Strategy for This Week and Rest of Year

I am going to take the time and kind of lay out my strategy here, to just give you an idea of my gameplan for the next few months. With the market rallying about 25% since March 9th, we should and I hope we get a strong pullback. The timing of this is key though. From studying the options market and various other indicators, we are in a weird zone. My technical indicators show we NOT fully overbought; however, this rally is very strong and happened soon, for a few reasons. One is that the market was “overshorted”. Many hedge funds were in negative territory and did not keep a lot of longs because of the fears of redemptions; therefore, the only way they could make returns is by shorting. When the “Doug Kass” rally took off, many hedge funds went all on in the long side and drilled the trade, which took us higher. Its rather interesting the rally was called after all the Q1 redemptions were done…just a thought. Then the “second leg” of the rally was driven by the people in cash who didn’t want to miss the rally and kept buying to drive up the market more. Friday in my view should’ve been a strong day and it wasn’t, because profits were being taken. The reason for this is obvious, Financials are up 40% in 3 weeks, Industrials up 25%, and Tech is now near positive territory for the year.

Right now my portfolio is 80% cash and 20% equities/options. If we get another rally, I will PROBABLY sell all of my longs and go 100% cash. However, I really don’t want to do that because I already have a 80% cash position, but I want to keep current returns. On the short side, I own various put options on MAC. The returns are at even for some strikes, others up around 50%. I will hold them and if we continue to sell off, they should expand. As for my longs, I own TTWO, NTGR, WTSLA, GNR, and RBY. Most of these are speculative, so I will kick them soon; however, I will say that I like the names but will also admit I may be a little early. I’m not a market predictor by any means but if I had to guess, we are going to pullback soon (don’t know when) and I will buy back the big dip and ride it all the way home. Economic indicators are improving, so a second half of 2009 rally is in the making; however, timing is the key. I want to see the housing inventories to drop some (we are seeing some hope) and I want to see unemployment rates drop. Alot of states are in severe trouble, I just read today that SC has an 11% unemployment rate. Jobs is my top economic indicator, so if jobs don’t improve, how can people spend?

My strategy will be rather aggressive here soon. Eventually, I will get 100% in the market and have various derivative trades. Again, I will position my longs to firm’s with solid balances sheets. Keep in mind, even if a firm has no debt and a lot cash on their books, I try to understand their business model and estimates because if they have quarterly losses or inventory write-offs, their cash levels deteriorate, causing the firm to be less attractive. Secondly, I will loaded up on more aggressive “junk” stocks that have been crushed this year, calculate various “ranks” to based around cash levels, price to book, volatility, etc. and buy them up. Stocks like SWHC, CENX, and SLW were stocks I bought in depressed times and made 25-100% returns in a month. I make most of my money being long stocks, not leveraged etfs. The risk is trying to catch them at the right time because you think, “they have to go lower…right?” but that is when scale buying comes in, so if they take off, you got some chips on the table and if not, you can cost average down. Lastly, I will look to short (with scale) certain things. I will focus on oil services/exploration, commercial real estate (getting a little crowded), currencies, and certain banks. In addition, I built my first trading “system”: its called “Daily Shorts”. I will test it this week. Basically at 10a it will tell me select stocks to short based on a “RF Test” and I will short them. If it’s a huge success, I will sell it to someone, leave the blog, and go move to Fort Lauderdale. Nevertheless, I will post these shorts at 10a and if they work to the close, it will be very cool. If not, I will destroy the “system” and build another gadget (in the process of building day trade longs).

So in conclusion, I would raise some cash this week. The “voices” in my head are telling me we will break 800 on the S&P this week but I am trying not to listen. Keep your new trades small and cut your losers. Be ready because I think the S&P will be 950+ by December (RF prediction – first in blog history). Be selective shorting because if you get caught, your returns will be damaged and could wipe your year out. Lastly, remember the Ben Graham theory on the market (summarized by RF). Mr. Market is nothing more than a manic business partner. He comes to you daily and offers you prices for companies, he wants us (you and him) to invest in. He changes his mind every second and wants you decide quickly. He changes his prices based on greed and fear, so keep that in mind. And lastly remember, the market is there to serve you, not guide you into a decision.” In short, I made the most money buying things no one wanted, at times no one wanted to buy them.

I will post some picks tomorrow A.M.