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You Can Only Beat A Dead Bear So Many Ways

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Yes my fellow Minyans, Boo is getting his furry arse kicked left, right and center.

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To say that the Minx and I view the world through different prisms just might be the understatement of the year. Hoofy is on a rampage, divergences, non-confirmations, and imbalances be damned; and since in this business the score is kept in "price," he is winning by a mile. Yes my fellow Minyans, Boo is getting his furry arse kicked left, right and center. In a prior incarnation this type of move, within the current "dangerous" backdrop, would have buried my P&L for the year. Fortunately, my risk/reward is defined and the pain lies in the frustration of some (large) missed opportunities rather than in actual losses.

When I sat down to write, I was thinking about yet another piece explaining why the market really really really "should not" be behaving the way it is. But you can only beat a dead bear so many ways. Rather, here is what I am doing and thinking during Hoofy's mojo:

  • Looking at the source of buying pressure behind the rampage, I doubt that there can be much disagreement that "buy programs" are driving prices. I cannot recall ever seeing so many 1000+ ticks clustered together, and there have been entire 10-minute bars that felt as if they were in the grips of a never ending program. On Sep. 25 there were three consecutive 60 min. bars registering tick highs of 1330 or more. Whenever the programs abate – briefly as that may be – the indexes stall or fall. The only way I know of to keep up with this type of action is via index futures or index options. I thought about covering my Index ETF's short positions, but a) I would lose the downside protection against what I still perceive as a secular bear market; and b) not many of my longs are in the S&P 500 (SPX), where most of the price gains have taken place.

  • I rarely adopt the "hold your nose and dive in" approach to trading, but at times there aren't too many choices. Goldman Sachs (GS) is the poster child for everything that is right and wrong in the current environment. This "Black Box" of unquantifiable risks is being rewarded with relatively low implied option volatilities despite a non-stop vertical move that started the morning it reported earnings. I'm up to my eyeballs in 2-3 month calls against which I gradually short stock, and which I roll up seemingly everyday, sometimes more than once. If I had had no other positions, I'd have had a great year just in the month of September. As it is it has kept me from getting waxed.

  • There are two areas of technology that I like: software and select semiconductors. The first includes many smallish companies (Tibco (TIBX), Interwoven (IWOV), Opsware (OPSW), and others) with strong balance sheets, improving businesses and depressed valuations. In addition, the big caps are coming out of their M&A induced coma of the last couple of years, and they are either on the prowl again and/or their businesses are picking up speed. I am playing the large caps with the Software Holdr (SWH). Semis on the other hand are going schitzo. Outfits like Cypress Semi (CY) are ramping and the Mother Chip (INTC) is mounting a price comeback, if perhaps not a business revival. Others have gotten smashed to the point that if the economy will not go into a recession, a rising tide will likely lift even these rafts. Broadcom (BRCM), Marvell (MRVL), and Vicor (VICR) is what I'm thinking about. If we do end up in a recession (or worse), I'll chalk these up to "managing upside risk."
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Positions in SPX, GS, OPSW, TIBX, IWOV, SWH, CY, INTC, BRCM, MRVL
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