Closing Portfolio Insurance Bets at a Small Loss

I decided not to fight the tape. Yesterday, after the market closed, seeing a lot of ugly reports and selling in the after market, I put on some portfolio insurance bets. I bot SDS and QID, effectively shorting 2x SP500 and Nasdaq. I was very surprised that despite the disappointing results from bellwether stocks like MSFT, AXP, AMZN, and a slew of others, and overdue profit taking that is typical on summer Fridays after a nice run up, the tape more than held its own. On the other hand, we just witnessed a significant range breakout and cut through a very difficult psychological barrier on the Dow, 9000. Clearly this has brought in

I am closing SDS and QID positions at a small loss and consider this a good trade, despite losing money. Thankfully, the longs have more than offset this loss. It was the right trade and under the same circumstances, I would do it every time. Having said that, I am not turning this trade into an investment. Easy enough to put it back on when I need to.

Get Ready for a Red Day on Friday

The after hours picture looks ugly. MSFT, AMZN, JNPR, AXP, RVBD and many other stocks are getting hit in the after hours. Some missed on expectations, others provided weak guidance, yet others are already getting hit in sympathy or on profit taking.

Just when it started to look like we may get through this earnings season unscathed, BOOM, goes the dynamite.

I had a very good day in the market this week, correctly predicting a break out. I sold some calls, but not enough, and really didn't do any trimming, really waiting for tomorrow, so I can square off some positions before I take the next week off.

Early look, it seems we will open 120-150 points down on the Dow. Summer Fridays are also known for reversal of the trend of the previous few days. Many will be taking profits tomorrow. Either way, barring something unknowable at the moment (4.30pm EST), I am expecting a pullback.

To protect my portfolio, I am buying SDS and QID after market. I entered positions at QID - $27.68; SDS - $48.90. although it is not a 100% hedge, it will get me down to 60% Net Long.

Can Market Momo Continue? Watching for Breakout this Week

GS, multiple analyst upgrades, and little economic news to spoil the party. Are we ready to break out?

This morning GS is out with a bullish call on SPX, raising the end of the year target to 1,060, based on the ~14x forward P/E. Goldman’s strategists also raised their expectations for 2009 SP earnings, boosting them to $52, mostly a result of lower financial losses and higher operating leverage.

In its usual sellside double-speak, they also acknowledged that there is still some risk of a ‘double-dip’, so either way GS will prove to be correct.

Why should we care? Well, we are approaching the upper end of the up trending trading channel. With little economic news coming this week and no major policy changes to come out of the White House (fingers crossed), I think the momentum we are seeing in the market will likely continue. The successful resolution of CIT clusterf$&#!, several key upgrades from on the Street(CAT, DIS, CSCO,) should also give the market some boost.
We are seeing better than expected earnings thus far this July, with analysts clearly underestimating the operating leverage resulting from significant cost cutting, and revising up up their models that they severely ratcheted down just a few months ago. So the beat goes on.

As we have postulated in the past, there is still plenty of cash on the sidelines. As VIX continues to decline and remain at multi-month lows, the 'fear' trade is no longer a way to make money. Cash, bonds and other ‘’safer havens’ are going to continue to see outflows, especially as the market continues to move higher.
Generally, chasing momentum is not my game, I much more prefer to buy on a pullback (see my previous post), but one can make some decent money, playing range breakout. If you are planning to chase this rally, raise your portfolio beta (go to more volatile, higher risk positions) and continue to rotate into energy, materials, industrials, etc. The same rotation was also suggested by Goldman.

Maven's 50 Focus List and Portflio Methodology

I finally compiled my current focus list that contains approximately 50 stocks I follow pretty closely. These stocks I know fairly well from the fundamental perspective, since I either presently own them, owned them in the past, or monitoring, so I can take a position at a more attractive price.

Fundamental Criteria: For each of these stocks, I listed some of the fundamental criteria, such as forward PE, 5-year earnings growth rates, current and next year's consensus earnings estimates, average price targets from Wall Street analysts, etc. This is just some of the information that I monitor. I also pay close attention to their balance sheets, insider trading patterns, and most recent earnings transcripts.

Entry/Exit Prices: The spreadsheet also provides my "ideal" entry price and exit price for each of the 50 stocks. I use a variety of technical tools to identify support/resistance levels for each, and remain disciplined about both the entry and exit. Generally, I'd like to see a pullback to my 'ideal' entry price or just below it in order to initiate a small position. I would add on a bounce from there. The near term price target/objective is a level where I generally sell either most or some of the position. The balance of the position would then be hedged with at-the-money calls.

Risk/Reward and Portfolio Beta: I calculate the risk/reward of entering a position frequently, using a very simple, but effective calculation. If I decide to buy into a position right there and then, I need to see at least a 2:1 reward-to-risk ratio. This is only one of several criteria which comes into play. Other factors include my expectations for the overall market, portfolio's concentration in a particular sector/theme, and portfolio beta. Speaking of beta, I use it to decide how much risk exposure I want to have in a portfolio at any given time. When the market is oversold, I increase my weighted beta by loading up with high beta stocks. When I believe the market is vulnerable to a pullback, I 'lose' risk by decreasing my portfolio beta. I accomplish this by either rotating from higher beta to lower beta sectors like utilities and healthcare, going to cash, writing covered calls or frequently all of the above.

Here is the first installment of Maven's 50.

And the beat goes on..and the trading range market continues

Give the masses what they want. The masses were looking for a summer pullback, with consensus expecting 10% selloff on the average, and we actually witnessed an intraday 9% high-to-low move on the SPX (from a high of 945 on 6/11 to the last Wednesday's intraday low of 869 on 7/8). In our previous posts, we repeatedly mentioned that investors we were looking for a 5-10% pullback before committing new funds. It appears that the recent selloff may have satisfied them. We would've preferred to see, a less volatile selloff, taking at least a few weeks to complete, but this was more of a wishful thinking on our part.
The short term technicals have improved, Stochastics and RSI were both oversold last week. We are encouraged that the trading range held the 870 support. Despite testing the level several times and briefly violating it intraday on 7/8, buyers managed to hold off the onslaught of bears at this important and highly watched level. VIX remains subdued, hitting a 10 month low yesterday. The 'fear' and risk aversion trade worked well when the indices were close to the resistance, but the trading range trading continues - and we gingerly bounced from 870, feeding off the optimism from better than expected INTC, GS, and a number of other companies. We sort of expected the actual results to come in line or above expectations, but the positive outlook and improved visibility provided by some of the CEO's caught us a bit by surprise. The combination of solid headline results a number of somewhat more positive economic headlines, boosted investor confidence, translating into short covering frenzy we are seeing this week. Well, we were correct, thus far, not to short them market for more than a quick trade.
Yes, we seem to have dodged an economic collapse, and we are definitely seeing signs of improvement in the economic environment. Having said that, our belief is that the improved fundamentals and corporate results have pretty much been priced it in at the current level. For forward valuations to take a step up, we would require to see more consistent and broader recovery, not only in China and US, but in Europe and the ROW. Thus we are most likely remain stuck in a trading range ~870-950, at least until we see a decisive move above 950 (or a breakdown below 870). We may have our answer in the next few days. Until then, there is no reason to load up, as we are within a stone throw of the upper end of this range. The breakout will put two additional price objectives in play for the SPX: 1st - 1010, and 2nd - 1070.

See the S&P chart below.



Consistent with our theory, that we are still in a trading range market, we continue to favor a strategy that uses a combination of swing trading, beta leveraging/deleveraging, and sector rotation. In my next post, I will provide additional information on this strategy, and finally, (yes, finally!) publish the Maven Top 50 Focus List.

Good Trading!

Shorting Oil Services (OIH) and Hedging with US Dollar (UUP)

My previous post detailed the 10 reasons to be cautious going into July. As the matter of fact, after being bullish roughly since the rally started, I put the brakes on in Mid May, and have been taking beta out my portfolio. In a nutshell, I am all about risk and reward and I use a number of different indicators technical, fundamental and sentiment based to estimate the potential outcome of specific trades. I have been in neutral (basically long/short mode for the past few weeks), trying to slightly outperform the market without high risk exposure.


Earlier this week, I have sold all of my energy positions (except for XTO) and put on a Long Dollar and Short oil Services. You can replicate this trade by buying UUP and shorting OIH or XOP.

Why? In the beginning of the oil rally, Oil Services lead the Oil trade. For every 1 or 2% move in underlying commodity, the services group (which was extremely oversold and cheap on every metric, would go up 2x)would usually move up BEFORE the oil moved. The last few weeks the group was less 'vigorous' and this week, the move up in oil totally decoupled. The geopolitical situation (attacks in Nigeria, Iran, etc) were helping support oil prices, but the services and E&P companies were not following through.

Oil Services fundamentals have improved slightly, but most have already priced it in. From a long term perspective I totally love this space, but near term, the Head & Shoulders pattern signals technical weakness. Given that high beta nature of these stocks (largest positions in OIH are RIG, SLB, HAL, etc) I would expect them to significantly underperform the market on the downside.

Lastly, I expect US Dollar to get stronger from here - many factors in play. Mostly, I expect US dollar to move inversely to the market and commodities, so I am going long dollar to hedge my short of OIH.

Why hedge with US Dollar? Since early May, the major stock market averages have been trading in a range with few deviations to either side. A key during that time has been the reflation trade - strength in commodities and commodities stocks on a persistently weak dollar. Naturally, the reflation trade is only plausible in this market on a weak dollar, and a weak dollar is only plausible during periods of increasing risk acceptance. This has broadly been the trade in play over the past couple of months. Now we are going the other way, in my opinion, as risk averse invetors are taking profits and moving to the safety of US Dollar and US deniminated short term money market instruments.