Wang's Happy Trading

Hello this is OptionDragon and I have the pleasure to write tonight’s review. As our man Happy, gets to relax and be happy!

There wasn’t alot to write home about that’s for sure!
More writedowns this morning cut the S&P futures gains in half as Freddie Mac, the nation’s No. 2 buyer and guarantor of home loans, posted its largest quarterly loss ever and warned that it may need to curtail its business unless it can raise fresh capital.
Not a good way to start the day after such good earnings from HPQ. The 4 Horsemen as well as my leading indicators(noted below) all gapped up and ran and then all proceeded to sell off during the middle of the day. At one time during the middle of the day, the S&P 500 showed a falling star at the bottom of the range on the daily charts (not good) and then proceeded to rally back strong before the close(like nothing happened?). At the close, the market was unchanged.
What gives? Don’t try too read to much into today’s action. The market continues to be stuck in a range that is short term trending lower and oversold, in the medium term oversold and long term oversold. Technically we are testing the correction area back in the middle of August YET you can see that the uptrend is still in fact intact. Look at every time frame.

So the question is where are the buyers? Well some are on vacation, and holiday trading is historically listless and today was no exception except that these ranges are still historically higher than the norm. During these range bound times, spreads or put buying were golden and this strategy has shown fruitfulness. But things change and as more banks come out with writedowns and the market still rallies you know it still worries about being blindsided by something unexpected. So you downgrade the C’s from GS to test the meddle of the market and try to get a wash out. But it doesn’t happen. Too oversold weak hands are being shook and no one’s dropping. I mean GOOG had a $900 price target today, as they aspire to become not only the defacto search standard but the “one stop shopping” of advertising for all business sizes. GOOG is at $648! That’s $252 dollars away! But remember that’s a $64 stock going to $90 so that’s in the realm of possibilities(I think $6.40 to $9.00, LOL).

Tony Crescenzi of the Realmoney.com believes after reading the full notes, expanded commentary, and economic projections under the new guidelines as well as the “why” behind the forecasts for the first time under new guidelines, says that the FOMC is leaning towards cuts as they,
“indicate that the Fed sees far more downside risks to economic growth than risks to inflation, and that meeting participants continue to view monetary policy as “restrictive,” partly reflecting these risks. This clearly signals the likelihood of continued interest rate cuts.”

I believe him and listen to Bill Gross of Pimco in order to analyze future interest rate decisions and forecasts. I think now the odds of a December rate cut as well as more rate cuts to come are higher but I agree with Cramer that it might be too little too late for some. But the survivors who do will prosper as a new wave of refinancings will take place. The FOMC will lower rates to where Bill Gross and Pimco’s executive team believes they will lower to 3%! Maybe down to a 2% handle!
“The Federal Reserve may reduce its target interest rate to below 3 percent to keep the U.S. economy from lapsing into recession, said Paul McCulley, a fund manager at Pacific Investment Management Co. “
“A low three-handle is a done deal,” McCulley said. “A two-handle is quite possible, particularly if the Fed delays. The longer the Fed delays in getting aggressive in easing, the lower the ultimate fed funds rate will be.”
“If the Fed is too slow in cutting short-term interest rates and the contagion of risk aversion gets worse, we are going to have a recession,” McCulley said. “Every time I increase my gut feeling on recession, I increase my projected decline for the fed funds rate”.
(http://www.bloomberg.com/apps/news?pid=20601087&sid=apImut5Zg0wc&refe r=home)

What this means is very, very good news for investors but some crosscurrents remain. Will we now fly because the fed will lower to 2.75% possibly? We WILL EVENTUALLY but they are cutting because there is more risk to growth. Plus next time the money won’t go to housing like it did last time because everyone got burnt, the higher probability is that they will put it in the market via many channels(retail, mutual funds). For frame of reference Bill Gross called the recent rate cuts to the tee back in Spring before anyone even thought about cutting! And that’s why he gets my respect, the man is one of the best in the biz.
But it will take time maybe a year. It’s a big puzzle and when you add the world economy and spread of systematic risk that before would have sent you into a depression not all is bad, and last time I check the malls are PACKED! The Bernake Put is on and they will do whatever it takes to keep the market up.
I think we are going to be very busy til the start of summer so you better get ready for all the fireworks. Bollinger bands on Happy’s index charts are widening and the Vix is stabilizing at a high level here at 25!

My leading indicators for this market are GOOG, AAPL, GS, XLF, XOM, FXI. I watch all of them at the same time.
RIMM has earnings within December options so the premiums are very high, so I want to be patient. GOOG and BIDU options as well as the majority of our favorite momentum stocks have some pretty high premiums associated with them. So I have been gravitating towards some AAPL which has the best of the worst premiums(IMO, if there is such a thing). Stick with the strongest stocks (leaders, Internet, Ag, solars, new leaders)on this possible larger wave up in the near future. After every correction new leaders emerge in order to push the market higher, IF it goes higher. So keep a lookout for change of leadership. Remember it could be old leaders too(OIH, Refiners, Oil and energy plays, maybe?).

It is still a stock pickers game and you want quality. Hedging is a very good idea right now for portfolio management because we could get the final big washout that could lead to higher highs in the future. But if you are a trader, than you want to take it day by day and trade by trade. Take those profits and don’t press the end of the ranges until it shows its in a breakout mode(which you will be able to clearly see). Find high probability trades and watch the leading indicators. Listen be patient! the day will arrive where you can shoot fish in the barrel all day but until then we have a holiday trading week that you shouldn’t take seriously and you should be preparing for some still volatile moves starting next week. The sweet spot of trading options occurs during the first 2 weeks of every month so be prepared for a lot of action. DE, TSL and some retailers have earnings tomorrow morning but I expect the same of today, tomorrow so lets see what tomorrow morning pre market brings as new info and data must be crunched!

Have a beautiful night, kiss your loved ones and prepare for a prosperous day tomorrow.

OptionDragon
Viet-An Ly pronounced (Veetawn Lee)