Thursday, May 1, 2008

Bookkeeping: As the Market Rotates - I'm Rotating Opposite - Some Sells

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Good news, Bad news day. Good news is we were way ahead of the curve on this commodity sell off [Apr 24: Sector Rotation?] so we had far less exposure than the past few times this happened and we were full bore into commodities with no "early cycle" exposure. This time we own some of those names. So the fund performance today, while sickly, is not as bad as previous episodes when the same rotation was happening in mid January and mid March.

Bad news. I still am having a hard time sitting down today after this butt whipping. I don't mind the long positions getting hit, but I just hate when the Ultrashorts get smacked down right along with it. But this is the power of the hedge fund computers moving in a wholesale switch. Keep in mind, many accounts are that 70% of all trading is automated (i.e. machines) so when you see things that don't make sense - just remember, it's not humans doing most of it.

I am trying to keep my "turnover" lower and not trade quite so much, but as I stated in my Sector rotation piece 1 week ago

Some interesting charts out there - if I had shorter time frames (i.e. hedge fund), I'd be jumping out of these commodity names (which despite my buying today are still prone for further sell offs) and looking at some of these names for a week or so. It is interesting to watch the sector rotation which in the past has usually lasted for 5-8 days. A whole lot of retailers are peaking their head over key resistance points on this rally... all it takes is hope or a soft weekly job claims number, and people are ready to rush in.

So if that reversal in the dollar happens and even if the market goes sideways, money would in the near term flow out of commodities (we can hear about the "commodities are dead" trade again for a few weeks) and then I am scratching my head as to where the money will GO. The obvious candidates are the one that would make no sense from an economic point of view, the "early cycle" plays. But sense never is an impediment to traders who act like robots "dollar down, buy commodities.... dollar up buy retailers, financials, homebuilders".

But again, I take this portfolio in a more conservative way - which means we will take more hits when the market changes direction suddenly - even if we can see it happening ahead of time. As I wrote, above - in a hedge fund environment I wouldn't care so much about turnover and I'd turn 180 degrees anticipating this move, long the 'early cycle', sell/then short the commodities - a powerful pair trade for a week at least... much higher turnover and I could press bets a lot more aggressively. Here I have to sit meekly by and take body blows as my positions get socked in the teeth.

With that said, I am going to be a contrarian and begin selling off some of these "early cycle" stocks as we hit S&P 1405. I believe the best case upside is 1430s which is only 1.8% higher from here, before we hit serious resistance. If the market blows past area (and through that) than I have to say I was wrong to ever doubt the power of the herd, and get fully exposed long (and take the hits on short exposure).

So basically I am fading the rallies (selling the good stuff) and buying the beat up junk in small pieces. I did a bit of buying this morning, and now I'm going to sell part of 3 positions in "favored" areas - Morgan Stanley (MS) investment banking, Lennar (LEN) homebuilding and even dear Apple (AAPL). This is the exact same strategy I did with the commodities LAST week when they were hot... begin selling them off piecemeal as they rally, not catching the top but locking in some profits, with hopes to buy them lower. So the same strategy, with completely opposite groups. Of course I hold far less of this type of stuff because most of it (ex-Apple) is stuff I don't have much long term belief in. But unlike past episodes when I held none of it in the portfolio, it is helping to cushion (to some degree) the pain in other areas. Again these sales are similar to the purchases this morning - layer in, layer out - $4-$6K type of sells.

So as/if we continue ever upward I'd keep siphoning off these 'early cycle' winners and keep rotating money into the beaten up sectors, so when things reverse - whenever that may be - I'll partake in the exact opposite rotation we have today. I don't know when it happens, or from what price points, but I am confidant it will.

I will say Goldman Sachs (GS) I might actually add to as that baby is looking ready to break out. I won't post it, but if we get north of $200 I will be adding GS. (chart is much finer than Morgan - that is why I am treating it differently)

I still am waiting for even more selloff in commodities before becoming more aggressive on the long side... if I'm wrong and they for some reason rally I have enough exposure to partake.

Tomorrow's Employment report (another major faulty report) should dictate the mood of Friday trading. Again we have no idea how it will turn out so we cannot do anything about it. Even if I told you the number, would we know how the market gods would react? Let's say expectations are 80K loss and we come in at 110K? Does it even matter? Would the market sell off on 'worse than expected' or rally on 'doesn't matter, things will be fine in 6 months'? That's why I ignore these things but realize the herd reacts in knee jerk reaction... so it must be monitored if nothing else.

Long all names mentioned in fund; no personal positions

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