Wednesday night reading

Today I found a great post by MH. In the article titled "Yield" Stocks Continue to be Punished,
Mark says,

After a huge run earlier this year these stocks were positioned to "revert to mean" but the action still catches your breath when you see major rotations.  I mentioned yesterday morning that the REITs and utilities had taken it on the chin from the moment Bernanke answered in a Q&A that we'd potentially slow QE sometime in our lifetimes and this week has not been any more kind to them.  They are of course incredibly oversold at this point and prone for dead cat bounces as the entire candle is below the lower bollinger band in these type of ETFs, but of course knife catching is an art for those who enjoy it.

I also believe it is time to think about the impact on FED's exit strategy. Don't get me wrong here. I am not calling for the end of Quantitative Easing, I am not fighting the Fed, and I don’t care what Ben Bernanke says or doesn’t say. I’m only looking at price. That’s the only thing that matters to me.

If FED exits,

• Bonds will take a hit, because of less buying (Bond Yield will go up);
• US Dollar will be bullish, because of less money printing;
• Interest Rate products will have a twist in yield curve to reflect the market condition;
• Dividend stocks will be bearish, because of the comparison factor of bond yields going up;

 

The above two charts showed a clear turning point for 30 Year and USD on May 1, 2013. I guess some big guys knew it a little earlier.


 
The above 2 charts are more interesting. IYR, the ETF for Real Estate made a new high on Wednesday and dropped over 6% since then. XLU, the ETF for Utilities peaked on May 1 with Bonds and made a lower high on Wednesday with over 7% loss for the month.

At this point I am still not sure if end of QE is good or bad. It is good sign of economy, but since bad econ is driving us to all time high already, what's next?

Here are other readings I just did.

Is the U.S. the next hot 'emerging market'? [WSJ]

Margin debt hits a record [WSJ]

The bull case on Hertz Global (HTZ) [Barron's]

Goldman Sachs says AIG shares still most loved by hedge funds [Marketwatch]

If you only know 5 things about investing, make it these [Motley Fool]

Bid on lunch with Warren Buffett [eBay]

Activist investors: let's do it my way [The Economist]

House flipping back in style [WSJ]

Is that it?

As we discussed here multiple times, economy is yelling at the stock market for multiple times and in multiple ways. Yesterday, 5/22/2013 is an important day. Eventually, helicopter bEN started to mention exit strategy. This caused a gravity check of the stock market. SPX went up hit all-time high 1687 and then closed down over 1%. How serious is this signal? The situation happened twice in history, 10/11/2007 and 3/24/2000. If you are familiar with the market, you should know the other 2 days are in trading books already. I don’t know if the 3^rd time is a charm. I think it is still a little too early to call a peak imho. It will be safer to close everything out on lower high (if happens). Nevertheless we may experience a few negative days from now on.

In my opinion, the 1475 breakout is totally baseless. It needs to be corrected or digested. We also discussed the technical importance of 1530 level in multiple posts. We talked through 1600 break out in Being and Nothingness discussion. What's next?

 

That said, I am NOT betting heavy on it. This is the GOV market anyway.  What’s the plan?

Short term: I don’t think it’s the time to close all positions. It’s better to hedge.

• Sell calls if the quality of the stock is not too bad.
• Buy puts if you are not sure about the future of the position.
• Portfolio level hedge by using ETFs.
• VIX products. (If you have no idea what I am talking about, then just forget it.)
• Metals. Yes I mean gold and silver and the miners. Gold and silver are considered classic hedges to traders and money manager portfolios, even though in the Anti-fragile discussion I mentioned gold may not act the way.  Now with the massive pullback in silver and gold prices, the play could be back as we wonder what the hell is going to happen to stocks.  The entire sector is very oversold. This week silver prices hit a new bottom not seen since 2010.  We have reached the highest silver to gold ratio in about 33 months.  I believe we are finally near the bottom for these precious metals.

A tiny little bit option play

Here is my plan for THE stock

Assumption:

If the activist prevails, the stock should get a nice bump over 75 resistance. On the larger scale chart, there is a clear overhead resistance zone from 77-86. My best guess is it is going to at least re-visit that area. I didn’t do detailed research but I believe the 2010 peak of 86 bucks is also related to similar movement.

If they fail again, it should go down a little bit. Per my reading, the supports are 62.5-60 area, then the bottom zone of 50s.

 

Based off the reading above, here are couple possible plays.

1.      75-80 vertical

a.      Breakeven: 76

b.      Investment: 113

c.       Max Loss: 113

d.      Max Gain: 387 (3.4:1)

 2.      77.5-82.5 vertical

a.      Breakeven: 78

b.      Investment: 75

c.       Max Loss: 75

d.      Max Gain: 425 (5.7:1)

3.      Close stock long and short 62.5 put.

a.      Breakeven: 62.5 – 77.5

b.      Max Loss: unlimited

c.       Investment: 26

d.      Max Gain: 474 (18.2:1)

This is my favorite structure. If stock goes higher, my gain will be capped at 82.5 which I can totally live with. If stock doesn’t move after THE meeting, I will close with minimum loss of 26 bucks. My tolerable range expanded to 62.5. If the stock is going lower than 62.5, I will be assigned stocks. I will have to live with THE Ram Man’s guidance.

Overall I believe this stock still has good quality. I’m indifferent which side wins. I think in the long run it will do fine. If I can buy stock at 62.5, I will do it.

The 3^rd strategy needs margin as you could be assigned the stock. Theoretically the stock could go down to 0. The calculation is like this. If you plan to own 1000 shares of this stock in a long run, you should sell all current holding to avoid the downside, and open 10 combo. Meanwhile you should have 75K cash / margin in account to get ready for it.

LMP May 2013

No change in market signal. No change in my view.

The 5 IVY portfolio components are 

• SP 500 (Risk ON) 
• MSCI EAFE (The Most Famous International Index) (Risk ON)
• U.S. 10-Year Government Bonds (Risk ON) / USD (Risk ON)
• NAREIT (U.S. Real Estate Index) (Risk ON)
• SP GSCI (Goldman Sachs Commodity Index) (Risk off) / GLD (Risk off)
• US Dollars / UUP (Risk ON)

I don't like broad index for millions of reasons. I will discuss it if I get time. As mentioned last month, I believe it is time to think of individual stocks or ETFs to catch alpha. Below are some of my trading ideas.

Growth:
Here are the small-cap 3: 




Value Play, the WB's way:
to add

Dividend Play:

I still think AGNC is good stock. Real Estate is going to be the next bubble again. After the earning release, the risk is over. Just enjoy the dividend for the next couple quarters. (Dividend yield is at 16.31%.)



My view on Metal:
As discussed last post, I still believe Gold is bottomed. It was good chance to add at low 1300s. I am not doing it at this moment. I think there is good chance we will see double dip sometime this year. I will take trades then.