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My Bullish Bearish Perspective

Published on October 30, 2007

My Bullish Bearish Perspective

October 30, 2007

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US stock (and also the world markets) are eagerly waiting for FOMC meeting which begins today. But what street is actually waiting for is the FED announcement that will be shared around 2:15 USEST. In this special post I am going to share what I think and how do I plan to trade this event. Bottom-line- My bias is bearish (except in two cases) and I shall present to you my thought on why do I think so.

Everyone knows that Emerging markets are on a bull run (specially China and India) and US market is trading within a range. For perspective, it took the Mumbai Sensex a little over 20 years to reach the first 10,000 mark; but just a little over 20 months to double that score. Think about it. I also mentioned about TimeZone trading opportunity that I keep handy to trade on special occasions. Linking to that, let me also share big picture, kind of self-fulfilling prophecy that adds air to the market balloons:

  • If US Stock Markets close higher –> emerging markets go higher
  • When emerging markets go higher–> US futures lift higher
  • When US futures lift higher–> Emerging Markets go even higher

And the cycle goes on. Take above hypothesis with a grain of salt. If life were so simple as this, I would be raking tons of money. It’s NOT that simple but yes I have observed this and profited several times. However, neither I have data nor do I plan to spend time to find it to prove it (in case there are mathematician brains reading this, you may want to research this. I will publish it with proper credit to your research). This is to simply present you an observation that you may want to monitor and analyze.

As you may know, some popular themes make news wave time to time. For instance, Santa Rally, Jan effect, sell in may and go away, buy on anticipation and sell on news, etc. Even though those are known to everyone, it is, at times, fruitful to be with the herd. This time on FOMC announcement, I am with “Buy on anticipation and sell on news”. Financial markets are already projecting a 90% probability of rate cut. Now if something is as sure as 90%, what’s the news?

Few Scenarios

  • Fed Cut by 0.25% – Bearish, after short term bullish reaction (90% chance)
  • Fed Cut by 0.50% – Bullish
  • Fed Doesn’t cut interest rates – Immediate Bearish

What to do – In general, do nothing. Cash out and relax till Monday. Let the dust settle.

Here is what I am going to do. At least 75 to 80% of my portfolio I shall convert into cash before the FOMC announcement. [As soon as news is out, IV will drop. If it’s only Nov IV drop I shall be happy but if it is long term IV drop, then my returns can be wiped out very quickly. Capital preservation always overrides missing an opportunity.

My intraday-trading approach will be pretty much based on the above three scenarios. However, I need to do some pre-work before “The Event” takes place. Here is a list of pre-work I plan to do:


  1. Prepare a watch-list of High Beta, Momentum stocks. I have not subscribed to IBD 100, if anyone has, you may want to share and I shall share my thoughts on that. Select straight calls or straight puts on those underlying.
  2. Prepare a list of China stocks that might see selling in case my hypothesis turns out to be true. It’s high risk, high reward strategy. But only if Dow sells-off (Scenario 1 and 3). Why China, this is the market that has pretty high probability to drift lower. Neither I can ignore when Mr Buffet says be cautious on China), nor I can disregard perspective of high profile magazines likes Barrons’ (How High can China shares fly? and It’s not the time for China) especially when these coincides with what I think.
  3. Mark Aug16th lows on the DOW and Dow Transports charts (Why, it’s a famous Dow Theory and according to that theory, if both DOW (12,840) and Dow Transport (4,670) falls below those levels, A BEAR MARKET lies ahead). Clear the way and give proper respect to bears then.

Whatever be the outcome of FOMC announcement, find out and select cheap options (not abs $$ but lowest IVs) to position for Gold’s rise. GDX, GLD, ABX could be gold play. I expect gold to do well.

Special case- I will turn fully bullish if Dow breaches 14,200 and Dow Transport 5,490. This will automatically turn me on to the bull’s tune.Till tomorrow market’s are not going to go anywhere in any meaningful way, but be assured, there will be wild move around 2:15US EST on Wednesday.

Be prepared, analyze risk, and trade profitably,

Disclaimer: Investing is risky, especially option trading. The above perspective is my own thought and not a recommendation. Pls do your due diligence before making investment decision.


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