Good times, bad times

Portfolio performance (1st chart to 10 October, next two charts to 30 September).



After checking the potfolio returned less in September than I initially estimated -- 24.2%. Pretty good performance and I am happy with it. What really annoys me is that, after being short equities for 13 months, I closed my positions and went long at the end of September, right before the major indices dropped by another 25% or so. It is bad enough to leave that sort of money on the table, it is REALLY annoying to lose money when the collapse that I have been expecting for so long finally happened.

Two mistakes were made, both of them made before: insufficient patience and poor risk management. I should have waited longer for the downtrend to continue, and I should have closed my long position immediately after it became obvious that the decline was continuing. Stop losses are very important in volatile times, especially when one cannot follow the market closely.

That all said, I feel very optimistic now that the market is very close to a bottom, and there are some great returns to be made on the long side. I closed out my long positions early last Wednesday, avoiding some of the worst drop. I then tried going long Thursday morning but quickly closed the position when it became apparent that the market was not going to rally. Then bought HXU and SSO pretty aggressively near the close on Thursday. Added long Japan (EWJ), long EAFE (EFA), long energy (HED) on Friday morning (NY time).

The main rationales for the purchases are as follows: markets have fallen way too far too fast -- a bounce is due; there was an immense amount of panic in the markets (see VIX), the bad economic and financial news is widely known and expected; I strongly feel that while there may be a bad recession, there is not going to be a depression; a number of historical technical indicators had been reached; very few bottom callers around, the politicians are finally taking some real action on the banks, the panic in the equity markets did not seem to be mirrored in the FX and fixed income markets -- although the fixed income markets were bad, the slide was not on the same scale.

As the market sold off throughout the day, I felt a bit sick at first, but I soon realised that I felt very strongly in the position, so I am comfortable holding this even if indices go another 5% lower (more than that and I might get worried).

So we shall see what the week brings. My base case scenario is that the markets bebound for 4-6 weeks before falling again and re-testing the current lows. We then might have a sustained rally for 4-6 months.

I should mention that I also have a significant short gold equities position. This is baed on 3 factors: 1) the steepness of the increase in gold equities recently, 2) gold was well bid over the past week due to the chaos in the financial markets, but it never came close to its previous high, 3) industrial metals prices have been plummeting as the economy weakens and concerns about deflation return. What can I say? Overdone.

MARKET POSITION: EQUITIES: LONG ENERGY (1 unit); LONG S&P/TSX (1.5 units); SHORT GOLD (2 units); LONG JAPAN (2 units); LONG EAFE (2 units); LONG SPX (3 units); CASH (1 unit)