Fed's true color

Today, Fed showed what they really think about inflation (going up) and economy (slowing down), and they reset the inflation target and growth target, this is to manage the expectation better, and allow them more freely to cut interest rate again. Fed's true color is revealed today. Before it's all over, the real infation will be higher than their forecast. Now is a great time to buy commodities. Fed is saying, they have to deal with short term issue (economy) first and worry about inflation later, you know how this will be played out.

1. I sold DBA a few days back to protect my gain, it turned out to be not necessary, it recovered all and hit new record today.
2. I did add GDX using the money I sold for DBA. Since I think GDX has more catch up to do than DBA.
3. I think the Fed will cut rate aggressively to avoid a recession, and this in turn will be a great year for gold and commodities.
4. DBA is a great vehicle to play three of the most important agriculture components: corn, wheat and soybean. All three are in shortage, however, I think they're all extended and specially wheat, with some reports saying Australia will have a record havest year in 2008 due to the rain, from previous three down years. So use a sharp correction to add, and sharp rally to sell.
5. Gold has different purpose, now with dollar in a long term decline, China and the middle east countries, Russia will be forced to use gold as one pillar of their reserve, this will be one of the long term trend in gold.
6. And more investors are using gold ETF to balance their portofio. Even a small 3% in all investors portofio will push gold price much higher.
7. Likely gold will touch 1000 soon (as early as this month), and then 1250 in 2008.
8. Tomorrow ABX and NEM will report. The result will impact GDX performance. In the long run, it doesn't matter their earning is good or bad, as long as they have the gold reserves, they'll be paid, and if gold price keeps going up, these companies will be worth more.
9. Another ETF, MOO is a good candidate to play commodities too. Remember the gold rush, it's not the miner who got rich, it's the people who sold the tools. Add to my watch list.

Higher low for markets

Last week, the market completed a higher low compared to January low in S&P500, Nasdaq, and GDX. If you check the chart of APPL and GOOG, they all made important low. As a result, I think the market is likely to resume its bounce, this time, it first need to test the recent high it could not break(SPY139), if pass that, we'll have a decent bounce(to SPY 145).

Today, even with AIG's news the market holds up pretty good so far.

Recent actions and reason:

1. Added GDX again around 50 last week. This is not well timed action. I thought the PM market would hold well even in the market sell off, not true. People sell PM to cover their losses. After that, it made low of 147 and now back to 148. I expect GDX to do really well if market indeed make a decent bounce.
2. I sold QLD at 72.9, and after that it made intraday low of 66.5 again. I didn't add since I didn't know if market would test Jan. low. Now it is 71.
3. I added AAPL at 124.4 last week, this is the same amount I used to purchase QLD, small position. I think AAPL has the potential to make a sigificant bounce if market bounces. 150 to 160 range is not out of question if SPY bounces to 145. And the downside risk is low since AAPL is such a darling in Wall Street, and it comes down from 200 at the end of Dec. 2007. Way oversold.
4. Added ORCL since it's the best and safest tech play right now, it's a solid position, risk is low, reward is high. As long as market bounces, ORCL should out perform market.
5. Still hold DBA,DBC and NLR. DBA made great run recently, and it likely to continue this record breaking uptrend in the near term. Wheat is in a panic rally mode and it may well triggers soybean and corn to follow it. GS forecast Wheat to increase 50% in 2008. This is the start of another parabolic move! Risk is high, reward is even higher.

Plan:

1. Pretty much hold these positions and lessen up when they make a significant move to the up side.
2. Downside protection should not be there since all these except DBA are formed a nice base. Need to protect the gain in DBA.

Market looks to test the recent low

The bounce is too shallow, I thought it had more room to go, and I didn't follow my own advice to sell QLD when S&P near 1400, I could sell QLD at 78. Yesterday I sold QLD at 72.9,I bought it at 66.5 a few weeks back. Still keep GDX, DBA,DBC and NLR.

1. I think the market may test the recent low or around that low. It's intertesting to see if S&P can hold 1270 and Nasdaq can hold 2200.
2. So if the market can hold these level or bounce back from today's level, I may consider to play the small QLD position again.
3. On the long term view, Fed's aggressive cuts will eventually force ECB and BOE to follow, and it will trigger global inflation in the next 5 years, and this will be great news for gold and commodities in general. So long term I still like DBA, GDX, GLD.
4. If Fed and other central banks successfully avoid recession and put the economy back on track, that will be great news for commodities.
5. If indeed we head into recession, then GLD will do well, but GDX and DBA, DBC won't do too great. NLR is a long term play, like in 10 years, nuclear will be one of the major source of global energy.

Trading plan:

1. If market indeed test low and then bounce back, then will use the dip to add GDX, DBA and QLD.
2. If the market just bounce back from today's level, then I'll trim GDX and DBA if they go higher with the market.
3. Today market's reversal (low, high and then sharply lower) is bearish. On the other hand, the market is back to oversold again, let's see if it can consolidate and then have another strong rally like the one on Jan.23rd.

The bounce

Today's reversal (Dow down 320 at one point and then closed up 300!) in the market pretty much confirms this is the short term bottom for the next few weeks, judge the length of this down leg and the magnitude, I guess the bounce in SPY will be back to around 140 (today's low is 126 and closed at 133.9) in about 1 to 2 weeks.

The market was very oversold even before today, now the capitulation in market early today is very bullish short term.

After that, all is possible.

Actions and reason:

1. Added GDX again to play the Fed cuts and inflation, gold will likely to resume the up trend, this correction in gold is shallow due to Fed's action. Gold is likely to hit $1000 before going back to $800.
2. Added DBA again, this is to play the inflation, which is almost certain in this environment. DBA maybe the best in this environment, due to three out of its four components are in shortage in 2008: corn, wheat and soybean. Only a deep recession in US will cause it to crash.
3. Added QLD. This is new. At 66.5 (low is 64.53, I waited until it started to rally). It closed at 73. I will keep it tight and let it go when SPY is anywhere close to 140. Today QLD is better than SSO since Apple added to QLD's downside, which was down over 10% at one point. This is a small position.
4. Keep enough cash to add DBA and GDX.
5. So far ,my pick of DBC is not too bad; but NLR is very bad, down almost 20% before today's small bounce since I bought it. Glad it's only the no. 4 position after GDX(no.1), DBA(no.2) and DBC (a distant no.3).

Next:

If the bounce indeed happens, then once it's back to 140 (about half point between high of 157 and low of 126 in SPY), we may go beyond that ( the August model, went all the way back to all time high, which I think is unlikely), or the bears return (which is very likely). And I need to reduce holdings to raise cash when I think the bounce is close to be finished. Rather to be safe than sorry.

P.S. I will not allow people to add comments to link to their sites, this is my personal blog to discuss trade only, not advertisement).

First test in 2008

Future looks like we'll have a 4% drop tomorrow at open, and global stock markets dropped biggest percentage in this free fall 2008.

While I totally missed the short opportunity, since I misused it so badly in 2007, I don't deserve the 2nd chance. But now I think the pull back in gold and other commodities, like agriculture should be used as a buying opportunity, like GDX,GLD and DBA. I will add DBA and GDX on pull back, as I already did last Thursday and Friday.

When it's over, these are the groups that will come out strong. I'll add small positions at a time to average the price, I won't be able to pick a bottom, but tomorrow if we have a big drop at open and then come back, I think it's the short term bottom for the market and PM and commodities. Even it's not the bottom, it should be really close in the short term.

Another wild card is Fed, will they be forced to cut interest rate tomorrow to rescue the market? Like what they did in August?

Anyway you put it, it will be a long term plus for gold and precious metal, I think central bankers around the global will be forced to cure the short term problem first, which is recession and credit crunch, and deal long term problem later, which is inflation. So, commodities will go up, in the long term, like in the next 10 years. So I think DBA, GDX and DBC are long term buys. Since energy has a dependence on economy, I think DBC(more than 50% are related to oil and natural gas) may not be the best of these three right now, but long term, all three should do better than the market.

2008

Since my last post on Dec.14th , S&P500 was down from 1467 to 1390 today. Meanwhile, GDX was up from 43.8 to 50.7 today. This is the first significant divergence between precious metals and general market. This is a very important sign!

For 2008, I think we have following main trends to play:

1. Dollar continue to decline due to the twin deficits. Yes, there will be bounce along the way, but I think Dollar will end lower against major currencies at the end of 2008. Dollar has to hit new lows in order to have significant impact to reduce trade deficits.
2. US may head into recession. Credit crunch, housing, negative saving rates, etc.
3. Emerging markets (BRIC) are still very strong, so demand for commodities are strong.
4. Election year is usually good for stock market (government will add funds to make economy strong for election purpose). This is a counter argument against recession. But this is a plus for inflation and the decline of dollar.
5. Inflation is edging up, you can find food and energy as an example, even though they're not in the core inflation complex Fed is watching.
6. Fed has to cut rates for economy, good sign for gold and bad sign for dollar.
7. Geopolitical events, US elections, China and Taiwan, Middle East, South Asia. People want to own gold, which just hit another record today.
8. Global warming will have more impact on economy down the road, and clean energy is one way to play this long term (10-50 year) trend.

Based on these, I have following ETFs that I think will do well in 2008 and in the future:

1. GDX. If gold is going to $1000 this year, GDX will outperform gold. This is the play against inflation, geopolitical crisis, and the decline of dollar.
2. DBA. Agriculture play. It has Corn, Wheat, Soybean and Sugar.
3. DBC. Commodities ETF. It has oil, natural gas, gold, wheat, corn, aluminum. But over 50% are tied to energy (oil).
4. NLR. Nuclear, uranium mining, nuclear operators. This is a energy, clean energy (global warming), foreign (Japan, Europe, Canada, Australia) play. It's like GDX, there are lot of companies in this ETF.

Out of these 4, I like DBA the most, then it's GDX, and DBC and the last one is NLR. I think all 4 of them will outperform SPY and QQQQ this year. As a matter of fact, I think short ETF may finally do better than SPY and QQQQ this year. But, the lessons I learned last year, I will not buy short ETF and will gradually add the above 4 ETFs.

The bears vs the bulls

After some research, I think now almost a year late (which caused me money!), my thinking of a bear market is near us. Here is the bear market case vs the bull market case.

Bear market case:

1. Credit crunch is spreading into real economy. I thought the market would take it seriously in March, and then in July. But I was wrong! But the credit crunch issue originated from sub prime is not going away anytime soon.
2. The world economy is still coupled, not decoupled--as some argued: therefore the US slow down won't affect the stock market. I think China and most of developing countries are still depending on US. So a slowdown in US will drag down the world growth.
3. Inflation is going higher, you can find it in energy, food, and all over other industries (any one purchased airline tickets recently?). China is the main deflationary force in the world, but the inflation in China is growing more than 10% in food, and the cost for imported goods into US is growing. Therefore, I think in the long term, like from now up to 5 years, we'll see a real inflation that can't be contained any more.
4. Dollar is heading lower (Thanks Fed's cutting rates and our twin deficits), all these are inflationary forces, around the world. Lower dollar will force foreign money to flow out of US stock markets.
5. Fed's "balanced" argument is fundamentally flawed. They said the inflation pressure and the slowing growth balanced each other out. The argument is saying, if we have two bad news, then we have good news. And most people totally discount another opposite possibility: higher inflation and slower growth, even a recession.
6. Over the history of economic cycles, central governments and central banks can delay a recession, but can't achieve real soft landing. If the soft landing is achieved, it's not due to policy, it's due to higher productivity and new economic activities originated from new technology. Therefore, we should not rely on Fed's policy to think the stock market will push higher.
7. Even from trading perspective, we didn't have the usually rally from Thanksgiving to Christmas (now still early, I don't know if we'll have a late rally soon), but the fact that Fed started cutting, and market had not performed very well, telling me the 5 year of bull market is near over.
8. Overall bullish tone all over the world in the last two years. If you check all the markets around the world, we had a great bull market in Asia (China), and very extended rally in US (more than 5 years). The bulls are tired, to say the least.
9. Global warming will cost us big time! More and more governments and people realize that we need to deal with this problem NOW! and there will be a huge price tag, this won't be good for energy price, food price in the short term. So I think within the next 20 to 50 years, mankind will pay a heavy price for our mistake! Even though in the long run, 50 to 100 years, dealing with the problem now will save us big time in the future(100 years away).
10. Any hot spots around the world will have negative impacts to the stock market. For example, Taiwan's president ignored both China and US, continued to push his own agenda, if this goes out of control, we'll have a global crisis if China invades Taiwan. Taiwan's president hijacked the whole island and thought China won't do before Olympics, I think that's playing fire. Even though, I think it will play out peacefully, but there will be lot of stress and scary moments, and market won't like that.
11. Middle east, Iraq and Iran. Even though we have a relative calm period recently, the long term perspective is not good, unless miracle happens.

The bull market case:

1. New technology greatly improves productivity around the world, the Internet and mobile phone are two examples. And new technology will continue to emerge to make our life better. Bio tech is one area that I think will have the next break through, even though this has been said for the last 10 years!
2. The "rich" developing countries (China, middle east oil countries) have money to invest in US. Even though the lower dollar will force them to buy hard assets (oil, metals, mining) rather than stock markets.
3. Even though the decoupled theory is wrong at this point, there is evidence that we're decoupling now, 10 years ago, a crisis like this in US will cause world stock market to crash, today, the strength of China, Euro Zone and other countries helped world absorb the negative waves.
4. China's Olympics in 2008, it forced China to absorb lot of bad stuff around the world, continues to keep inflation in check and tolerates Taiwan's Independence push! As a matter of fact, Chinese stock markets and housing markets already show some weakness, smart people will exit before the it crashes, so don't wait the Olympic is over to sell your shares, it's wise to keep the profit than to catch the last push higher.

All things considered, I think the correct investment idea right now is following:

1. Keep enough cash.
2. Buy ETFs link to hard assets (against inflation), like PM, energy and agriculture.
3. Buy ETFs benefit from the falling of the dollar.
4. Buy ETFs benefit from new technology, and the awareness of global warming.