It’s fun to compare market conditions in the past to current conditions. Unfortunately, it usually isn’t very informative. Since 2000 there have been three instances where our position was changed from a Market Risk Warning (where we’re hedged with something that contains volatility) to a fully hedged position (using a short of the S&P 500). Usually, enough of our core market indicators have turned positive that we come out of a market risk warning into a moderately hedged position. The first instance was on 6/2/2000 where we tried to add exposure and got whip sawed all the way to 9/5/2000 where we were 60% exposed. Then added hedges every week until we got another Market Risk Warning on 9/25/2000. The second instance occurred on 6/6/2005 where we slowly added exposure while the market moved sideways and were 60% exposed when our market risk indicator flashed a warning on 8/22/2005. The last instance happened on 8/21/2006 where we quickly added exposure and were 80% exposed by 10/9/2006 allowing us
Our market risk indicator flashed this week, however, we always use a weekly close to generate a signal. The strength on Thursday and Friday reversed the signal early this week so we end the week without a risk warning. This means we didn’t add any aggressive hedges today. Instead, we’re following our core hedging strategy indicators leaving us 100% cash in our Long/Cash strategy and 100% hedged with a short of the S&P 500 in our Long/Short strategy. Some of our core indicators are getting close to going positive that could give us some exposure to the market at the end of next week if the trend continues.
On 7/13/2012 our Long / Short hedging strategy moved from aggressively hedged (using put options, or an actively managed short fund like HDGE, or midterm volatility like VIXM or VXZ) to a full hedge using a short of the S&P 500 index. We’re still long 50% of the portfolio with stocks that we believe will out perform in an up trending market and short 50% using the S&P 500 index. When we’re in this position our expectation is that we’ll make money if the market moves higher (our long stocks should out perform). We expect to lose a little money if the market moves sideways or down…but that’s the price of insurance. The current hedge ratio is 1. On the chart below the green lines get wider as we add exposure. The yellow lines get wider as we remove exposure by adding hedges. The red line indicates an aggressive hedge.
On 5/11/2012 our Long / Cash portfolio moved from 40% long stocks and 60% cash to 100% cash. On the chart below the green lines get wider as we add exposure to the markets. The yellow lines get wider as we take exposure off.
There is a lot of talk (actually hopes and dreams) of QE3 coming soon due to the signs of a weakening economy. I’m of the opinion that the economy isn’t what the fed is trying to help. The fed (and the European Central Bank) is trying to keep financial institutions solvent and sure up confidence in financial markets. Their actions over the past 3 years have not been targeting the economy and won’t be over the next few years. The economy is simply their justification for action. What the fed fears most is a loss of confidence that results in falling markets that destroy the balance sheets of financial institutions and even governments (can you say Greece, Italy, and Spain). While they’re standing back and watching the ECB and EU participants try to save European banks and countries, they are also implementing policies that make it easy for banks in the US to recapitalize through high earnings (ZIRP). They’re not implementing policies that help consumers…that would then strengthening the economy.
When my oldest son was in eighth grade he came home, sat down for dinner, and excitedly started telling the whole family that the local Chinese restaurant was serving cat. He’d heard the rumor from one of his friends and believed it immediately because it was such a great story. Being the evil father that I am, I couldn’t help asking him a few questions about cats and restaurants. I first asked him how much meat was on a cat. Next I asked him how much meat was on a chicken. On a pig? On a cow? Then I asked him about the price of a pound of chicken, beef, or pork. “Yeah, but cats are free”, he responds. So I told him to think about the last time we ordered Chinese food and estimate how many pounds of meat he thought the restaurant used in a day. Then I asked, “How many cats would they have to catch every day to supply the restaurant?” This is when the light
Sentiment on Twitter is tanking after the poor earnings report. Look at the before and after pictures (below). One important thing to watch over the coming days is whether market participants treat the bad earnings report as AAPL specific or as signs of a weakening economy. I’m hearing a lot of chatter about the slow iPhone sales being a result of people waiting for the iPhone 5. Watch the other device makers who don’t have the same product release schedule in the near future to get some clues about the economy.
My reading on gold stocks is that they’re probably not finished declining. GLD has been trying to hold the 150 area for nearly three months while GDX and GDXJ have had a rally with a trend line failure. Previous failures have resulted in fairly severe sell offs. However, there is some good news in the charts. Notice the volume on the recent rally was very high for GDX. Then as it started selling off as volume is drying up. This is different than the two previous rallies that failed (they had low volume rallies and higher volume sell offs). So what would I do? If I held absolutely no precious metals in my portfolio I’d be willing to dip my toes in the water at these prices as a hedge against the European debt crisis escalating. The position would NOT be an inflation hedge. It would be a hedge against a confidence failure in the Euro as a currency. I’d be buying with the expectation that I’ll add more to
Twitter resistance is falling for SPX with people only talking about 1380, 1390, and 1400. Coming out of the early June bottom people were more optimistic with the old highs as their target. It appears that the volatile nature of this up move is reducing expectations. While there are fewer people talking about the June lows as a target or support they have lowered their target to between 1320 and 1330.