Quick update

Equities have been trending downwards the past two weeks, and today we had the first really big down day in a while (almost 3% on SPX) and the Dow made a new low for the year. Credit spreads have jumped out, the TED spread has turned up again, USD is soft, gold spiked up and oil prices are hitting new highs. The big question, of course, is whether this represents a tradeable bottom, or at least are we near to one i.e. should I be covering my shorts?

Sentiment is getting pretty bearish. I hear a lot of talk about SPX re-testing the March lows. Short interest is high and rising. The economic news has continued to be bad, and I get the feeling that the consensus may swing towards a 2008 recession again. On the flip side are a number of other factors: VIX is still pretty low (23.9 today), treasuries are still well above their lows earlier this year -- and the curve is still pricing in a hike this year; stocks are not cheap, commodity prices are still very high (I expect these to break down before the market bottoms), EUR/JPY -- a great crisis indicator -- is high (167/168), and there are few people talking about a serious breakdown in the equity indices -- most are just talking about a re-test of March lows.

So unless we have a major breakdown over the next few days, I think I am going to stay put for now. In 2002, the market fell through June, and then SPX lost another 190 points in the first few weeks of July. Goes to show that when the market really collapses, it can move far. I think the real bottom will come in August or September. A large gap-down on the opening Monday might change my mind over the short-term, however.

Portfolio Performance

I am late posting May performance as I have been traveling the past few weeks. I will not say much here -- the charts speak for themselves. Disappointing. Returns have improved the past couple of weeks but have a long way to go to make up for the carnage in April and May.

The US markets have been pretty weak the past few weeks but Canada remains pretty strong. US economic data has been weaker than expected, for the most part, though it is still inconsistent. My base case is still that as concerns about global growth increase, commodity prices will weaken (gradually at first, then more quickly), and the TSX should also fall. Although there are a few holdouts, consensus seems to be that high commodity prices are here to stay. I never feel comfortable agreeing with the consensus (although this sometimes gets me into trouble).

Sentiment is interesting again. My greatest concern is short interest on the NYSE, which is at all-time highs. Hopefully this does not indicate a generally bearish disposition, as this would mean that the market is close to a bottom. However, other indicators suggest that the market is still not overly concerned. VIX is in the low 20s, many people still seem to think that the US has dodged a recession, and there is little panic talk. Price movements may have become short-term over-sold, but so far the action has been relatively calm, indicating that we are not at a panic bottom. However, if there are a large number of shorts out there, the market could rebound pretty quickly after a bottom is formed. We should get more confirmation this week with the FOMC meeting plus several key data releases.

I sold my remaining unit of gold last week on moderate strength. I took a loss on this position after haveing a sizeable gain at one point. I will not try and give a lesson right now, but needless to say, I see the downside as greater than the upside over the short-term.

MARKET POSITION: SHORT EQUITIES (10 units); SHORT REAL ESTATE (3 units); SHORT ENERGY (1 unit)

The end is nigh

I have a strong feeling that the end is nigh for equities. All equities. Let me be clear. I am not saying that equities will crash and never recover -- I am talking about a rather quick and messy slide that takes 15%-20%+ off of the major indices from current levels. It will probably also be a "V" shaped bottom, with a fairly quick bounce up from the lows. This is also not a prediction for the next week, but rather what I expect over the next 3 months.

My rationale is based mostly on current oil prices, which are having a severe impact on consumers and businesses in most countries at current levels. The liquidity cruch of 07/08 appears to have passed (the worse of it, anyways), but it has left economies weakened and vulnerable, and the big jump in oil prices is a kick in the head that will be impossible to dodge. The hawkish rhetoric coming out of some central banks does not help either. The UK and German yield curves are now inverted, pointing to recessions there within about 12 months. The US yield curve has also flattened as yields have risen -- definitively NOT what is needed to get the US economy and financial sector back in shape.

The slowing in global growth will inevitably impact commodities prices as everyone remembers about the laws of supply and demand. This will impact the TSE and many other indices that have been supported by commodity producers.

I would like to exit my remaining gold position at a decent price if possible -- unfortunately I missed the latest uptick but it is a relatively small position so I am not overly concerned. So far, the short energy position has worked well and I may add to that position in future. Other positions, such as short real estate and short EAFE equities, are also starting to do better. The one major loser in my portfolio is my short CDN equities position, though I feel comfortable with it given my comments above.

My fundamental analysis is supported by sentiment. As of last week the consensus was that the US had dodged a recession, but that is starting to change. This is now the best time to be short -- as the consensus slowly moves from one extreme to the other.

Bonds have been big losers over the past few months but I think the worst is past. Bonds yields also spiked up at about the same time last year, then dropped with equities in the summer/fall. I expect the same to happen again this year, as concerns about the economy return over the next month or so. However, I expect inflation to remain troublesome so it is very possible that the previous lows may hold.

MARKET POSITION: SHORT EQUITIES (10 units); SHORT REAL ESTATE (3 units); LONG GOLD (1 unit); SHORT ENERGY (1 unit)
Posted by CDN Trader