Gualberto Diaz

Minyanville has an interesting article on the recent market bottom.  I suggest you check it out.

Some setups that I’m looking at include multiple stocks in the financials and home builders sectors.  All of them are for shorts.  I think HOV, BZH, and KBH could be ready to go down big when the market turns back over.  Although the fundamental story on the financials now appears to have changed, I think we could get a turn back down within the next few days.  Whether we retest lows, or if its a pullback on a continued upmove remains to be seen.

Some plays I got into today that may be worth looking at:

KBH April 22.5 puts.  Like I said, homebuilders have set up as shorts.  I’m choosing to play this through options.  The stock just made a nice little run up.  New homesales numbers come out tomorrow.  Something to keep in mind if you choose to short the stock outright.  The home sales numbers, both new and pre-existing, do NOT include cancellations.  I believe it was HOV that came out and said cancellations were running around 45% recently.

RIMM April 85 puts.  This is a pure play on earnings.  We’re in a bear market.  If they miss, the stock could go down tremendously.  It’s more sepculative.

CELG April 55 puts.  The upmove seems to be exhausted.  I bought these puts yesterday in front of the 60 offer.  I think this is a fake breakout that ultimately resolves to the downside.  After looking at today’s chart, the upmove through the 60 level wasn’t as strong as it should have been for the bulls.

I also went short SPY through SDS, when I saw it couldn’t get above the 135.50 level.  Levels on the SPY i’ll be looking at tomorrow will be held offers below 134.70 and then 133.90.

Risk managament is probably the single most important part of trading.  If you don’t manage your risk, you won’t be able to stay in the game.  Over the past 6 months, risk management is something I’ve learned alot about.  Until I began trading in the ultra short term, I took the Warren Buffett approach.  Even if it took a while, I was going to be right.

I no longer feel that way.  Before I enter into a trade, the first thing I look a is what my risk is.  Why’s that?  I need to make sure that if I’m wrong, I live to see another day, and I don’t get so hurt that I’m making a bad decision on my next trade.  By managing my risk, my profits begin to take care of themselves.  Believe me, taking profits too early is a high quality problem.  Letting losses ride too long is not.

How do I figure out my risk?  First, I find a play that interests me.  I take a look at the chart, and decide what my stop is going to be.  In other words, before I get into the trade, I want to know where I’m going to get out if I’m wrong.  Then I decide how much I’m going to risk on a particular trade, money-wise.  Once I decide, I can figure out how big of a position to take.

One of my biggest problems, which I have been working on, is not following my stops.  Thus my losses have been much bigger than I have wanted them to be.  But as a trader, this is something that I’m continually working on to improve.

But you always have to remember, you don’t want to put ALL of your chips in one basket.  Even though I’m not a fan of diversifying out of your gains, make sure you leave yourself with enough room to be able to get out when you know you’re wrong.

Now don’t get me wrong, I can’t wait to turn bullish on the stock market. Trading LEH intraday this past week has helped me realize just how strong we’ll bounce once we do put a bottom in. There will be strength, and lots of it. I just don’t think we’re there yet. Today, GS and LEH were downgraded by S&P. Since equity markets were closed, there was no reaction yet, but FX showed the dollar get slightly weaker after the anouncement. This is the same S&P that came out about two weeks ago that said the sub prime crisis was almost over.

With talks of all these writedowns, I have yet to hear about the next wave: Alt-A. In August, Countrywide came out and said that the higher default rates which had been strictly limited to sub-prime back in December 2006, and which they in no way, shape, or form saw spreading to higher grade borrowers, actually DID spread to higher grade borrowers. That’s when I knew I hit the jackpot with CFC. That’s when we saw the beginning of the end of the company. So why is it, that still, 7 months after this anouncement, we don’t hear about Alt-A writedowns? Why do I just hear about a bottom being put in because subprime is almost done?

I think we get another downleg in the indices. Barry Ritholtz, writes that the bottom hasn’t been put in, until you’ve already been burned a couple of times trying to buy it. And from the personal experience I’ve gained over the last 7 months, he’s completely right. We reach the bottom when there’s desperation. When things look like they can’t get any worse. We’re not there yet.

Listening to the commentators on CNBC, one would think that everything is beautiful out there, and that the worst is over. But delve deeper. You don’t hear what they don’t want you to hear. How about emerging markets? The Chinese stock market is down about 30% off its highs. Inflation is a HUGE problem in China. And don’t think it’s not going to get exported to the States. You have to be able to stop listening to the media. Formulate your own opinions. Make your own decisions. I have to admit that there are times when I myself get caught up in the emotions that these people try to paint. I think that maybe I’m getting short at the bottom. But then I read news articles that show me it’s not so pretty out there. Not all the problems are over. So don’t let yourself be fooled into thinking they are.

Looking at those short setups, most of them were stopped out last week.  MCD still looks like a decent short.  SOHU could work, CELG possibly.  Wednesday morning I was looking at the price action and RIMM and it looked like it could start getting weak pretty soon.  I went short in the low 96’s, and except for Thursday morning, the market really seemed to reverse.  That was the only trade I put on last week.

Watch MS below 42.  I covered some of my BSC short position below 80 on Friday after the buyout rumor came out.  I was hoping it would maybe bounce back up to the low 90’s so I could reshort it up there, but it had trouble getting above 84.  That seems like a decent short, although I’m not particularly fond of shorting financials anymore really.  I feel like the risk/reward isn’t there as much anymore.  Be selective if you choose to short. 

There will however be more writedowns.  S&P’s downgrade of $13 billion worth of CDO’s caused the selloff in the afternoon.  You can bet banks will be writing down more assets.  The whole Ambac and MBIA saga has to play out, and that looks like it will favor the government entities instead of the banks.  We should have some sort of solution on that this week.  We’ll see what happens though.

CPI and housing starts come out tomorrow morning at 830, so that should set the mood for the day.  I’m still astonished CPI number have been so tame, especially considering the insane rise of costs of food and energy over the last year.

With the market bouncing, and what looked like something that could’ve been a late date fizzle, I looked for some setups that looked good as possible shorts.

I think the SPY could bounce higher still, 138 is a level for them, with 140 being the recent high from the last bounce.

The levels for the following stocks are prices you need to set your stop at, where you choose to get short is up to you.

APD - 93
CELG - 60
DRYS - 80
ESV - 54.65
FSLR - 200
FCX - 95.14
GIGM - 21
MCD - 56.87
NM -12
SGR - 60
SOHU - 50.36

You can do what you want with these levels, I’m probably not going to get into all of them, I’m going to see which ones I like the best tomorrow morning.  Have a good night.

GS reported this morning, and the Street’s reaction to their numbers was not pretty. So far, both LEH and GS have reported numbers, both have beat the Street’s expectations, and both have sold off. Tomorrow morning MS reports, followed by BSC on Thursday morning. Today both stocks closed near their 52 week lows. If you look at the weekly charts of both of these stocks, we could be setting up for the next leg down.

I sold MS at 48.50 this afternoon to play its earnings. I see risk being very minimal. Judging by what I’ve seen so far, if they beat, it looks like people will be selling the rally. If they miss, I have no idea where they could be trading….. maybe low 40’s for MS and low 80’s for BSC.

But what’s even more troubling is that the Fed’s from around the world are scrambling the keep the financial system afloat, and the market is selling off into this news. Last Wednesday morning, the Fed announced a plan to inject $20 Billion worth of liquidity into the system. We gapped up and then sold off. This morning, the ECB said it will pump $500 Billion into the system. Although there was a rally in the afternoon, the market did selloff into the morning. I suspect there will be many more Fed interventions in the coming weeks.

Talking to some people, I’ve heard that alot of hedge funds that are up for the year are done. This could be a reason why there are no bids in the market right now. Come January 1 we will see what happens. I suspect that the performance of the investment banks will determine where we go from here.

So I’ve been trying to figure what exactly this Fed Auction actually is. Apparently, its the first time the Fed has used an instrument like this in its history. So in other words, we don’t know what the unintended consequences will be.

First, let’s paint the picture of where the market is at tonight. We have an inflation problem. We have a credit problem, which was fueled by insanely low rates in the earlier part of this decade. If the Fed were to cut rates to zero today, sure banks would survive, but inflation would suddenly become so high, the dollar would become worthless, and the price of everything would skyrocket. Long-term, inflation would be a HUGE problem for Americans.

Yesterday, the Fed cut a quarter point. According to the futures, this is what everyone had expected, although there was a huge sell off when it actually did happen. After the close yesterday, there were leaks that the Fed was looking at other alternatives to ease pressure on the financial system. The question running through everyone’s minds is “Why didn’t they say this at 2 PM?” This makes them look very reactionary to the markets reaction, which is not good for their credibility. You’re going to see everyone in the news bashing them. Tonight Cramer said Bernake was stuck in an Ivory Tower, and Dennis Gartman wanted Bernake out of the position. Cramer because he’s a puppet for the financial industry, and Gartman because he feels Bernake has lost all credibility by reacting to the market’s reaction. I agree, Bernake has lost credibility, but at least he’s not bowing down to Wall Street. He’s thinking outside the box, which I think may lead history to treat him well if he can weather this storm.

So let’s get to this Fed Auction. It’s a coordinated effort among multiple governments to provide liquidity to markets. It’s different than the discount window and repo’s from August because they’re accepting more types of paper. They are accepting CDO’S and MBS’s and giving them top dollar…. as much as 85 cents on the dollar. These are securities that have NO market. And these numbers are based off a September 2006 paper, so their values are very outdated.

The key number to watch going forward right now is the 3 month T-bill LIBOR spread. The wider it gets, the worse the credit market situation is in. All these derivative products are based off of this spread. The problem is that LIBOR is decided out of London. In other words the Fed can’t control it. We’re fast entering into a period of time when Fed policy will no longer be as meaningful to the markets.

I’m still short. And I’m not jealous of the position Mr. Bernake is in. Good luck to all in your trades.

Over the past two weeks, the market has started to become significantly weaker. The SPY is below the 200dma, the QQQQ is below the 50dma, and any morning rally has led into an afternoon sell off. Even bounces in the afternoon don’t seem to be very convincing. Financials are weaker. Any up day in the markets leads to bad news from financials, which leads to reversals.

There are CFC bankruptcy rumors flying around the Street. I think the Fed will end up cutting rates either at or before the next meeting. The dollar is in for another leg down. I love how Paulson has kept repeating that it is in the United States’ best interest to keep a strong dollar, yet interest rates have been continuously cut, and money has been pumped into the system like its going out of style.

I currently have a short position in BSC and own puts in GS. If you look at the charts, you see the homebuilders were the first group to have the down move. Last December, when Countrywide had the subprime problems, the mortgage brokers started following the same pattern the homebuilders did. Now the brokers are the next ones to come to the plate. Why? Much care has been taken to write down subprime assets, but even then, this number is too small. What started this credit crunch in August? Countrywide’s statement that it was no longer just subprime assets that were in trouble. Wall Street banks have only been talking about their subprime exposure, yet CFC has stated this exposure is NOT contained. And even if there were absolutely no more writedowns from today, the CDO/MBS market is completely frozen. This money machine has been shut down. With a slowing US economy, mergers and acquisitions will slow, where will future profits be coming from? Trading?

Even though it’s been a holiday week, we’ve had some high volume days this week, with today’s trading volume in the SPY being higher than any day since the August bottom. This move is not to be taken lightly. After waiting for a year, I think we may now be towards the beginning of a Bear Market. The Bulls will not go quietly into the night though. With a rate cut, I’m sure shares will rally. The real question is how long will the rally be sustained, and how real will it be?

The market felt a little weaker today, as people are starting to get nervous about the Fed meeting.  Bernake has already shown he will bow to Wall Street, and with the Presidential elections coming up, I’m sure he’s being pressured by the GOP to keep the party going for as long as possible.  But nonetheless, there is uncertainty on the Street, and when there’s uncertainty, there’ price volatility.

I got stopped out of my CF position this morning, as I pretty much paid the high.  Other stocks that had strong earnings that I looked at this morning were FDP and AG.  They didn’t perform as I expected them to though, so I will look at them again tomorrow morning to see where they’re at.

I’m continuing to hold GS, and will decide tomorrow what I will do with my position.  With the strength of the Q’s, I’m disappointed that I was not only stopped out of my BIDU trade about 15 points lower, but also that I missed my entry point of 680 for GOOG.  It shot up to the 690’s without looking back.  I did however buy AAPL above 188.5 today, and although the stock didn’t perform as strongly as BIDU or GOOG, it could have a run up tomorrow.  Tech has been very strong over the past 2 months, and has taken the lead as financials have fallen to the rear of the pack.

I don’t plan on entering into any more trades tomorrow until after I see what happens with the Fed.  I’ll expect a pretty calm morning as traders are awaiting news from the Fed.