Monday, February 1, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 26

Year 3, Week 26 Major Position Changes
To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 64.8% (v 65.4% last week)

20 long bias: 12.7% (v 26.2% last week)   
8 short bias: 22.5% (v 8.4% last week) [Includes 2 option positions, and 2 'long dollar' positions, 1 option related] 

28 positions (vs 27 last week) 

Weekly thoughts 
Things have degraded quickly...

Quite a change in character in 2 weeks - let's look at how things looked on the S&P 500 chart 2 weeks ago versus the situation we find ourselves in now. 

2 weeks ago - smooth sailing, no major moving averages broken & well above the area we broke out of (the "box")

1 week ago - lots of damage done the previous Thursday and Friday, one of the 2 "gaps" filled and the S&P 500 fell back into the box from which it broke out of in December.  Market watchers knew S&P 1085 was the key as that was the bottom of the box that had held throughout November/December 09.

Now - first round of damage complete.  S&P 1085 broken, and both gaps filled with the latter late Friday at S&P 1071.

With support now broken... support becomes resistance.  Last week that meant S&P 1110-1115 which had been support, once broken would be the ceiling.  If the market broke back over that area we'd have to consider our return to bearish stance.  That never happened - in fact the S&P 500 barely broke over 1100 and did not make a serious attempt to go those extra 10 to 15 points.  Hence our decisions last week were relatively easy.  Now we bring that "support is resistance" mantra down from 1110-1115 to 1085.  At this point there is so much damage in the charts, we won't be turning "bullish" in any form if the market breaks back over 1085 but we will simply allow for a more nuanced stance of "kinda neutral for a short moment."   Another disconcerting development is the cross over a shorter term duration moving average (20 day) just about to cross below a longer duration (50 day); the former is 1112, the latter 1108 - by Tuesday of next week this should occur.  It is not a good thing.

So where to from here? We are now in a wider range between the 20/50 day moving average at the top end and the 200 day at the bottom end; S&P 1045 is that level.  That's a good 65 points so a huge range.  All gaps I can find have been filled.  We are approaching oversold - but that doesn't mean a dark day or two (or three) cannot lie ahead before a snap back bounce.  The "oversold bounce" can happen Monday, Tuesday, Wednesday who knows.  Just don't get excited about it, and be drawn in by the "Fast Money" crowd would will proclaim wonderful times are here again  In old school technical analysis, this bounce will set up some excellent short selling opportunities.  But where do we bounce from?  Certainly the 200 day moving average will cause the computers rushing in (we'll certainly liquidate short exposure there) and a knee jerk bounce led by HAL9000 must at least be attempted one would think.  Expect commodities and foreign stocks - especially of the Chinese kind - to lead the oversold bounce... but it's only for the quick and nimble to play; others risk losing fingers or entire hands trying to catch falling knives.

In the near term, I have one main goal - try to profit from any more downside without getting my neck snapped when the oversold bounce happens.  I will not be rushing into a ton of individual positions because its just too hard to navigate jumping in 15 equity position for a bounce that could be 4 hours or days in length.  All those positions would need to be liquidated at the end of the bounce and it's just a ton of work.  So instead I will most likely play the counter trend move with some index instruments, while picking and choosing at some individual names we're interested in for the long run... but they won't be massive positions.   So in a perfect world, we'll liquidate most / all major short exposure if / when the market continues down - turn on a dime when the oversold bounce happens - and use the end of that bounce to rebuild short positions.  From there we should continue down for the intermediate term - if that assumption is correct, we win.  If not, we will stop loss out and have our risk control measures in place and re-adjust to whatever the market looks like at that point.

Not much difference in the NASDAQ and Russell 2000 charts as once more we are back to monolithic movements amongst markets, asset classes (ex US dollar / Treasuries).  The NASDAQ in fact, after being the leader in 2009, has been the laggard thus far in 2009. 

Lost in the mess of late is that we are still in the heart of earnings season.  The vast majority of stocks have been sold - good report or bad which is 180 degrees different than the past 2 quarters.  I continue to scour earnings reports, compiling a list of names I like what I see with plans to purchase but in a "take it slow" approach because a good earnings report doesn't mean the stock cannot fall another 30% as babies are thrown out with bathwater.


A very busy week for economic reports:

Monday: ISM Manufacturing (less important in my eyes than services, but the market in infatuated with mfg), construction spending, personal income outlays
Tuesday: Pending home sales but I imagine the oligarchs will have their eye on Paul Volcker's hearing at 10 AM
Wednesday:  ISM Services (making up a vast majority of the American economy, this has lagged manufacturing the past few months)
Thursday: Factory Orders
Friday: The monthly employment report - at this point I don't know what the market wants anymore.  Weak data to ensure easy money?  Or good data to confirm a recovery? (but a potential loss of easy money someday down the road)  All we can do is treat it like an earnings report and stay out of the way of the lemmings.  Consumer credit is also released in the afternoon which "economic wonks" like me like to review.


For the portfolio, a very enjoyable week.  This has been the first time - aside from a few days at the very end of October 2009 - we've been able to strut the peacock feathers of the short side with vigor since July 2009.  The market had taken us out of many long positions via stop losses the past 2 weeks, and once the S&P broke below 1115 we were back to being bears.  Which played out well this week.  By Tuesday we really only had 4 material long positions, of which Potash (POT) soon was stopped out of to reduce its size.  After S&P 1085, and then 1080 broke Friday we went very heavy into the short side, with a target of S&P 1071 - did not expect it to fill so quickly but we do not turn down gifts from the market.  I covered about half our short exposure on the 'gap fill' but still am skewed short, with heavy cash exposure to boot.  I imagine adding some long exposure in the weeks to come (with some new names) but with the caveat those positions most likely lose some money in the near term.  We'll try to make that up on the short side or with strategic darting in and out for some quicker flips.  Aside from that I am really liking the set up for the US dollar in the near term - albeit it is "slow money".

To close out the weekly summary - a great Jon Stewart clip which touches on what we've said a few times over the past 2 years... everything is now done in this country to please "the market".  If you dare do things that might help the country in the long run but cause near term pain - especially to the speculator class - you are an evil doer.  And "the market" will exact it's revenge.  We can see how much dislike "the market" has towards the Volcker plan, which makes me think this might actually be the first legislation to have teeth - or at least the oligarchs have been blind sided by it for now.

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