Monday, September 20, 2010

Bookkeeping: Weekly Changes to Fund Positions Year 4, Week 7

Year 4, Week 7 Major Position Changes

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

Cash: 73.8% (v 66.7% last week)
21 long bias: 17.1% (v 19.4% last week)
5 short bias: 9.1% (v 13.9% last week)  [Note: Long bond and volatility positions considered 'short']

26 positions (vs 30 last week)

Weekly thought
Monday morning is here, and so is our now traditional gap up in the futures market.  No one could have predicted this... except for everyone.  What is amazing about this trend is when everyone knows something is going to happen in the market, it usually stops working.  But this trend has worked for a year and a half, almost without relent.

As written last week, the bears were running out of time as Monday morning gap up was on the horizon.  This gap up would take the S&P 500 either to or above the key S&P 1131 level.  That actually happened briefly Friday, until poor consumer confidence numbers came out and the rest of the day was spent in a state of numb as the market did nothing the entire day.  Except for strong trend days, we have a very similar pattern - all the action in premarket/first hour - the churning by HAL9000 and his merry band of computers for 5 hours, and then a flurry of activity in the final 30 minutes.  I could be speaking of May 2009, September 2009, January 2010, April 2010 or now.   Same comments for the "V shaped" low volume rallies that has everyone who learned technical analysis scratching their heads at the new paradigm market.  We are firmly encased in another one - the question now is will we break out of this multi month range on the fragile volume.  And what happens once/if 1131 is cleared?  We have to look to May 2010 highs to see upside targets - the first appears to be S&P 1150, and then second roughly 1175.   To the downside, S&P 1116 (the 200 day simple moving average) and then gaps at 1110 and 1090.

Knowing these downside gaps generally fill within 2-3 months makes it difficult to jump in... especially after a 'vertical' move which has demonstrated only 1 material down day the entire month of September.

If this is the top end of the range, than we'd expect Treasuries to be set to rally again... but if the market is about to escape the gravity of this range, we might see 10 years headed back to 3%+.

Those are the only 2 charts one needs to know anymore as every ETF is correlated almost perfectly to what the above 2 do - I'll throw China up here as a leading indicator that took a turn for the worse late last week - Shanghai 2700 is like S&P 1131.

Other than that, we saw some signs of frenzy last week - a chinese real estate firm IPO'd Friday and was up some 60-70% ... even though E-J House (EJ) is sitting here in the U.S., almost ignored.  We've seen days oil AND airlines are up together.  And the leadership stocks - namely anything six degrees of cloud - are acting like bubble stocks of the late 90s.  Just having a CEO on TV saying they are open to any possibilities (read: buyout) now sends stocks up 12% - see Netsuite (N).  Does that mean we have to fall soon?  Not necessarily - it just means people are throwing caution to the wind and risk appetites have done a 180 from just 3 weeks ago.


On the economic front, we continue in the "all news is good news" mantra and until that changes it is hard to stand in front of the freight train.  The market has benefited from very light economic news flow the past two weeks, and whatever economic news there has been has been shrugged off.  Irish credit default swaps blew out to their highest levels of the entire crisis last week, with a denial of IMF bailout and still no one cares.  The belief appears go forward there is no country that cannot be bailed out so who cares I suppose.  One of my favorite sayings... it won't matter, until it matters.

This week we have some housing data - everyone knows it will be poor.  So I guess the bulls can brush off any bad news as it is 'expected', whereas any good news is a reason to run up the market because its a 'surprise'.  Other than that, Fed announcement Tuesday - I'd expect zero changes as any QE won't be coming until after election.

Monday: NAHB Housing Index (10 AM) - a minor report

Tuesday: Housing starts (premarket), and FOMC announcement (2:15 PM) - I am not sure we will act like lemmings to this FOMC meeting data since the expectation is for no change.  Interestingly, the last two selloffs came as the S&P 500 was at 1129, and 1131 - and the FOMC announcement marked the peak.

Thursday: Weekly claims (premarket), Existing Home Sales (10 AM), Leading Indicators (10 AM).  It will be interesting to see if weekly claims can finally drop once more below 450,000.  Existing home sales is the important housing figure of the week as it represents the majority (90%) of home sales... only question is "does it matter" since everyone expects poor numbers.

Friday: Durable Goods (premarket), New Home Sales (10 AM) - while the market reacts to new home sales just as much as existing home sales, they don't mean much other than to home builders.  Durable goods is volatile month to month but closely watched.



I am bit confused by the market's inability to pull back even 1-2%.  Many of the stocks we own have had huge runs, and I took very serious profits cutting them back to an extreme level.  The other stocks left over are doing very little as it appears so much of the buying is in the same names over and over, week after week.  The portfolio did take a hit last week in Power-One (PWER) which was hit by a competitor's margin warning.  I've tried a few shorts here or there as a hedge but despite buying laggards, this rally has gone on so long even these names are catching some mild bids.  I am going to under perform on any big move up but it certainly would be atypical to see a continued rally of more than a few % from here, after such a huge run - with zero consolidation along the way.  All eyes are on behavior of S&P 1131... the playbook is to buy the breakout, but everyone in the world knows that playbook.  Is it going to be that easy?

In terms of portfolio, it was a very busy week but a lot of transactions that got us nowhere.  It is very difficult for me to purchase the stocks that everyone continues to chase, because it is simply not my style to be a momo (momentum) chaser.  When something is up 25-35%+ straight, it starts to become a game of musical chairs and these folks are just hoping the music does not stop.

On the long side:

  • Monday, as Indian markets continued their recent surge, almost all remaining shares in Indian bank HDFC (HDB) were sold as the stock hit 30x forward PE. 
  • The last of 3 tranches of (AMZN) was sold as the stock hit extreme overbought levels.  Only a 0.1% exposure was kept.
  • A good sized amount of Spreadtrum Communications (SPRD) was sold, even though the position had just been upped the previous Friday.  With the stock up 10% in 1 session it was too good to pass by and more importantly I had placed a limit sell order at the 10% gain, which immediately hit.
  • Tuesday, a 1% exposure was added back to Cleveland Cliffs (CLF) as the stock pulled back to its 20 day moving average.
  • A modest 1.4% position in Thoratec (THOR) was restarted as the stock broke above multiple resistance levels.
  • Tuesday afternoon it appeared the market was finally going to break out so I bought some SPY 113 October calls... but with no follow through these were immediately sold.
  • A quarter of Gafisa (GFA) was sold as it was up 7% from entry.
  • Thursday, Power-One (PWER) broke support and seemed intent on staying there, so with a 17-18% loss the position was closed
  • Friday, Rovi (ROVI) was reduced by 55% as it broke support intraday. 

On the short side:

  • Monday, the stop loss in Monsanto (MON) was triggered at about 4% loss. 
  • I had started a of Texas Instruments (TXN) the previous week, and one half was covered for a quick profit.  I reshorted that half position Monday.  After entering a stop loss, I realize I had a 'fat finger' and placed a limit cover instead so I lost the position.  Tuesday morning it was reshorted.  Mid day Thursday this position was covered for 'flat' - good timing as the company announced a stock buyback in after hours. 
  • Another batch of iShares Barclays 20+ Year Treasury Bond (TLT) was bought as the ETF came back down to the 50 day moving average.  I treat this as a 'short' even though it's not technically ... but it has moved inversely to the market for much of the past few years. 
  • Caterpillar (CAT) was at the top end of its range, so if the market could selloff it seemed ripe to book some profits on the short side - I shorted it Tuesday but had covered for a 1% loss Friday.
  • Wednesday I added some iPath S&P 500 VIX (VXX) exposure as well as minor index short shorts (BGU/TNA) as the market kept teasing the top end of the range. 
  • A short on Intuitive Surgical (ISRG) was covered for a 4% loss as many of the laggards in this rally finally showed some life. 

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