that this is not just a subprime problem things may get really ugly here. Oh and commercial real estate is in trouble too... of course.

Depending on market conditions, if the opportunity is looks ripe, on Monday I may buy a little SRS in the morning early before working/studying for chemistry related stuff. If SRS drops into the 80s there is support at around 80 with a possible move to 120 or above which is stellar.
If SKF drops too much lower I will start to monitor it also and calculate support and resist
areas to predict possible risk rewards before getting in.

As with all shorts stops are imperative in my opinion. You have to determine how much you are willing to lose and adjust the lot size accordingly. Because the SKF, SRS, and FXP are so volatile and huge overnight gaps can occur I tend to limit the amount I ever put into these ETFs at any one time. The smaller the lot size the larger the fluctuation is permitted for a given loss scen.

On the long side I only have a small position in CMED. I have a background in biochemistry and I see this company as a very powerful long-term play. IVD products in the world's biggest market have enormous potential. The HIFU is a wildcard and is just bonus in my opinion. The best thing about this company is that thus far the management has been very very smart, disciplined, and conservative. This is not a fly-by night Chinese emerging market company in my opinion. The science products produced from this company, a company that is aligned with one of China's top univesities, rivals that of counterparts in the West. The potential here I believe is huge. It is undervalued by over 20% (just look at the PEG ratios for yourself) and though I have trimmed my position due to this market I am willing to ride out some small short-term losses in exchange for insuring that I am in place in case the stock decides to shoot upward.

Remember the earnings for a company like this do not go down in a poor market and so the stock pressure is due to market conditions alone. The more the stock goes down the more undervalued it becomes. If it goes down lower I will add in small portions at key support areas and put stops below. If it gets ridiculously low over the course of this bear market I also have no problem taking a page from Buffett and holding a larger sized position for the long term.

I am also looking at stocks that have just gone down too much even when taking into account that their earnings may suffer in the slowing global economy. Some dry bulk shippers earn money from long-term contracts and though they may get less from spot rates the earnings will not be impacted enough to bring the stock prices to levels they sometimes fall. NM under 9 is an example, as is the case with many others.

Highly undervalued stocks are worth looking for regarding trades where the up/down ratio
of the stock p is lo enough. Tight stops always here on any long trade in this market. The idea is that one big winning trade can more than compensate for a number of small losing trades, should they occur (and some will always). Companies like CROX and DECK, and many others sometimes are juiced for short term upswings even in a down overall trend. Again, stops are imperative because the floor could be almost zero here.

And always looking at new companies to place on the watch list and examine closely for when
the market rebounds. Fear creates opportunity. When the conditions are ripe only those that have done the work and know exactly which stocks to buy will be the big winners. The benefit of a market like this, at least for stocks, is that it creates time to find great companies while the stocks are going down. In a bull market often by the time gems are found the prices are high.

If I were to summarize my overall philosophy on stocks I would have to say that it's largely about correctly searching for, identifying, and capitalizing on the opportunities that the market provides and trying really really hard not to force something that isn't there.


" I held a moment in my hand, brilliant as a star, fragile as a flower, a tiny sliver of one hour. I dripped it carelessly, Ah! I didn't know, I held opportunity."

~Hazel Lee