Thursday, May 11, 2006

With Chaos Come Clarity. So, Don't Blow It.

So, the Nasdaq makes its second biggest downmove on the year and I immediately come across alarmist articles like this one (Next LTCM?) and this one spelling all kinds of horrors.

My analytical side looks at this and says, "that's why I don't read news". My cynical side (I like it more and more these days) says (with a big, toothy grin), "Damn, lovely!"

Regardless of the commodities explostion, oil debacle, Fed, debt crisis, phases of Moon and Venus and pagan gods of thunder, it is business as usual, folks. The charts are oversold, they are running at support levels at the speed of a freight train and as far as I can tell nothing has really changed in the world from yesterday. So, if you plan on selling once the support is broken you will achieve three things:
  1. You will lose money. The more you sell, the more you lose. (I know, this is brilliant)
  2. More importantly, you will lose confidence in your ability to play the game. The irony of "of course it came right back after I sold it - the damn thing is random!" will ring true and you'll reach for the proverbial towel.
  3. You will blow the biggest opportunity of the year (this far) available in the U.S. equities market.
While you're busy hitting the evaporating bids (I honestly hope not), at Cadence Capital we'll do the following:
  • We'll be buying (actually, already are) June NDX 1650 calls. We're long just a few now and plan to buy more lower. A break below 1640 (especially if it happens tomorrow) will be a massive buy signal. Every low will be bought aggressively.
  • The housing sector is nearing buyable levels and we're beginning to accumulate RYL June 60 calls. LEN 50's will follow shortly.
  • Oil stocks should be sold here and we'll do that via put purchases. None initiated yet but we'll sell upticks.
  • Gold is done for now. Nonethelss, going short here is a tough call and as crazily aggressive as I am, I can't pull the trigger. However, we'll sell any new highs via long ATM puts.
  • Semiconductors - be discriminate here as the sector isn't as unified as it used to be. We like MXIM and KLAC. I think MXIM is a huge trader and KLAC is right behind it. Long calls on both of them. LLTC, SLAB to follow.
  • Japan and Russian markets had a nice sell-off from their tops. I like Japan more than Russia from risk-adjusted returns standpoint. However, if you have the nerve, buy Russia here and smooth it out with a portion of long Japan.
You'll find it funny that the above "to do" list comes from an almost net premium seller. I have to tell you, I've learned to like being long. There is something about making money at supra-normal rates of return. I found that I don't mind the (sometimes crazy) risk, the drawdowns and occasional fits of anxiety (ever felt nauseous after making money?). Hell, we're traders and it's a part of the game.

We take our lumps and deal with the pain. In the end it pays off. Big time.

Cheers,
/Dmitry

3 Comments:

At 9:21 PM, Blogger stocktraduers said...

Careful with that shiny knife. It sure is pretty but it is sharp. Maybe you should have some steel mesh gloves.
While I agree we are getting close to oversold, outside of a bounce there is still much damage in the tech sector. As far as housing goes, I don't agree. Why in the heck would you try to catch that dead watermellon bounce. We haven't even seen the full fallout from one of the most speculative housing bubbles in history. And as you know about swings, thing can swing way lower before they swing up. Just like things get over-bought get over-sold.
Personally, I am just trading this. Will go for the biggest bounce in the biggest realitive strength winner and probably short materials and steel as they are over-bought and show signs of rolling over. good luck to ya

 
At 11:36 PM, Blogger Dmitry said...

Won't argue with you on any of the points. To me it's really a matter of timeframes. Not calling any bottoms - I am merely positioning our fund for the proper odds on the short term moves in the sectors I mentioned. Granted, the moves can come later rather than sooner and they can be of any size. That's why it's an odds game, and that's why we make calculated bets.

As far as housing bubbles and other mantra go - I really don't care. I read at charts and I never read people's opinions. If it's a bubble, great. If it isn't, fine. People can tell me whatever they want but charts (in my very subjective read) tell me to start buying. Over time I've learned to trust the latter.

Best of luck!

Cheers,
/Dmitry

 
At 10:49 AM, Anonymous the game of clarity folks! said...

Are you saying that if you can't stand the downswing, get off the roller coaster?

 

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