Trading Directions for the next few months

We are at a very critical stage of market. Things seem to hinge on what Bernanke will hint tomorrow about the Feb policies on any further running  monetary easing  or running of the "printing press"

I am writing  before market opens on Jun 7. For the sake of time, it is written in  short sentences and to the points as I have no time to put up a proper essay. I will modify and improve on it as the week ends. It gives a direction for trades tomorrow and also some directions for the intermediate and longer term.

It is usually a mistake if one is ultra bearish or ultra bullish on the market. There are many extreme calls by analysts and investment commentators on either side because  if they are right, they make a reputation for themselves but if wrong, no one remembers them. Sensationalism sells.

The sound way to invest is to keep some bias on directions short and long term and trade according with risk control and hedges. Ride on the wave when you are right and cut short the loss when you are wrong.  Options are critical for investments using this process. Basically, I am still a trader at heart.

I am trying to make some calls on the directions. As someone said, if you try to predict the future through a crystal ball, more often you end up eating broken glasses.

Economy

So far almost economic data worldwide point to a slow down in continents from Europe to China to USA.

Companies earnings were up but dragged down by USA fiscal cliff, debt burden, Washington deadlock, European crisis, imminent default of Greece and potential default of Spain, Portugal, Italy Iran and spreading to Netherland and France.

Friday's unemployment figures were dismal.It is a big set back for Obama's relection campaign.



Most of the economic data were bad. It is expected it will stay this way for a while or employment probably will worsen to >10%. Shadow stats indicates that unemployment is a lot worst than reported.  Companies are squeezing blood for the bottom line. Unemployment stay or even worsen >10%. Efforts are spent on increasing efficiencies and productivity and in many instances it mean reducing manpower.

Some Key trades

US$ - long term down

- No many people realize that US fiscal condition is worst than Europe. It is camouflaged by having the reserve currency status that allows them to borrow easily for many years.  Much of the spending in America are on borrowed money. They have an annual spending of $32T and a tax income of of only $25T. The debt is ballooning and it will not be paid. There is no balanced budget and for that matter, an agreement on the budget. Some day it will reach a tipping point and implode. Unlike Japan, whose national debt is the largest of all, Americans do not own their public debt. Much of US debt is owned abroad by China Japan and OPEC China could dump $2T in US dominated assets on world markets and all hell will break lose.This will happen some day - confrontation with China? or some really bad economic event - a black swan? The US $ now can fired up the printing press to buy these assets and it is actually doing now. 

- Looking from a long term view and benchmarking against inflation and gold, US$ is on a steady decline for more than a decade.

- Not many people can understand the weakness of the dollar because of the safe haven status, patriotism and also the media propaganda.

So no matter how US$ is acting as a safe haven, I always look for opportunity to enter short trades on the US$. But it can rise substantially on the perception of a safe haven but it will come down.

Bond Market

-  Why the bond market has rallied to this level is beyond me. Paying a bankrupt nation to hold your long term cash for zero returns? How does US able to float $1.5 trillion in new issues each year when the interest rates on bond is less than the rate of inflation?

Having said that, I have lost money in shorting treasuries. It is one of my worst trades for the past 1.5 years. I am waiting to get back again.

A rise of interest rates will come sooner or later. It is as sure as the sun will rise from the east but only problem is that I cannot pin the precise timing. I think it will happen probably at the end of summer with a stock rally. There is a lot of money to be made here.

The bubble in bonds is as huge as the dot.com bubble. It may have capitulate down last Friday with rates going down to 1.44 % - a historic low.

Thus I am looking to a summer reversal to short bond again.

Commodities

I am long term bullish on commodities because I am bearish on the US dollar. Also, commodities offers basic value with the currency wars and printing worldwide.

But technically, it is still bearish.  My belief is that it will bottom. Wait for "risk off " trades again.

For copper I use FCX as proxy

I like PHO ( water ), AGU, POT, MOO and my favorite undervalue stock, CCJ ( for uranium ).

I entered also a call calendar for JOY - maker of Agriculture equipment during the last 2 days.

Currently, all these stocks are being collars waiting for the right time to ride the bull.

Natural Gas: 

Natural Gas is on a long term glut because of new 100 year supply from "fracking" and horizontal drilling in shale formation.  So I will be shorting it if it reaches resistance. It is almost there.

But because of the wide and cheap availability of Natural gas, I betting on CLNE ( transport ), D( transport - an income play ), and WRPT.

CLNE and WRPT are multi baggers but I am probably on the early stage. I like these kind of companies. I have traded successfully with handsome profits for WRPT a couple of times. Currently, I am back on WRPT again. These are pretty wild and volatile stock but offers very nice premiums.

Oil  -

My bias for oil is down. But it is too late to short it. If it breaks from $85 in the next few days, there may be a good calendars or verticals option trades to ride it down to $75. 

There are plenty of supply of oil being built up the last 1.5 years in USA because of new technology

The price of oil is artificially held up by political uncertainty in the middle east  down to $75 and if cannot hold will be lower

- held up by political factor in middle east

- over supply now with new technology in US. US may be even self sufficient if Obama is more friendly to oil companies. He is not. 

Gold

Gold is building its base but no bullish signal yet. At best, it is in a consolidation phase. The bottom for gold is 1400 but it may rally to 1670 or 1700 short term. 

If QE is announced tomorrow, I will change my position.Gold is officially on a bull trend. But as with precious metal bullish news, be careful that manipulative actions will be taken that gold does not go up. It has happened before. Do not buy until you see a break on the upside AFTER the announcement. It will not be too late.

Long term gold is up and I confident about it. But every good trade, we need to wait for the technical to align. Wait until the signal is clear. For the time being, it will trade sideway or down  dipping to 1500 or even 1400.  Gold tends to take the stairs up and the elevators down and many times it just falls out of the windows! It is my belief that gold is manipulated! Many of the price actions in gold should have alerted an Regulatory Agency to proceed investigation and persecution.  One way is just buy at the dips and hold it. That is what I did and am doing with physicals metals I buy and keep it in a vault overseas since 4 years ago. I will only sell if I see a dot.com mania or bubble. We are not even close to it. For the rest, I wait until the signal for the bull is clear.

Also,  for some  junior stocks like EZK and FNV, I buy and hold.  No options. From time to time, I use naked put to double up. Hold it until it is 50-100% or more. Many of these should give me few hundred percent. Keep it to about 2-5% of your portfolio.

Financial

I will not touch financials and real estate except shorting them on peaks. If you understand the underlying leverage, the fractional banking system and the derivatives exposure of $230 T for the top 5 banks, I will not be bullish on it for a while. Too late to short financials now although I am still holding my put calendar on JPM

I will enter more shorts once it hits the resistance again. 

Technology

If there is a bullish sector, it is technology. I can write off companies like DELL but bullish on AAPL, JDSU, CSCO, QCOM, MSFT, INTC.

I buy them on dips. I did enter bullish trades for JDSU and APPL last few days. 

I should be getting more aggressive to acquire ownership of these companies.

My belief is that technology will still be the key drivers for productivity improvement and efficiency which most companies are looking for.

The Market

Market up today. First it rallies because of rumors that Spain is going to be bailed out. Again this is just a rumor. Draghi's speech today is not particularly encouraging to LTRO or QE hopefuls but I respect him taking a sound process towards solving the problem. Reaction to crisis is not the hallmark of a good leader.

I believe there is more downside to the market but it Will NOT crash because we are not as leveraged as 2008. MF Global has cast a shadow of fear on the market. 

Also, many had gotten out of stock and redeem their mutual funds.

There are a lot of cash on the sideline. If there are fears, there will be bottom fishers like me.

But if conditions are real bad and fear is at the maximum, you bet there will be LTRO or QE.  So, we have a Bernanke PUT in place.

So my bias is a market sell-off after Bernanke's speech. I am on a standby to go bullish if there is any announcement of QE. I do not think there will be QE announcement tomorrow. It is a difficult political decision. This is an ammo that will be used only as a last resort - like a nuclear warhead. 

My position is market will continue to go down in the next month or less. Then China confirms their soft landing, various countries announce monetary easing or money printing, the Fed finally pump in liquidity, Europe comes out with a hat trick to solve their crisis temporarily and then stock market rallies for the rest of the year.

Having said all the above, I could be totally wrong. If I am >50% right, I will make money. 

Summary

Stock market will still go down but no crash. It will probably bottom around 1150 to 1200 on the S&P. If no announcement on QE tomorrow, stock market will slide down. It is 'risk off' again.  This is my bias.  I will be ready on puts and negative trades once the announcement is made.

Gold - longer term bull but short term consolidation. Buy on dips and collar.

Nat Gas = will not buy. But actually look to shorting it if it goes up a little higher. But long on transport and engine markers that support Nat Gas

AGU - longer term bullish but not time to buy. Also, like CCJ, POT, and MOO. Too early to buy now. Will get it once I feel the market has bottomed. Obviously, I do not think it has bottomed yet.

Copper - bearish now but longer term bullish. My proxy for trading in copper is FCX. 

Yen - down. Long on YCS and short on FXY. YCS could be a big winner. Current I am on a covered call with Aug OTM SC. Japan is very bearish long term. 

Financial and Euro - will short once it hits resistance again. On the Euros, I have closed my shorts a little early with >25% profit in about 2 months. I intend to buy EUO again if the Euro hits a resistance again. 

Bullish on Technology - continue to accumulate