My Strategy for This Week & 3rd Qtr

A new week is here, so let the fun begin! This will be a long write, as I discuss a few views on the market and third quarter.

I suspect this week will be rather choppy as the bulls and bears fight out the tape, in addition to options expiration this Friday. The bearish sentiment is back but this rally is not over, so don’t go run for the flood gates yet. Personally, I think we have another 5-10% left on the indices. The pros have been calling for a pullback for the past 3 weeks, while your boy RF laughed and racked up a 290.47% YTD performance. All I can say is that we win again. (Note: If I say things like RF wins or I will not be denied, I am not bragging or trying to be cocky in any fashion. I post all of this for free, to help yall out. I just like to give some of my buddies who run funds a hard time.)

I sold some stuff Friday because honestly, I got to raise cash to preserve the gains and I am a little uneasy about July. I think we have a few weeks left in this rally then we will develop a wider trading range that will be difficult to navigate. A side of me wants to purchase more conservative plays, while the other side wants me to load up on cyclical and press the pedal. I am unsure on what I will do but I will be traveling a lot in July, both on vacation and work, and will not be around my desk.

As for a roadmap for third quarter, I will stay in technology and banks (in specific plays, not broad). I will look at commodities but will not chase them because if the dollar begins to gain some strength, commodity prices will be lower; however, timing will be the trade. I listened to GNK’s Chairman the other day and he believes commodity prices will continue to rise and I agree but the destruction of our dollar is a very serious matter. In addition, treasury yields are rising; however, I believe they are peaking. The 10-year may get to 4.20% but I think we will see a reduction. Lastly comes the big fear – a rate hike. The question on everyone’s mind is “Will Bernanke raise rates this year?” Many believe no but many are saying yes. Watch for the equity markets to play games and try to price it in beginning in third quarter. Personally, I believe there is a 20% chance of a rate hike by September and a 60% chance by December. It truly depends on inflation and the speed of our economic recovery. The concern of this rally is that it is a “jobless recovery” however, jobs lag the market during a recession normally by 9 months. In addition, some bears are saying that the Michigan Sentiment report shows signs of a future decline in consumer confidence, so that is something to watch.

Now, I will give a little advice. This small cap lotto that has been going is something that I have never seen in my entire duration of trading. However, due to the sharp risk of these stocks, I will begin to position myself to stocks that have better balance sheets, lower betas, and larger market caps. So anotherwards, as sad as it is, the 25% day gains will be over soon but will be remember this for years. And that brings me to another point, remember these times. Last year was absolute hell and things look so much better now. Will the market do a “double dip recession”… I honestly don’t know. At first I was bearish around 800 and then I just came to the point there is no reason to fight the tape and I went with the flow. I would avoid the ultrashort ETFs and keep more cash than short positions (then again that is me). I don’t know if this is a bearmarket rally or a birth of a new bull…but I am prepared for both in case we shoot down or up. I will say that the VIX is interesting at these levels and seems to be showing some complacency (in my view). This market rally is over two standard deviations from the annual average (mean return) of the past 100 years..a little alarming.

As my view for the economy or the market in general, I am more bullish on the market than the economy. We have printed a boatload of money and the job births don’t seem to be coming. In addition, unemployment is high, which is a problem since jobs are the key driver for the consumer. However, I believe many investors are more confident in the market and the question will be if the ‘fear’ will comeback in the market. Only time will tell I guess but the money we are printing is terrifying. Many firms will frown upon this regulation and if the government raises corporate taxes, firms will move jobs overseas and also make investments offshore as well.

As for investing/trading ideas, I will look at banks, commodities, emerging markets, select retail, energy, and some basic materials. My bank purchases will be viewed as investments, not trades. I have 5-6 banks that I really digged into and believe over the next 2-3 years will double if not triple (or maybe quadruple). WFC, KEY, and BAC are three of them, which I own and are on the less. There are three more that I have not bought yet and will wait a little while to see which ones will dip and buy 1 or 2 of them. Ultimately, my goal is to have between $10-15k in 3-5 banks and if it works in my favor that investment will be worth $20-40k by the end of 2011; however, this is far from risk-free. As for BAC – I am hearing good things…suspect a rip tomorrow