Sunday
Jul122009
Summer Fun
Sunday, July 12, 2009 at 11:30PM
It's been a while and I have to apologize to readers for not writing
more often. There are several reasons: one is that I am
still consumed with my other blog www.blogonsmog.com. I am
putting an extreme amount of effort into that blog in order to learn
internet marketing and see if I can achieve cash flow neutral.
For the short term I am deep in the red on that venture but am hopeful
over time there will be some parity between expenses and advertising
income. The second thing is that my wife went on vacation for 7
weeks so I was left looking after our four year old daughter during
that time, working full time, etc. Being alone for 7 weeks with
my daughter was a great bonding experience but was pretty hard on my
computer addiction.
Anyways I am posting tonight because we appear to be at a critical stage in the markets and I feel it necessary to check in. I want to recap the performance of my port first. I started this port on April 24th 2009. My outlook for the market was dubious but I was concerned about leaving my money in money market funds for two reasons: I didn't want to miss out on any market rebounds and second, I am holding my money in U.S. dollars whereas I live in Canada and it appeared that the Canadian Dollar was about to take off. My observation at the time was that there was a high correlation between the performance of the stocks I tend to trade versus the exchange rate of the Canadian Dollar. Looking back, it appears my worries were justified.
So how did I do? I have to say my portfolio performance was pretty mediocre. The port outperformed the S&P500 but not by much and the added volatility weighed against any outperformance. I felt that the port would have done better but had one particularly brutal day in June when 2 stocks were down by 40% and 30% respectively as a result of losing a military contract. The market was neutral or slightly up on this day so it stung just a little. Both stocks had involvement in the contract bids and both lost out. The port was fairly resilient as a result of the fact that it holds 20 stocks. Fewer stocks would have made for very dismal performance.
So here is the kicker. Although the port was up for the above time period, my account was not. How can that be you may ask??? Well remember what I said earlier about the Canadian Dollar? Here is what happened to this poor Canadian...
Both my port and the Canadian Dollar are normalized to 100 in this graph.
So here I am - after accounting for the rise in the Canadian Dollar my account dollar value is exactly where it started. I took on a lot of risk and achieved nothing for it. This being said I did manage to protect against a rising C.D. - it would have been devastating to be sitting in U.S. monetary funds while the Canadian Dollar rose 10+%. Additionally I was positioned for a stock market rebound which didn't occur with any authority.
Why am I not making 100%'s of percent return like some of those systems on the weekly performance list? Well I believe that one has to take these systems with a grain of salt, particularly the private systems. I scrutinize the public systems regularly and I've found that very few meet my criteria for trading. I suspect that none of the private systems do, and my feeling is they are clogging up the weekly performance EMAIL. Anyone can generate high performance systems that can't be traded. Enough of that ...
So now I am getting around to the reason why I have chosen tonight to become verbose... On Friday I decided that it was time to start taking a more conservative approach to my investments. We are now into the third quarter (July - Sept) and statistically this quarter doesn't produce profits from the stock market. And there is usually one major downturn between now and end of October.
So I decided to override some positions on my portfolio. I trimmed back some of my larger percentage holdings and put the proceeds into QID (QQQQ Ultrashort ETF).
Along with this activity I have been liquidating some other holdings, primarily other stock holdings, and have been putting the proceeds into Ultrashort ETFs other than QID: TWM (Ultrashort Russell 2000) and SDS (Ultrashort SP500). I estimate that in total I have a approximately 65% / 35% ratio long to short.
Am I being too conservative? I don't think so. This is a very high risk time period and it is better to be cautious than lose my shirt. Below is my reading of the DJIA.
The chart appears ominous. The dominant trend is definitely down. Now it is difficult to establish an exact timeline. Drawing trend lines can be an art. I think something will happen this month but it could actually be any time between now and the end of October that we have a real pick up in volatility and potentially a resurgence of the previous "crash".
Now the reason I am staying in the markets is for the potential of a base forming around ~8000 (where the DJIA is now). It is quite possible that the bear is over and will will see a slow rise from here. In that case I want to be positioned for a recovery.
Kids - don't try this at home. What I say below should not be constituted as financial advice.
My portfolio has recommended "cashing out" for Monday morning. Now I shouldn't say this but I am not going to do so. Normally I follow my port recommendations to a tee but I have an extreme dislike for cashing everything in at one time, not only because of the slippage involved when it appears a lot of people cashing out i.e. there are a lot of "sell signals" popping up around town; but because there is the potential for whiplash - who's to say that I won't be getting new buy signals next week? So I don't plan on selling into the Monday morning opening. My preference is to build up a hedge using Ultrashorts. If, in time, it appears that the base holds then I may start liquidating the hedge. That being said it is important to have an exit strategy when things get nasty.
My Exit Strategy
So I am going to try to explain what I did in the August 2007 mini-crash. It worked well and I hope it does so if I find myself in the same position again.
Some day in the near future I expect to open up Yahoo Finance and find a really difficult market condition in progress. By difficult I mean down 3% at the opening with the likelihood of more to come. In this market condition I have already laid the seeds for protecting my account by holding approximately 35% in Ultrashorts. What I found in 2007 was that the Ultrashorts protected my account for several days. At the end of the week I was down maybe 2%. What the Ultrashorts did was buy time. Holding much longer than a week would have meant a severe deterioration of just about everything as Hedge Funds were in a bad position and started unloading en-masse.
So when things get really bad - down %3 at the open. Markets crashing abroad. It is important to firstly maintain calm, particularly if you have a larger number of holdings in a diversified portfolio with some Ultrashorts as hedge. When I am in a disastrous position, I usually find I have losers showing 10%, 20%, 30% even 40% losses. There is a strong tendency to want to sell these stocks. What I do instead is sell the stocks in my account that are holding up, not losing dramatically. The stocks doing well will eventually crash along with everything else so sell these now and get your money out of them. Those people selling their big losers are locking in losses. What you really want to do is hold your account value, not panic.
Once you have sold a few non-losers then use the proceeds to buy more Ultrashorts, particularly if you are less than a 65%/35% long short ratio. The real losers, the ones down 10% - 40% will eventually have a bounce. Take this opportunity to sell these stocks on an upswing. As your stock holdings are reduced then start reducing your Ultrashorts as well. You don't want to hold too much of these either since the market may have a bounce.
So there it is. This strategy worked for me in 2007 and I expect it will do the same if we have another serious downturn..
Over and out
Steve
Anyways I am posting tonight because we appear to be at a critical stage in the markets and I feel it necessary to check in. I want to recap the performance of my port first. I started this port on April 24th 2009. My outlook for the market was dubious but I was concerned about leaving my money in money market funds for two reasons: I didn't want to miss out on any market rebounds and second, I am holding my money in U.S. dollars whereas I live in Canada and it appeared that the Canadian Dollar was about to take off. My observation at the time was that there was a high correlation between the performance of the stocks I tend to trade versus the exchange rate of the Canadian Dollar. Looking back, it appears my worries were justified.
So how did I do? I have to say my portfolio performance was pretty mediocre. The port outperformed the S&P500 but not by much and the added volatility weighed against any outperformance. I felt that the port would have done better but had one particularly brutal day in June when 2 stocks were down by 40% and 30% respectively as a result of losing a military contract. The market was neutral or slightly up on this day so it stung just a little. Both stocks had involvement in the contract bids and both lost out. The port was fairly resilient as a result of the fact that it holds 20 stocks. Fewer stocks would have made for very dismal performance.
So here is the kicker. Although the port was up for the above time period, my account was not. How can that be you may ask??? Well remember what I said earlier about the Canadian Dollar? Here is what happened to this poor Canadian...
Both my port and the Canadian Dollar are normalized to 100 in this graph.
So here I am - after accounting for the rise in the Canadian Dollar my account dollar value is exactly where it started. I took on a lot of risk and achieved nothing for it. This being said I did manage to protect against a rising C.D. - it would have been devastating to be sitting in U.S. monetary funds while the Canadian Dollar rose 10+%. Additionally I was positioned for a stock market rebound which didn't occur with any authority.
Why am I not making 100%'s of percent return like some of those systems on the weekly performance list? Well I believe that one has to take these systems with a grain of salt, particularly the private systems. I scrutinize the public systems regularly and I've found that very few meet my criteria for trading. I suspect that none of the private systems do, and my feeling is they are clogging up the weekly performance EMAIL. Anyone can generate high performance systems that can't be traded. Enough of that ...
So now I am getting around to the reason why I have chosen tonight to become verbose... On Friday I decided that it was time to start taking a more conservative approach to my investments. We are now into the third quarter (July - Sept) and statistically this quarter doesn't produce profits from the stock market. And there is usually one major downturn between now and end of October.
So I decided to override some positions on my portfolio. I trimmed back some of my larger percentage holdings and put the proceeds into QID (QQQQ Ultrashort ETF).
Along with this activity I have been liquidating some other holdings, primarily other stock holdings, and have been putting the proceeds into Ultrashort ETFs other than QID: TWM (Ultrashort Russell 2000) and SDS (Ultrashort SP500). I estimate that in total I have a approximately 65% / 35% ratio long to short.
Am I being too conservative? I don't think so. This is a very high risk time period and it is better to be cautious than lose my shirt. Below is my reading of the DJIA.
The chart appears ominous. The dominant trend is definitely down. Now it is difficult to establish an exact timeline. Drawing trend lines can be an art. I think something will happen this month but it could actually be any time between now and the end of October that we have a real pick up in volatility and potentially a resurgence of the previous "crash".
Now the reason I am staying in the markets is for the potential of a base forming around ~8000 (where the DJIA is now). It is quite possible that the bear is over and will will see a slow rise from here. In that case I want to be positioned for a recovery.
Kids - don't try this at home. What I say below should not be constituted as financial advice.
My portfolio has recommended "cashing out" for Monday morning. Now I shouldn't say this but I am not going to do so. Normally I follow my port recommendations to a tee but I have an extreme dislike for cashing everything in at one time, not only because of the slippage involved when it appears a lot of people cashing out i.e. there are a lot of "sell signals" popping up around town; but because there is the potential for whiplash - who's to say that I won't be getting new buy signals next week? So I don't plan on selling into the Monday morning opening. My preference is to build up a hedge using Ultrashorts. If, in time, it appears that the base holds then I may start liquidating the hedge. That being said it is important to have an exit strategy when things get nasty.
My Exit Strategy
So I am going to try to explain what I did in the August 2007 mini-crash. It worked well and I hope it does so if I find myself in the same position again.
Some day in the near future I expect to open up Yahoo Finance and find a really difficult market condition in progress. By difficult I mean down 3% at the opening with the likelihood of more to come. In this market condition I have already laid the seeds for protecting my account by holding approximately 35% in Ultrashorts. What I found in 2007 was that the Ultrashorts protected my account for several days. At the end of the week I was down maybe 2%. What the Ultrashorts did was buy time. Holding much longer than a week would have meant a severe deterioration of just about everything as Hedge Funds were in a bad position and started unloading en-masse.
So when things get really bad - down %3 at the open. Markets crashing abroad. It is important to firstly maintain calm, particularly if you have a larger number of holdings in a diversified portfolio with some Ultrashorts as hedge. When I am in a disastrous position, I usually find I have losers showing 10%, 20%, 30% even 40% losses. There is a strong tendency to want to sell these stocks. What I do instead is sell the stocks in my account that are holding up, not losing dramatically. The stocks doing well will eventually crash along with everything else so sell these now and get your money out of them. Those people selling their big losers are locking in losses. What you really want to do is hold your account value, not panic.
Once you have sold a few non-losers then use the proceeds to buy more Ultrashorts, particularly if you are less than a 65%/35% long short ratio. The real losers, the ones down 10% - 40% will eventually have a bounce. Take this opportunity to sell these stocks on an upswing. As your stock holdings are reduced then start reducing your Ultrashorts as well. You don't want to hold too much of these either since the market may have a bounce.
So there it is. This strategy worked for me in 2007 and I expect it will do the same if we have another serious downturn..
Over and out
Steve
Reader Comments (2)
Nice to see you post again.
The market almost appeared "propped" up this last while and Larry Summers gave a speech that very nearly lays out the apology for manipulating any market to inspire reflation and "confidence". But balloons don't inflate forever and trees don't grow to the sky.
I have been focusing on long/short portfolios but have noticed in the past two weeks there is a factor inversion again. This is when the factors that rationally should drive performance invert... similar thing happened in 2003 and is indicative of mkt tops or bottoms when I prefer to be long/short. I do believe we will see another big leg down after the stimulus money is spent.
One strategy you may consider is writing puts on the Ultrashort ETF. If the market rises, you get put into the ultrashort ETF but at a lower cost base. If the market falls, you collect the premium and can also purchase the Ultrashort ETF.
There is truly excellent free economic research here: https://ems.gluskinsheff.net/index.ncl.html
The market has definitely been propped up. Politics can't allow the markets to collapse anymore.