Assorted Thoughts and Trades for September 25, 2009

Today has been a wild day in the financial markets, and I almost hesitate to jot down my thoughts before the close of trading. However, I will be shutting things down to get the weekend started as soon as possible, so I am writing now while thoughts remain fresh. There is no one theme I can point to today, so I am calling this post “Assorted Thoughts and Trades.” If I do more of these, I hope to come up with a more spiffy title. Some of the items in the following list I sent out as tweets today.

1. The yen continues to stomp on every major currency. I have read that the new Japanese government thinks that a strong currency could be good for its economy, but something tells me that old-line mercantile forces will start protesting loudly if this strength continues much further. Some of the strength is likely coming from traders switching from the yen to the U.S. dollar for carry trades. The yen is not far from multi-year highs against the dollar now (last set in December, 2008 and January, 2009). However, I am testing out the waters with a small position long the U.S. dollar vs the yen (per my expectation that a dollar relief rally is coming sooner than later).
2. Given the devaluation talk we heard from Bank of England Governor Mervyn King this week, I think traders may eventually consider the possibilities of using the pound for carry trades as well. In the end, I think the pound is going to fall “uncomfortably” lower, to the point that the Bank of England will be forced to retrace some of its weak currency talk. Until then, I will continue to short the pound at every opportunity, perhaps even after any relief rally is over for the U.S. dollar (I closed out the latest round of positions earlier today).
3. Consumer confidence numbers reached levels last seen January, 2008. Ironic that consumer confidence is rising to such heights just as economic data is starting to surprise to the downside. Existing home sales disappointed yesterday. Today’s disappointments were durable goods and new home sales. Perhaps in a case of “real data trumps feelings” (stolen from my good friend TraderMike), the stock market remained under selling pressure for a rare third day in a row. I am particularly marveling at the intense selling pressure in Mastercard (MA) and Visa (V) on the good news in consumer confidence (sell the news?). Both stocks sold down quickly to support levels (at the 50-day moving averages) where it looks like trading programs kicked in to fight back with a heavy dose of buying. The sellers are currently taking back control. I think both stocks will be ones to watch closely next week.
4. The VXX is not up as much as I would have expected on a day like this. I am wondering whether the latest bounce is already losing steam.
5. My calls in ReneSola (SOL) are nearly worthless now. No point in selling this speculative play at this point. This experience demonstrates once again how high trading volume in options is very difficult to interpret.
6. Having said that, I actually added to my latest round of calls (doubled) in Energy Conversion Devices (ENER). This is also very speculative, but I see high potential for another spike upwards as ENER now reaches oversold conditions on the charts and shorts bail – even if the trigger is another round of mysterious rumors about acquisitions and the like.
7. First Solar (FSLR) is hanging around double support at the 50-day moving average and the 200-day moving average, so I increased my (short-term) hedge on the short position. At the time of writing, FSLR is actually positive for strong relative performance on the day.
8. Intuitive Surgical (ISRG) is also on fire today, currently up 5% and right above fresh 52-week highs. Given the immense speculation in the market this month, I targeted ISRG as a potential play once it appeared two weeks of consolidation could break. I bought one call on Wednesday and meant to add on yesterday’s weakness. I am kicking myself…for now! If the highs are cleanly broken, a fresh round of short squeezing could carry ISRG to $275 and beyond no matter what else is happening in the general stock market.
9. Kb Home (KBH) is down 9% and counting on a poor reaction to earnings. The company’s negative short-term outlook on foreclosures surely motivated some selling and confirms what I have printed here before: “Foreclosures will continue to inflate total housing inventory in the coming months and may even accelerate from the current rate. Says it will be difficult for the housing sector to build significant momentum, as long as potential home buyers lack the job security needed for them to make a major purchase.” (from briefing.com). Nevertheless, I locked in profits on my short position in Toll Brothers (TOL) on the weakness and maintained my puts.

That’s all for now. Be careful out there!

Full disclosure: long USD/JPY, net short FSLR, long SOL calls, long ENER calls, long ISRG call, long TOL puts, long VXX