My bold prediction: A big down day tomorrow

Prediction of short-term market direction is generally a fool's game. A predition of next day's market up or down is even stupid. But I'd like to make a bold prediction that we will see a big down day tomorrow. Why?

Not sure if you have noticed that the market has been especially resilient in the past few weeks, trading in a very narrow range. Almost everyone is predicting that Bernanke will announce QE3 to stimulate the economy at his Jackson Hole speech. This has supported the overall market, especially the commodities, quite strongly. Now the day is coming, that tomorrow Bernanke will speak to central bankers in Jackson Hole, Wyoming.

But when everyone is betting on the same thing, often than not it will be a disappointment. That's the basis of my prediction: I don't believe Bernanke will announce QE3 tomorrow, which will profoudly disappoint the market, causing a huge sell off. Precious metals may be the most hit sector if I'm correct. However, any severe sell off will be great buying opportunities for the near future. Get your money ready to work.

Three strong uptrends I'm seeing now

Just some quick words about what are the strong uptrends I'm seeing now. I think there are 3 of them worth noticing:
- Precious metals: I talked about it in more details at the last blog and this is the strongest bull market I firmly believe in for the long term. I have a quite strong hunch that it is coming out of its relatively long consolidation period in the past year or so and is heading up again with a strong force. For those more aggressive, DGP is a 2x leverage ETF for gold, which I personally had bought in the past and had no problem with tax on K-1 form reporting.
-  It appears the housing market has bottomed and the home builders have shown some strong uptrend. If you want to bet for it, ITB is the ETF for this sector, which has performed very well in the past half a year or so, though I'm not sure now is the best time to get in given my view that there is some severe correction looming. But it should be a good idea to establish a position at any weakness.
- Another strong uptrend I'm seeing is the health care sector, especially pharmaceutical companies and biotechs. I have been in a biotech ETF for many years, PBE, which is picking up its upward steam quite a bit in the past few months. For pharma companies, RXY is the one to consider. Again maybe not be a good idea to get in immediately but wait for a pull back.

There is another strong trend but not upward. I have talked about it recently, that is the oil sector. I think there is some quite severe correction for it to come, which is not necessarily a short term trend. Not many people know and realize but the US is becoming a big oil producing country in the world but its demand has come down quite a lot. This is not a good condition to bet for a bullish oil.

Buy gold and silver at any pullback

Needless to say, it has been a very frustrating year in the past 12 months or so for those who have invested in precious metals. From top of around $1900 to as low as near $1500, an over 20% correction for gold. Even worse for silver, near 50% haircut from near $50 at top to around $25 recently. It is even more painful to see their prices up and down with mostly a downtrend in the past year. I'm sure a lot of people have just thrown in the towel to give up with frustration. Well, this is exactly what a bull market loves to play: with the weak hands cut off, it is ready to advance, QUIETLY and potentially in an explosive jump forward! The fundamentals are extremely in favor of a bull market for precious metals: the whole world is in big trouble economically; EU is totally a mess and US is muddling through; even China, the world economy's engine, is struggling and facing a hard landing. The solution for the total mess all over the world? Printing money! That is the only measure each government can think about and afford to use at the moment. The US Fed's meeting minutes in July has clearly indicated that a new QE (ie. money printing) is almost certain to come. All of this is extremely bullish for precious metals. That's why in the past week or so, both gold and silver have quietly broken through their resistance line after a long time of failure to do so. The recent price action for gold and silver is very bullish and may be the precursor to a big price upward movement. In the next few days or a week, gold and silver may drop a little bit due to their fast advance in the past week. I will take any pullback as a good entry opportunity to add more long positions for both gold and silver.

Do nothing at the moment but if you are a trader, short oil

There is too much complacence in the market and I have a strong feeling that there is a severe correction looming soon. While it makes people feel good with everyday increases of stock prices, you could be a big sucker when the headwind suddenly changes its direction. Don't be lured into this trap. Personally I'm basically doing nothing in the past few weeks except I took some short positions to bet for a market decline.

As I said a few days ago, I think oil is due for a significant drop now. But the best time for shorting it is not now.  Why? From the technical perspective, the general pattern is that you will see a quick drop first, then it will try to bounce back to test its previous high because there are always people out there trying to catch the bottom. That is actually the best time to short for a relatively longer term. Having said that, if you are a very nimble trader and can move very quickly, you may still put in some short positions against the oil but you need to get out very swiftly to cash out your profit as soon as it starts its first leg drop. Otherwise your profit may be wiped out when it bounces back. For shorting oil, you may buy the September put options of UCO, which has 2 x leverage to amplify your profit if indeed oil starts to decline. Of course, it is highly speculative and don't bet with your money which you cannot lose.

More reasons for FaceBook to plunge

Not sure if you noticed today that FaceBook (FB) has plunged over 6% today to below $20. This is over 44% drop from its peak reached on the IPO day at $45. You may remember that I talked about how ridiculous it was for the FB IPO priced at 100 times its earning and it was doomed to plunge. I just did not expect it would come down so fast so soon! So what's the reason for today's severe decline? It turned out that there were 270 million shares of FB unlocked today and were sold in the market. In other words, those who got FB options which were vetted today were running away as fast as they could by selling their options, a clear sign of no confidence!

This is just a beginning. There are more to come in the next 6 months or so. See here for FACEBOOK LOCK-UP RELEASES.

In a nutshell, there will be about 2 billion FB shares unlocked and eligible for sale in the next 4 months, which is about 70% of FB's total outstanding shares. When everyone is running to exist, you know what it means for the underlying stock. It puts a huge pressure on the stock price. I read somewhere about its book value, which is only about $7-8 per share. So there is likely more room for FB to drop. I will stay away from it and may even think to short it if it shows a dead cat bounce someday.

Oil is ready for another plunge soon

Early this year when oil was over $100, I predicted that oil was due for a severe decline. It did and dropped to below $80. Then late Jun I thought oil was due for a bounce back and I was even played with this idea with my own money (see here). Again it behaved as I said. Unfortunately I did not have enough time to play this to its full capacity due to my trip to Australia/New Zealand. I did not want to risk my profit by holding the very speculative short-term trading while I was away. So I closed my position of UCO with only a small profile of over $1000.

Now Oil has fought back fiercely and come back to over $90. I think oil is due for a severe decline again. Why? Because the fundamentals do not support such a strong oil price, period. It may further climb a bit but I don't think it will be long before it resumes its downtrend. Technically it also argues for a drop of the oil price. Two months ago when I called for a bounce, the oil price was 20% below its 200 days moving average (red line). Now it has come back so much that it is very close to its 200d MA, which now serves as its resistance. Likely it will start to plummet when coming back to this strong resistance line. I'm thinking to play again with this idea but this time of course to bet its decline.

This is what I called free money around the corner

I have lost track how many times I have talked down Euro in the past 2 years. I have repeatedly said Euro for me  is a dead fiat currency and it won't survive in its current format within 5 years. I have even said shorting Euro is the easiest money you can make as it is free money lying around the corner and the only thing you need to do is go there to pick it up (see here). I certainly put money where my mouth is. In a July 2011 blog, I talked about a methodology how to be more efficiently short Euro by selling EUO put options. Here is the status of this position I'm holding:

EUO Jan 19 '13 $17 Put                  0.05    -50   $2.10   $10,196.57   96.62%   -$250.00

I sold 50 contracts of EUO Jan 2013 put options for $2.10 in May last year, i.e. the target total profit is $10,500.00 by Jan 2013. But my account has shown that I have already almost reached the target; if I close the position today, my profit would be $10,196. This is over 4 months ahead of the schedule! Why? Because the Euro has declined so much in the past half a year or so. That's what I called free money with shorting Euro.

Of course, I know Euro won't disappear overnight and ECB and all the countries involved will try their best to prolong its life. There is still a chance that Euro will bounce back. I hope it will as this will give me another good opportunity to pick up more free money.         

Investors’ 10 most common mistakes

This is a good read about what common mistakes we may often make in investment. Hope you can learn something from it. I did.
http://www.ritholtz.com/blog/2012/07/investors-10-most-common-mistakes/

KCG jumped over 60% today

Did you get in with KCG early today? If you did, you should be happy as it jumped over 60% today when people learned that KCG has opened its book for suitors and there are indeed some potential hunters expressing their interest and doing their due diligence. As I said last night, I think there is a good chance that KCG may be bought up or get merged. Apparently I'm not alone out there to think about that. Congratulations if you can make a profit over 50% in one day!

A high risk high return speculation with KCG

KCG, the symbol for Knight Capital Group Inc, is one of the largest firms that buys and sells stocks to provide liquidity to the markets. But a technology breakdown  yesterday at this major trading firm roiled the prices of 140 stocks listed on the New York Stock Exchange, undermining fragile investor confidence in the stability of U.S. stock markets. Today, KCG reported that it lost over $400 millions due to this glitch. The stock lost over 62% today and another 17% after hours as I'm writing now. It is trading around $2.15 per share. See the chart below:

This is not a small company but one of the major trading companies. When it drops

like that and lost 2/3 of its values, I'm thinking some value guys out there must be very interested in it and I think there is a good chance that KCG may be bought by others. If so, this may happen very soon. If you are willing to risk your capital (i.e. 100% loss) to make this speculation, the potential return could also be huge, maybe double or even more. This is something I'm considering to do, if a merger deal does not come in tonight.