-- Posted Sunday, 30 July 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Monday, July 31, 2006
For investors who’d rather be smart than lucky
So, what do you do when you are short a market that stinks to high heaven but continues to move against you? In this case, as I explain in greater detail in the current edition of Rick’s Picks, it is a good time to stick to your guns. That of course applies to the short position we hold in Citigroup. Our 45-strike puts got whacked on Friday as banking-sector stocks racked up some very impressive gains. Citi led the charge with a 2% surge to 48.33; it knocked our September 45 puts down by 20 cents, to 0.25. Although the rally had short-squeeze written all over it, beginning as it did with a breakaway gap on the opening, we cannot simply dismiss it as a phony and blow raspberries at buyers from the sidelines. Indeed, “phony” rallies caused by panicky bears are almost invariably more powerful than rallies catalyzed by even the most ardent bulls.
And that is why we must be especially disciplined when shorting a market so obviously ripe for a collapse as this one. In practice, that means setting aside an amount for speculative buying of puts in the coming weeks, or perhaps months, deploying our capital a fraction a time, one month to the next. Realize that no one will be able to nail the exact top of a bear rally that is soon to enter its fifth year. However, our chances of catching the long-overdue plunge will be good if we take a patient and disciplined approach, remaining short for the duration without betting the ranch.
I continue to believe that when stocks finally start to fall in earnest, the first leg down will be so precipitous as to preclude getting short belatedly. In practice, that implies U.S. traders will awaken one morning to a gap-down opening catalyzed by wholesale panic in overseas markets. To be prepared for this eventuality, we must always be holding at least a few puts that will necessarily be going against us until a day when they do not.
In the meantime, it is beyond absurd to say, as some economists have been saying, that the U.S. economy is in the throes of a soft landing. In fact, the all-important housing sector is in a state of silent collapse, as I shall explain tomorrow. Stay tuned.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Sunday, 30 July 2006 | Digg This Article | Source: GoldSeek.com
