Wednesday, August 18, 2010

2010 Fund Performance Period 8

If, after reading the blog content you might have an interest in participation for the mutual fund, please consider reading why this blog exists. Conditional launch date should be late October to mid November 2010.

  1. [Jan 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
  4. [November 2009: General Updates, Questions]

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For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we moved to a new tracking system in 2009 ( as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence while the website and portfolio began in August 2007, we "began anew" in terms of performance with portfolio "B" as of early 2009. Detailed history on latter 2007 and 2008, as well as 2009, [Jan 7, 2010: 2009 Final Performance Metrics] can be found on the above mentioned tab. For 2010 our eighth 4 week period is now complete. (Data is through last Friday's closing prices)

(click to enlarge)

Period 8 was a struggle.  Unlike Period 7 which was one of my favorites over the past 3 years, where there was multiple large swings that one could trade this was a period of muddling.  Until the last few days it was an upward slope in the indexes for the 4 weeks, but most of the gains came in a small group of days with the movement concentrated in premarket surges hence impossible to 'trade', since if you were not "in" the previous day you missed most of the move.   Frankly out of 20 days, all the upward movement was concentrated in five, and four of those days were the 'premarket' surge variety where almost all the gains were complete by 10 AM.   Indeed, the selloff late in the period actually helped relative performance since I was trailing the indexes by a good 4-5% until the swoon in week 4.  This was simply a time frame that did not suit our style - it happens, and with earning reports causing us to cut back on position size we were effectively tabled for much of the period.   The key when the market is not "our type" is not to start doing stupid things (forcing trades) and rack up substantial losses, especially with a big year of performance already locked in.  During period 8 economic news in the U.S. continued to be poor, but the dominance of the U.S. multinationals earnings reports superseded all.  Further, China finally woke up from a months long slumber - this, along with the Fed's 180 degree about face from potential exit strategies to a drumbeat for "QE2" were the big changes.  The U.S. dollar was weak for a good part of this period as the yen seemed to take over the mantle as "best of the worst fiat currency", and a flight into bonds caused yields to plummet.  Gold rebounded from some heavy selling early in the period..

For the eight "four week" period of 2010 the fund returned +0.2%, versus the market's +1.3%, so an underperformance of -1.1%.
On a cumulative basis in 2010 the return is +51.4%, versus the Russell 1000's -3.1%, so an outperformance of +54.5% for the year to date. (thus far 32 weeks)

Period 8 was a period of absolute performance (making money) but relative underperformance (did not outperform the market). The yearly goal of beating the index by 15% is on track.


*** Long/Short Fund Discussion below

Portfolio Overview:  While the S&P 500 ended more or less where it began this period, it was quite a trip.  In week 1, the S&P 500 remained below key resistance so there was no reason to change exposure.  Most of week 2 and 3 was spent over key moving averages but again the gains were so concentrated - with much of it happening in premarket surges - it was difficult to partake.  Further, many of the stocks we owned had earnings data released during this period so to reduce risk our position size in these names were lowered.  This led to a mixed bag as we avoided most of the damage to the downside (aside from Acme Packet (APKT) which I had not realized was reporting that evening and hence did not sell down exposure), but we also missed some of the big moves up in names like (PCLN) and Polypore (PPO) since our position size had shrunk.  Aside from the last of the multinational earning reports early in the period - which benefited from the slashing and burning of U.S. labor + strength in Asia -  the drumbeat for QE 2 began when James Bullard showed up with his 'deflation' thesis.  Hence as U.S. economic data continued to come in weak, "bad news is good news" became the theme since it supported more easy money.  That was true until week 4, when the Fed actually came in with QE Lite and the market began to ask itself "why exactly are we celebrating the need for the Fed to support the entire U.S economy?"  I expect this push pull between weaker economic data, and a desperate Fed to be the main themes for the months ahead.

Below is the chart for period 8:

Week 1: Entered the week: Cash 78%, Long 18%, Short 4%

The market had come off a big run off S&P 1040 to 1070 in the previous week so I thought the trading would get more choppy go forward so I had cut back exposure, and waited to see where the market would take us next.  There was some volatility this week and a 'chopfest' began as the S&P 500 churned below some key moving averages.

On the long side:

  • Wednesday, ahead of earning reports for each I cut back positions in F5 Networks (FFIV) and Netflix (NFLX).
  • I cut the position in Dr. Reddy's Laboratories (RDY) by 2/3rds as it broke the 50 day moving average a day ahead of earnings.  Thursday, I sold off the rest of the position as earnings were released and the stock continued its sell off.
  • Friday, I added to Rovi (ROVI), (CRM), and Acme Packet (APKT).
  • As Currency Shares British Pound (FXB) ran into the 200 day moving average, I closed out the position for a small profit.
  • Friday, I started Cirrus Logic (CRUS) as a poor man's play on Apple.  I also added a decent amount of exposure in Direxion Small Cap Bullish 3x (TNA).
  • Almost all remaining F5 Networks (FFIV) was sold into the close Friday as the stock has had a tremendous run.

On the short side:
  • Tuesday as the S&P 500 cleared 1070, I cut back sharply the TNA short position I had put on the previous Friday, at a modest lost. 
  • I shorted (AMZN) post earnings after a sharp rebound from intraday lows.

Week 2: Entered the week: Cash 70%, Long 27%, Short 3%

A quiet week on the economic front as poor housing data continued to dominate. The S&P 500 broke over the 200 day exponential moving average and was next ready to make a run at S&P 1115 the 200 day simple moving average.  It was able to do that Friday.  Copper surged this week as did Brazilian and Chinese (+6%) markets, so despite Ben Bernanke sounding dour on Capital Hill testimony, people were happy since dour Ben laid the groundwork for the fans of QE.

On the long side:

  • Monday, I closed a position in Direxion Small Cap Bull 3x (TNA) as the S&P 500 ran to the 200 day simple moving average of 1113, that I had bought the previous Friday on a break over S&P 1100. This was just a quick trade which garnered 6% in under 24 "market hours".  In retrospect, while the market peaked the next day at 1120 it ended up being a good trade considering the chop fest that was to occur the rest of the week.
  • I closed out the rest of Netflix (NFLX) which had been cut back the previous week, as the stock struggled post earnings.  Still like the story and I expect a dead cat bounce, but I need to see the chart firm up OR a drop lower to re-enter.  I replaced Netflix with Chinese semi stock Spreadtrum Communications (SPRD) as money was moving into Chinese small caps after months of underperformance by this group.
  • I closed the last of a gold position held since March 2009; Powershares DB Gold Double Long (DGP) as the technical condition weakened. 
  • Tuesday as the market surged over 1113 to 1120 I took 1/3rd off the table in Polypore International (PPO) and Tibco Software (TIBX) to lock in some profits as their charts were very overbought.  Polypore dropped 9% from where I sold within 24 hours, so I bought back what I sold (plus a bit more) Wednesday. 
  • Thursday, after the stock was punished post earnings I cut back half of my modest Akamai Technologies (AKAM) position; with the other half I was willing to give the name some more rope to see if it could regain key support levels quickly.  In the morning selloff Friday when it looked like the market was going to fall apart, I sold out the other half portion of AKAM, closing the position.
  • I restarted NetLogic Microsystems (NETL) which reported a great quarter, but still sold off sharply.  Unlike some other stocks which were punished post earnings it still held support as of when I bought so I began a 1.7% stake and decided to watch to see if it could hold support.
  • Acme Packet (APKT) reported stellar numbers but the stock was priced for perfection.  With the work on the mutual fund this week and on pledges, I did not monitor earnings releases closely and had a pretty good sized position on - which was hammered Friday morning - taking away all my unrealized gains along with giving some capital losses.  A big 'red candle' was formed, so I sold 2/3rds to right size until I see how the stock reacts and if it is quickly able to regain support.  

On the short side:

  • A long standing limit order to short Energizer (ENR) hit Tuesday - since the price was not that bad (the stock gapped up to fill my order) I let it stand for a few days to see how the stock fared on any selloff... later in the week when ENR held up well during a selloff, I closed out the position for 'flat'.
  • In the Friday morning selloff, I added a hedge on the indexes with a short of TNA - this was to be held if the S&P 500 stayed below 1093/1094.  That drop was quickly bought and I just as quickly got out of the short for a loss.
  • I closed out a long held short of iShares Barclays 20+ Year Treasury Bond (TLT) as bond yields continue to plummet, causing this position not to work.

Week 3: Entered the week: Cash 79%, Long 18%, Short 3%

The market had cleared the 200 day simple moving average of S&P 1115, and everyone's fingers were trigger happy waiting for a move over June highs of S&P 1131.  The market went to go test this level almost every day of the week as traders chanted "QE! QE! QE!".  So despite a series of weaker economic data - even weaker Chinese ISM was viewed as fine because it meant "more liquidity" - markets stayed elevated.  Monthly jobs data was poor on Friday which was initially poorly received until speculators realized the economy does not matter... it just means more free money from the Fed down the road.

On the long side:

  • Monday, as we had a return to a hallmark of the 2009-early 2010 rally (the Monday morning melt up), I started a basket of commodities.  Since I did not know which "one" to get into I simply put 0.5% into Potash (POT), Freeport McMoran (FCX), Walter Energy (WLT), and Cleveland Cliffs (CLF) to create a 2% position.  In my mind this is "one position". 
  • I cut (PCLN) exposure by about 2/3rds ahead of earnings... in this case this removed the chance to partake in large gains with a much larger position as the stock skyrocketed post earnings.  By Friday, with the stock up some 35% from my entry point not too long ago, I sold almost all remaining shares.  This does *not* mean the stock cannot keep running, I am simply managing from a portfolio perspective.  
  • I added 1.8% exposure to Monsanto (MON) as the stock seemed ready to make a new move up, after consolidating for a few weeks. 
  • Tuesday, I cut back 2/3rds of Polypore International (PPO) ahead of earnings.  Like Priceline, but to a lesser degree the stock shot up post earnings.  Just as I did with Priceline, I sold almost all shares Friday.
  • Wednesday, I added back to positions in Acme Packet (APKT) and VMWare (VMW); the former had regained some key technical levels after a negative earnings reaction (to a good report) while the latter was simply churning along, making new high after new high.
  • I restarted a position in (AMZN) after covering the short in the same name Tuesday evening.
  • Thursday, I closed out a Direxion Bullish Small Cap 3x (TNA) position ahead of the Friday labor data, and took a 2% loss. 
  • Friday, I restarted positions in Netflix (NFLX) and Powershares DB Double Gold (DGP) as both recaptured key moving averages. 
  • I sold the majority of BorgWarner (BWA) simply to lock in profits of an overbought chart. 
  • Late Friday I went long Direxion Bullish Large Cap 3x (BGU) anticipating a "Monday morning mark up" and a run to S&P 1128 ahead of the Fed meeting where I'd be happy to sell. 

On the short side:

  • Late Tuesday my limit price for the short for (AMZN) hit and I exited with a modest lost of about 3%. 
  • After the market reacted mildly to the labor data Friday, I put on a short via TNA with the prediction that post Fed meeting this week the market would come down to fill a gap at S&P 1106.44.  Within an hour this *almost* came true as the S&P 500 skimmed across 1107, as a selloff out of the blue happened.  I did not cover there because I wanted to see 1106.5 hit, so instead covered later in the day when the market began picking up some steam.  Still had some gains but not as nice as the ones a few hours earlier. 
  • To replace my index short (my only short exposure at the time) I started looking for some weaker individual charts.... I chose a basket of 3 to begin with: Whirlpool (WHR), Global Payments (GPN), Gentiva Health Services (GTIV).

Week 4: Entered the week: Cash 63%, Long 32%, Short 5%

Entering the week the S&P 500 looked poised to break out to new highs as the speculator class was demanding more QE! At least QE Lite if nothing else.  S&P 1131 remained the target. Despite getting what they asked for, and the market jumping after the 2:15 PM announcement Tuesday, most of the rest of the week featured a "sell the news" reaction as people realized the sugar high feels good, but why exactly did the Fed do a 180 degree switch in its battle plans versus what they were saying 60 days previous?  Cisco guidance also hurt the market, as tech stocks took a big hit - especially the semiconductor space.

On the long side:

  • The previous Friday I had bought Direxion Large Cap Bull 3x (BGU) as the S&P 500 bounced back over 1120, with a short term target of 1128 to be sold ahead of the Fed meeting.  This happened within 24 hours, and I exited Monday morning for a 2.25% gain.  TNA (my usual candidate) outperformed BGU by 2:1 in that short time frame, but since small caps are more American oriented and have been getting trashed of late, I went with BGU.
  • Spreadtrum Communication (SPRD) exposure was cut in half ahead of earnings - another reason was the stock was running into old highs so I thought there would be some resistance there.  Later in the week the company reported a stellar number, but after a 10%ish gap up, the stock was sold off all the way down to fill the gap.  I mostly just watched in awe, but was compelled to buy a small amount. 
  • Tuesday, I sold half of Netflix (NFLX) on a big deal with Epix to steam movies from 3 major studios.  The stock was approaching old highs, and despite the big selloff the next day and NFLX actually kept chugging upward for much of the week so this sale was 'wrong' from that perspective.
  • I sold 1/3rd of Acme Packet (APKT) as the stock was mentioned on CNBC *and* was approaching old highs - same exact situation as SPRD and NFLX in terms of running at highs reached a few weeks earlier.  I wanted to lock in some gains. 
  • Wednesday, I closed one of our oldest positions: Ultra Silver (AGQ) which has been range bound for months; further I had added other commodity positions in the interim, and some of those (i.e. agriculture) are far more in favor at this moment.
  • Thursday morning premarket as weekly jobless claims surged back towards 500K it looked like the market was going to have another very rough day so I sold quite a few things at the open.  Two of the four stocks in a commodity basket I created were closed - Freeport McMoran & Gold (FCX) and Walter Industries (WLT).  Monsanto (MON) was cut in half (the stock was actually up at the open!), and Rovi (ROVI) was cut by a third. 
  • Riverbed Technology (RVBD) filled its earnings gap in under a month, showing you cannot 'buy and hold' anymore as 'risk on', 'risk off' bipolar action steals almost all profits that are not taken quickly.   It did cause a limit order we placed at the gap to fill and let us restart the position.
  • I originally shorted the gap down Thursday with some index plays (BGU/TNA) but after some weird strength in commodity stocks, I decided to flip the switch, cover (for a loss), and go long.  Nothing but gut but was hoping for 6-7 points on the S&P 500.  I got about 5 which was good enough for half a day so I took my profits at S&P 1086.

On the short side:

  • Monday as we had our typical Monday melt up - I added a 2nd layer of short to the first half of the position I put on the previous week in Whirlpool (WHR), as the stock ran to the 20 day moving average (which has been its resistance for many weeks).  Wednesday, as the market suffered its big selloff I covered for a quick 5.5% gain.  At the time the S&P 500 was holding support at the 200 day exponential moving average which I thought might serve as an area of support, but it did not.

[Jul 20, 2010: 2010 Fund Performance Period 7]
[Jun 24, 2010: 2010 Fund Performance Period 6]
[May 26, 2010: 2010 Fund Performance Period 5]
[Apr 28, 2010: 2010 Fund Performance Period 4]
[Apr 1, 2010: 2010 Fund Performance Period 3]
[Mar 2, 2010: 2010 Fund Performance Period 2]
[Feb 2, 2010: 2010 Fund Performance Period 1]
[Jan 7, 2010: 2009 Fund Performance - Final Edition]

For previous years please see tab 'Performance / Portfolio' (we were using other tracking mechanisms at the time)  

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