Pre-holiday rally continues

Today was my last full day of monitoring the stock market (and blogging) until after the holiday. I'll be watching more passively for the rest of the week, and will be taking a break for a few days. As for today, it was nice to see recovery across many sectors, as well as continued gains for some individual names which had sold off heavily in recent months. This includes Wendy's/Arby's (calls 1.2% of portfolio), which is pushing to the mid-$4 levels. My position is quite small, but has a lot of leverage around the upcoming $5 strike price, so I hope the gains continue. Also higher today was Apple (calls 3.3% of portfolio), which closed above the $200 level. It also broke back above the 50 day moving average, so technically the chart may be more attractive to some traders who key off such events.

Waiting on growth, with limited downside

We finally got earnings results from GigaMedia (calls 0.8% of portfolio) this morning, and the numbers were disappointing, which was not much of a surprise. Now the value of the company rests in their large cash balance which limits downside, as well as hopes for potential in the new online gambling software partnership, and an eventual turnaround in the Asian online gaming business. But since any progress on those fronts (and growth in general) is likely a few quarters away, the stock is falling today. I'm just holding my position for now, which consists of a very small portion which will likely expire worthless next month, as well as longer term contracts which may eventually show some gains. The position is a very modest portion of my portfolio, which limits the downside even if all contracts eventually expire with no value.

On a much more positive note, Goldman Sachs just upgraded the fertilizer names, including Mosaic (calls 4.6% of portfolio). I'm also exposed to Potash in an indirect way, as it is one of the top holdings in the Market Vectors Agribusiness ETF (calls 5.8% of portfolio). Mosaic is also a large holding in that ETF, so I have some additional exposure to them as well, beyond my direct position.

Commodities and financials slide

U.S. Dollar strength continues to pressure commodities, including the precious metals. This weakness is compounded by further deterioration in financials, including Citigroup (calls 0.8% of portfolio), whose poorly priced stock offering is weighing down the whole sector. This includes Bank of America (calls 3.6% of portfolio), which had news of their own, designating internal candidate Brian Moynihan as the next CEO. Despite this wide-ranging selloff, some of my holdings are actually working today. These include GigaMedia (calls 1.5% of portfolio) which is showing follow-on strength to yesterday's gains, and Alpha Natural Resources (calls 4.8% of portfolio), which is hitting 52-week highs. I'd like a few days/weeks of sustained momentum in at least some of these names, so I can take advantage of sector rotation during the broader market weakness.

The long news drought ends

After a very long news drought, including a lack of quarterly results for Q2 and Q3, we finally got news from GigaMedia (calls 1.2% of portfolio) today. Their deal to divest a majority stake of the European online gambling software business is a bit complex, as it's not an immediate and outright sale. So it may take investors a while to gauge the true value of the company (i.e. 2009 ending cash balance, plus present value of future payouts, etc). And since the focus will also be placed on the much smaller Asian online gaming business that remains wholly owned, more details regarding their prospects are badly needed. The press release states that there will be a conference call on December 21, so hopefully more details (and quarterly results) will be available at that time. I added a very small amount to my modest position this afternoon, with call options that don't expire until mid-2010.

In other news, this morning we got earnings from Joy Global (calls 3.9% of portfolio), which initially pushed the stock higher. It then sold off, however, and is now trying to stabilize near the $54-55 level. I'll be interested to see how the stock behaves into the close, but my options are longer term, so I suppose the immediate price reaction doesn't concern me as much as their prospects throughout 2010 in general.

Earnings anticipation

The broader markets struggled all day, especially the financials. I'm trying to focus on what's working well, including Wendy's/Arby's (calls 0.7% of portfolio), which got some analyst coverage this morning. The gain was a nice contrast to the recent steady decline in the stock. Also higher was Joy Global (calls 4.8% of portfolio), which reports earnings before the market opens tomorrow morning. Although the actual results are important, investors watching the machinery sector will be more interested in their backlog and order flow. Everyone is trying to determine if there is any traction in the recovery, and if that will translate into significant orders before the backlog is depleted.

Rebalancing to start the week, with new holdings

I made several trades this morning to rebalance the portfolio. This reduced some existing positions, added back a previous holding, and initiated a new stake. Reduced positions include Abbott Laboratories (calls 2.7% of portfolio), Finisar (3.1% of portfolio), and ON Semiconductor (calls 4.4% of portfolio). The trade in ON Semiconductor also helped push expiration dates into the spring, as I sold a portion of the contracts that will expire next month, and replaced them with a smaller dollar amount of contracts that expire later in 2010. These sales brought the holdings back into proper allocation after recent runs higher.

I used the proceeds from the sales to restart a position in Mosaic (calls 4.7% of portfolio), and also to start a new stake in General Steel Holdings (calls 2.9% of portfolio). The latter name is a play on the consolidation of smaller inefficient mills in China, as well as growth in China in general. If they can even come close to achieving analysts' EPS estimates for 2010, they would realize very rapid EPS growth over this year. In that case, the forward P/E ratio would appear to be modest. Of course, that is dependent on solid execution and favorable conditions for steel pricing.

Stalled out, due to sector rotation

My portfolio has been running in place for a while now, as continual sector rotation hits several of my holdings each day, while boosting others. So the net effect is somewhat neutral, but obviously when holding call options, time value is lost each day. Today's iteration of this effect is that financials and retail are doing well, while tech, materials and commodities are struggling to hold the unchanged level. With several options holdings expiring in January, I'm currently doing research on when to sell them, or whether to hold on through expiration in hopes of recapturing some value. With 2009 rapidly disappearing, there is only about a month left to decide. After January, the expiration dates of the rest of my options holdings are somewhat evenly spread throughout the whole year of 2010 (and January 2011). So that provides quite a bit of time for those investment theses to come to fruition.

Responding to quick moves

Some of the stocks underlying my options positions have really moved quickly in the past few days, necessitating trades much sooner than anticipated. I should be used to the fast moves by now, but sometimes the rapid gains/losses are still surprising. Along those lines, this morning I closed my put position in Abercrombie & Fitch for a nice gain. The stock fell into the $33 range this morning, so I had to sell to free up cash to put to work elsewhere. Specifically, I rebuilt positions in Bank of America (calls 5.3% of portfolio) and the Claymore/Delta Global Shipping ETF (calls 3.0% of portfolio). I'm slowly getting used to closing positions after just a few days/weeks, when I originally anticipated that they would take months to come to a decision point.

Looking for pockets of opportunity

We've had quite a few days of negative or sideways market action lately. So I've been keeping an eye out for any pockets of opportunity, to try to capture some gains if possible. Today there were three areas of relative strength, the first being Apple (calls 2.1% of portfolio). It actually eked out a small gain on a day when the broader averages were down a full percent, in contrast to it's recent poor relative performance. It is a classic case of a company which has great fundamental prospects, countered by deteriorating technical indicators. The next few weeks will determine which has greater power over the short term price action.

Of more interest to me today was the retail trade, in which both sides of my pairs trade are working out nicely. This includes the put position in Abercrombie & Fitch (puts 3.8% of portfolio), which continues to slide lower, producing larger gains. I'll have to decide when to close that position out, perhaps when the stock reaches the $30-32 range I'll more strongly consider that.

Finally, and perhaps of most fundamental importance today, was news from a biotech company, Ariad Pharmaceuticals (calls 2.8% of portfolio). They detailed good clinical data and held a conference call; I listened to the webcast replay of the call and was impressed. So there seems to be nice potential for a partnership in the coming year, as well as hope for patients that have exhausted all available treatments in those indications.

Volume dries up

Trading volume has really dried up, and big players seem to have taken their chips home and stopped playing for the rest of the year. This can result in a slow drift lower, or perhaps sharper moves in individual names in which traders try to implement strategy based on technical analysis. Not too much worked in my portfolio today, with a few exceptions, such as my call options on the Market Vectors Agribusiness ETF (calls 5.7% of portfolio), which gained. I'm also seeing some progress on my put position in Abercrombie & Fitch (puts 3.1% of portfolio), as the stock continues to slide. It's nice to be able to use puts to capture some gains on down days, and I just recently started experimenting with them. As I learn different strategies for hedging out risk or just making directional bets, they should help enhance return as well as mitigate downside scenarios.