November 29, 2005
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  • The Big Picture Investor: Continuation Rally?

Continuation Rally?
For the Trading Week Beginning November 28, 2005

Dr. Peter Navarro is a business professor at the Univ. of California-Irvine. He holds a Ph.D. in economics from Harvard, and is the author of "If It's Raining in Brazil, Buy Starbucks." and When the Market Moves, Will You Be Ready? Dr. Navarro is a business professor at the University of California-Irvine. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund. Dr. Navarro has also created an excellent CD in conjunction with Online Trading Academy, covering his Macrowave topics in an easy to use multimedia format.

Last week, I called for a continuation of the current Xmas rally. Now some pundits are calling for a possible pause.

Me thinks, dear reader, that only a precipitating event could slow this bus down, at least for several weeks. Look, then, for how sales do over the Black Friday weekend. At least so far, the word from the trenches is "strength." So perhaps we get to party on.

The Week Ahead: Home Game

With the housing sector in a post-June slow decline, the existing and new home sales data will be of interest on Monday and Tuesday as will construction spending on Thursday. With the Fed signaling a possible end to raising interest rates, this sector could get at least a dead cat bounce over the next several weeks.

Watch out for any downward revision of the Q3 GDP numbers on Wednesday. At 3.8%, they seem a bit too good to be true.

Beige book on Weds. is always good reading while Thursday's auto sales are unlikely to have any good news for the industry – which is not out of favorable sector rotation spot.

ECRI weekly index continues to signal stable growth into 2006 – a bullish sign.

Peter's Portfolio: Shorts and Longs

Holding ASTM, ARDI, DSS, SVA, LVLT, AMKR, AIRN, VISG, QQQQ , ALVR, GIGM. Only ASTM is a long term stem cell play hold in the red but doubled down as it is solidly basing and moving to "accumulation" in its technicals.

CPTCQ.OB came off its lows with a nice end of week gain. Look for new order announcements to lift it over the next several months.

The plan now is not to add many (or any) new positions but just ensure that I preserve the Xmas rally gains. Vigilance is the watch word now.

Hedging Your Bets With Matt Davio:  What To Do When You Are Caught With Your Shorts Down

We had a Shortened week with the Turkey holiday. Half day today and volatility continues to grind down to a halt. The July low of 9.88 is nearing as we hit 10.5 on Wednesday on the VIX. Will we go lower or is the interim top in? Interesting when you look at this chart how if you flip over the VIX it mirrors the broader markets and their moves. So, I am sure not chasing this rally 6 weeks into it.

What follows are some lessons I have learned when I have been short in a rapidly rising equity market as has been the case over the last six weeks: 

  1. Avoid averaging up on your shorts. 

  2. Buy some out-of-the-money calls to protect from further gains to the upside. 

  3. Cover shorts down to levels that you can sleep with -- even reduce the number of your shorts in your portfolio by making some sacrificial covers. 

  4. Consider pairing some shorts with longs in the same industry or sector that are statistically cheaper than your short. 

  5. Go through the exercise of reviewing each and every short anew, and be objective in the process. 

  6. Work out, go skiing, or do some lifting. It will be refreshing, invigorating and will get your mind off the pressures associated with recent trading mistakes. 

  7. Finally, go back and reread some of the trading classics like Reminiscences of a Stock Operator or Pit Bull. 

That said, I don't think the short side will be a long-term lease in the House of Pain. 

Not by any stretch of the imagination. 



 

DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.

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