After a major market pullback the natural reaction might be to just hang in their for the follow up rally, but not so fast. Market bottoms are a process not a point in time. What I mean is that we may have made a bottom in equities on Monday but the odds are very high that we’re going to have a period of at least a few months to finally exhaust all the sellers. Markets will likely be whipped around like a puppy’s chew toy and I’d rather keep volatility to a minimum.
In the meantime scenes we’re likely to see:
Failure of a major European bank – Its not like they’re going to give a heads up notice. When you start banning short selling you know you’re in a losing battle.
2012 US earnings estimates: They haven’t budged at all. They stand now at $111 for 2012. Despite a plethora of weak economic stats the numbers haven’t moved down at all. They must come down to reality before they can be trusted. The downward revision process will likely be painful if you’re heavily invested in equities.
Commencement of QE3: So far the QE process has been a complete bust. But thats about the only arrow the Fed has in its quiver to aid the economy and its a loser……unless you own precious metals and then its manna from heaven.
While risk at the moment may not be very large, the prospects for Intermediate term gains in equities isn’t rosy either. This is not the time to be excessively bullish or bearish for equities. In the meantime we have lots of cash on hand and in many accounts the long equities are balanced by Gold, Silver, Swiss Franc’s and the SDS.
Gold and Swiss Franc’s still too hot for new money and needs to cool off. Silver is frustrating but could rally.
Happy Friday
Long SDS, GLD, SLV, FXF
Not since 2009 have I purchased an Inverse Exchange Traded fund but with this absurd volatility I see the opportunity for a trade in the SDS at $24.71.
We may have been up 500 points in the afternoon but nothing is resolved and the Presidents press conference was as politically biased as ever, not what we need. I still think this is part of the bottoming process assuming a bottom is in place which is in doubt.
Long SDS
Brad
Both the US stock market and Treasury market are seeing non-confirmations in the most recent moves lower.
US stock market:
Advance / Decline line is not confirming the move lower as the average stock is not falling with the market indices.
New Lows: The number of new lows continues to shrink when compared to the two other times we’ve been this low in the past month.
VIX: The VIX which is a measure of volatility which peaked in this cycle at 45 in May closed yesterday at 34.
Sentimentrader.com’s Intermediate Term model has moved to excessive pessimism once again. Generally a good time to increase long exposure.
In the Treasury market:
Investor Sentiment is at the highest since December 2008, not one of the better times to be buying bonds. Plus we have to be concerned with the thought of worldwide investment managers buying US Treasuries to look good for their clients in light of the decline in Euro bonds, otherwise known as “Window Dressing”.
Lastly, the decline in US Treasury yields is not confirmed by the bonds of other G-7 nations.
The Tesla IPO has gained a great deal of attention but it has to be time to ring the register. There will be other times to buy this if it can deliver something other than losses. I just read the battery for the car costs $30,000 and does not work in cold weather. Well, that pretty much kills the potential for a Tesla at 8000 feet in Colorado.
No positions
I’ve received questions relating to account volatility so this post is probably well timed.
The purpose of our hedging strategy is to take a position in securities in the accounts we manage that will rise in value should the stock market fall. The value of the assets that increase in value should the market decline will offset the decline in the value of stocks, thus buffering the decline so you don’t take as big of a hit had you done nothing.
Essentially, we’re taking a much more aggressive approach to preserving account value by reducing downside volatility. Our hedging strategy does not include the use of Option or Futures. The value of the portfolio could still decline in value, especially on days where the stock market falls significantly but the decline would be a fraction of the loss had the account not had the hedges.
Should the market rise while the hedges are in place, the account would appreciate at a slower relative pace as well, since the hedges would act as a drag to upside returns.
I do not expect that hedging will be a frequent practice. Hedges are expected to be utilized with the Intermediate or Long Term market values are at risk.
This is our way of addressing account volatility in what I believe is the most effective way possible and I must admit, my response to doing our best to never allow a situation like our experience in 2008 to happen again.
My goal is to aggressively attempt to maintain account values near their highs by keeping declines to a modest level. We don’t need to be too concerned about making money when the market is moving higher, our proprietary model has done an excellent job of that. My motivation is to see that clients have some downside protection which also feels great when the market falls.
Be Careful Out There
Brad
