Fed Speak - What to do with your portfolio this week and market direction - UP or DOWN!
We just went through one of the most volatile weeks in the markets since the dog days of 2008-2009 financial crisis. Is China slowing, what is the Fed going to do and is the world headed into a recession? So many questions and the answers are not very clear. From a volatility perspective, the VIX hit the highest levels on Monday last week when the DOW traversed over 4500 points - this has never happened before - there were huge opportunities to buy at the lows that day and make a huge profit - volatility is truly a trader's gift and an easy way to generate some very quick profits - if you are a technical trader it becomes even easier. You have to make your preferred stock list and watch those only else you will not be able to choose during big market moves, like the one we had last Monday 8/24. We did make money as we were net short into the market and would have really preferred to get into some stocks that tanked at the open - we knew that the markets would bounce - since it was an oversold condition and markets did rebound into the end of the week - just go check some of the low prices for some of the top stocks on 8/24. Several stocks opened down over 20% and then recovered very nicely. That is why you have to have cash set aside for trading on volatile days - because the returns can be magnificent.
Markets rebounded over 1000 points on the DOW late into the week and many stocks bounced off the lows - there was short covering and some buying buy the big funds since they saw this as a huge buying opportunity - we saw the fund managers discussing this on TV. Volatility numbers are still high and we would expect volatility this week also. Major trend-lines have been broken and we have to test the trend-lines and the previous support levels (which are now resistance levels) for all the indices.
Fundamentally we do not think the economy or the tech stocks have bottomed - China slowdown and the issues/headwinds they are facing from their bad loans, high debts, exports slowing, over capacity are going to have repercussions around the world. US economy is still strong with the jobs numbers still ahead of the 200K/month magic mark and we think the Fed sees this and is ready to pull the trigger in September. We still suspect whether the Fed will actually raise the Fed Funds rate in Sept. We wil have to wait and see - from our perspective we do not think they have the 'guts' to do it.
China intervention into their stock markets was one of the worst ideas and then they have been so reactive to every little piece of economic news, that they are acting like a 2 year old's in a candy shop. Lowering RR ratios, cutting interest rates, injecting cash, and so many others drastic measures, it makes one wonder what really is going on in China.
Is it really that bad!!
There was The Jackson Hole meeting this weekend and the Fischer indicated that the Fed would move towards hiking rates. They know there is a bubble and they are trying to defuse it before it becomes bigger and then they are left with no tools to fight it. We will just have to wait and see with the numerous number of crazy commentary on CNBC and Bloomberg non stop about the Fed's plans. It is getting really ridiculous!!
As we write this futures are down - we expected that heading into Mondays' - typically weak in recent weeks.
Anyway, we expect the markets to consolidate here within a 500 point range - with a topside target of 17000 and low of around 16000. S$P500 to be range bound between 1920 and 2040 range. NASDAQ which was primarily up because of biotech stocks should start seeing some pullback.
Use this opportunity to lighten up on tech stocks - fundamentally there has been no change in their outlook and forecasts - the trend is down and we expect it to stay that way. With Apple's event coming Sept 9th, we expect that the tech stocks may stay range bound here. We like SLAB for short term trade. We are short AMBA (earnings on Sept 1),SWKS,INTC,PYPL and MU. Our shorts did well for us during this downdraft. We were discussing topping action in the markets and we were ready for it. Long NFLX. We use options to hedge all our positions.
Commodities - oil bounced - expect that to be short lived - we are heading into the slowest season for oil - post summer time. Still some money to be made from short term trading here - check out chart for USO and OIL. Possibly very oversold - should go up for short term. Gold Bounced - we are keeping a close eye on this - as it is tied to the dollar - but with the weaker currencies abroad, we think gold can shine - wait and see.
Here are the charts for DIA daily and weekly - Daily chart shows an oversold condition and weekly is not oversold yet. Watch these carefully along with the VIX. We always trade stocks which have underlying options and are very liquid. We like DIS for short term - looks oversold. Do not like biotech - short IBB.
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