Monday, April 26, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 3, Week 38

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Year 3, Week 38 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 52.2% (v 65.5% last week)
19 long bias: 44.1% (v 27.4% last week) [Includes 1 option position]
2 short bias: 3.7% (v 7.1% last week) [Includes 1 'long dollar' position]

21 positions (vs 21 last week)

Weekly thoughts
After a hiccup on Goldman Sachs Friday, US markets made up all losses and more last week, with both the NASDAQ and S&P 500 gaining 2%+; the Russell 2000 doing even better.  There have been many days to wear out the bears the past 2+ months, but a day like last Thursday with a rare (perhaps 3x in 2010) material down day in premarket, and a swift 1% loss - is the type that kills a camel's bear's back.  What ensued is what has typically ensued since March 2009... a V shape bounce.  Since the morning touch of the 20 day moving average of S&P 1190, the S&P gained 27 straight points in a session and a half.  Debilitating for any bear.

I'll post the 3 major indexes below; I've been using a "6 day moving average" rule for this remarkable portion of the run... in which the S&P 500 was so relentless there was not even a pullback below this level for 2 months.  It took a fraud charge against the most powerful firm on Earth to crack that level, and Monday the S&P 500 touched the 20 day moving average before a quick bounce.  Then the fateful Thursday morning drop I mentioned above happened, and once more a bounce off that 20 day.  And late Friday, a squeeze to new highs of the year as S&P 1214 was breached. Until this 20 day moving average is breached there appears very little bears can hang their hat on - overbought or historic put call ratio or whatever else you want to use, thrown out the door.


The Russell 2000 has been even stronger... with still NO close below the 6 day moving average - even on Goldman Sachs Friday or this past Monday... only some moments intraday.  This chart actually broke to new yearly highs last Thursday, rather than Friday.


Ditto for NASDAQ ... so strong that it did not close below the 6 day moving average even during the turbulence.


Please keep in mind the 6 day moving average has no significance... it simply is the 5 day moving average with some rounding error room; it simply shows how strong the market has been.  Typically a market will pull back to the 20 day moving average if anything on an upswing, from time to time.  Aside from the S&P 500 (and it took some market moving news to do it), this has not happened.

The latest bear argument is something called the 200 week moving average.  Below is a handy chart, showing how rare it is to be below this level - in fact, before Alan Greenspan and Ben Bernanke went ballistic with blowing bubbles as official Fed policy, there had been 2 decades when the S&P 500 had not been below the 200 week moving average.  As you can see this past decade has not been so kind.



So what does the chart show us?  Being below the 200 week moving average is so rare it should provide resistance.  Even in the great 'recovery' early in the past decade (2003ish) the market tailed off for a period of time (what appears to be a few months) before it found enough energy to push through.  But this market is much more unrelenting than what we observed back then... so will there be a stall at this level (S&P 1225-1230ish)?  Any rest?  Anything?  Who knows... after 8 straight up weeks on the Dow Jones, you'd think so.  But anyone betting against this market has been made into mush.

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On the economic news front ... well does it matter?  Good news is great news, and bad news is future good news.  What we know is there will be some million census workers hired in the next 2-3 reporting periods through June which will cause celebration on national TV since very few analyze the figures.  The market will be "surprised" and we'll rally.  Housing will "rebound" just as it did a year ago in the spring and summer - before falling to record lows in some months in the fall and winter.  The only question is will round 3 of the housing bribery plan be announced once housing slows down again in the fall.  Bernanke won't raise rates ... and even though some of his minions are pressuring him to at least sell some of these mortgage backed securities off this balance sheet sooner rather than later; he is all about the Bernanke Forcefield.  All must be protected (except for assets of savers who return nothing) - risk assets must only go up because the "wealth effect" is the easiest bubble to blow up.  So they'll be some economic reports this week - they might move the market for 10 minutes... perhaps 15 minutes, before the grind up continues.  There is a FOMC meeting this week so maybe if they move one comma in the statement, CNBC can go to 24/7 coverage and we can all hyperventilate.  Obviously rates won't be changing, so the only analysis will be what sentences changed a word or two, and if any commentary about asset sales enters the fray.  Doubtful Ben will allow it.

Earnings continues this week, and this will be the last week of major S&P 500 companies... although the big hitters are mostly done.  What was very strange has been since a week ago Friday, many companies HAVE sold off on their earnings but the market continues to march up.   It's as if any company not reporting is fine to rally... very very strange.   It's not the first time I've said that when observing the character of this new paradigm market.

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For the portfolio, it remains (as I've said for over a month) an unshortable market.  When the only selloffs lasting more than a few hours require fraud cases, it's simply something you cannot stand in front of.  If I can see the 20 day moving average pierced I can at least make some case, but until then it's ride the train and realize this will end like all other have ended - badly.  But the level of desperation and meddling in this market & economy is multiples of what anyone has seen before, so no playbook.  Until then I will join the complacency crowd, knowing at some point I will get my head ripped off to the side. And look forward to how Bernanke is taken through the wringer in 2014+ for repeating, at 50x, what Greenspan did.

On the long side: Rackspace Hosting (RAX) was sold Monday for not participating in this epic rally.  Once more this week, it did not participate... not sure what is wrong with it.  After Atheros Communications (ATHR) rocked its earnings report, I sold 1/5th.  After some "surprising" housing numbers (all hail! housing figures are starting to bounce as we enter the spring season), I sold 25% of our largest position Lennar (LEN).  I was stopped out of half of coal name L&L Energy (LLEN) for a quite nasty loss, the stock sits right above a key support - if that breaks, we'll have to cut much more as a risk control practice - currently this is my only loser.  In a flurry of trades late Friday, I restarted a position in Bucryus (BUCY), added to Quality Systems (QSII) [new breakout] & Skyworks Solutions (SWKS) [fell back to first level support], and added index positions (SPY calls and TNA ETF) in the closing hours as the S&P was poised to take out highs for the years, and "Magical Monday" awaited.  I closed Market Vectors Brazil Small Cap (BRF) for similar reasons to Rackspace Hosting... no life.

On the short side... are you kidding?  All I did was sell some index put positions I was holding from late last week once the S&P 500 bounced off that 20 day moving average Monday.

A part of me is considering buying way out of the money puts perhaps for January 2011 since I do believe those multiple gaps must fill in time.  In fact, I thought mid April to mid May would be the time frame - which appears increasingly wrong.  It's quite rare for an index gap not to fill within a few months.  The only question is how soon I want to begin losing money on this trade.  Potential issues the market will be grappling with in the fall is (a) loss of 1M+ census jobs (b) seasonal slowdown in housing (c) election stress (d) China real estate slowdown (e) the first signs that Ben may actually relent on his foot on the pedal by Q1/Q2 2011 (f) producer price inflation and (g) do state budgets matter anymore as a "problem" or is the unspoken of "backstop" by federal government yet another moral hazard?

That said there is no reason the market can not be at all time highs (in nominal terms) with unemployment at 8.5%+ (that would be government figures, not reality) by end of 2011 - remember the less workers, the more profit for corporate America.  With the government having bottomless pockets to pay for the lifestyles of those out of work, plus many others employed no longer bothering to pay their housing bill - it's a nirvana economy.  In many ways this is the same economy we've had for the greater part of a decade+ - there is simply no bubble except government and healthcare to hide all the excess workforce.  A greater and greater portion of national profits are simply going to corporations, and workers are receiving less (as has been the case year by year the past 10-15 years) - so the government is taking the spot of the house ATM to fill the gap.  Until the US debt is called to the floor this can go on for years.

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