Uggh.

First off, I have been remiss in posting to this journal. The point is to document my thoughts and strategies so that they are clear and to ensure that I do not decieve myself. Doesn't work very well if I don't use it.

Second, performance stats for November.

I think the charts speak for themselves. It was a great month. Despite being a bull at the start of the month, I managed to be fairly agile and catch some of the big moves from both sides. I even nailed the bottom of SPX within a few points.

One major problem -- I closed out last Friday with a massive long equities position, then was very busy with the real job yesterday, and my portfolio got whacked by 14%. Uggh. What a day! My own fault, really. I knew the market was overextended and due for a drop (not like that, mind you), but I held on looking for a bit more. Poor risk management. My achilles heal.

So where to from here? As I mentioned, I am long equities (still), with a smallish cash position. My conviction level here is a bit weak, but I am still bullish. Yesterday's action smacked of panic. People went long last week (or did not sell) now clamouring to get out. The PMI and news of the official recession date provided good excuses to sell. We needed a correction to restore some doubt to the market. The optimists came out pretty strongly last week. Good bear market rallies should be choppy, volatile. Keeps everyone afraid and on the sidelines. Then they pile in when the market is higher.

So after yesterday's break I think that the optimists will hunker down some more. The media this morning is certainly really bad -- lots of stories about how long and deep the recession will be, how monetary policy is moving to quantitative easing, etc.

That is not to say that the news is not bad -- it certainly is. There is growing evidence that the credit crunch is not easing, and the longer it persists, the worse will be the impact on the economy. But the most likely assumption is that this is already priced into the market. The most likely path would seem to be up.

Now that the correction is out of the way, we should be clear for a rise into the mid 900s on SPX. But the market needs to rally hard today. If it does not, all bets are off -- a new low may be in the offing. For now, I am holding tight.

MARKET POSITION: EQUITIES - Long SPX, CDN equities, EAFE, golds, emerging markets; CURRENCIES: CDN/USD - long; Cash

October Performance

Portfolio performance to 7 November, monthly/6 month performance to 31 October. I will not say much about my performance in October, except to say that I am glad that I stuck with it. In the beginning of the month, I was almost ready to sell all my positions and take the month off. The volatility was very stressful. But it was worth it.

Last week was another stressful one. Massive rally on election day lifted my portfolio to a new high, then it was hit pretty hard by the sell off Wed/Thursday. I was so busy with my real job that I did not have time to follow the markets, therefore I did not reduce any positions, which would have been prudent at some junctures. Did not even have time to set some proper stop losses (I did not want to rush that, as I have screwed them up in the past).

At the end of the week, however, I am not too worried about my holdings. Yes, a lot of paper profits were wiped out, and that was poor risk management. But this market still looks like it is heading higher, and my portfolio is well positioned for that move.

A few of the reasons why I am still bullish: 1) the news is relentlessly downbeat. Everyone seems to know that the economy is going to be really bad in Q4 and through 2009. Even though the employment number on Friday was worse than 'consensus', it was better than the whisper number, and the market rallied. So few negative surprises left in the short-term. 2) The other financial markets did not really participate in the sell-off Wed/Thursday. Bonds, currencies, commodities all moved a bit in sympathy but far less than a 10% decline in the equity market would usually cause. 3) the 100 point decline in SPX was a nice 2/3 retracement of the 150 points it rallied in the previous week (if it falls below 900, then I would start to become more concerned).

So it seems, from my perspective, that the market just needed a big downward 'correction' to shake out the soft longs -- those that had jumped into the rally but did not have the stomach to hold on.

The market now should be better positioned for a slow grind higher. But this is still a trade. Not sure if I will hold this for a few weeks or months, but unlikely to be very long.

MARKET POSITIONS: EQUITIES: LONG CDN EQUITIES (3 units); ENERGY (3 units); SPX (5 units); EAFE (2 units); GOLD (2 units); CDN$ (2 units); CASH (1 unit)

Quick mid-week post

Quick mid-week post to update thoughts and trades. As I stated last weekend, I had become very bullish. The price action on Monday/Tuesday convinced me that we were building a base so I put most of the rest of my cash to work. On Monday purchased more SPX, and on Tuesday morning purchased more Cdn equities, gold equities and went long the C$. All of these looked very oversold and ready for a major bounce. The commodities downswing in particular was way overdone -- I had expected oil prices to fall to about $80, and they went to almost $60! In terms of the broader indices, there seemed to be about an even chance that SPX could fall by about 10% (to its 2002 low) or jump 20% higher. Those are pretty good odds that one does not see very often.

As it turned out, I was luckly in my timing, as the market exploded upwards late in the day Tuesday. Certainly did not expect that! And it made me a bit uncomfortable, as sustainable rallies generally do not happen like that -- they are slowish grinds upwards. When the SPX was up almost another 3% yesterday afternoon I was about to sell, but then the market collapsed in the last 15 minutes, so I held off. Ironically, the decline actually made me feel better, because it showed that there is a lot of nervousness out there, which is important for the rally to be sustainable.

All in all, it's been a good few days, and my portfolio is up another 9% since last Friday, and is up 34% since the end of September.

Market positions: EQUITIES: LONG CDN EQUITIES (3 units); ENERGY (3 units); SPX (5 units); EAFE (2 units); GOLD (2 units); CDN$ (2 units); CASH (1 unit)

Even more bullish

The past week in the markets has been a meatgrinder for investment portfolios. I think that most people probably lost money. I managed to eke out a small gain, thanks to my large short gold position. This was a great position and was very profitable and essentially bailed out my long equity index positions. But I am now completely out of it. Gold may fall further in the short run but a bounce is looking more likely and it's not worth the risk.

The price action in the equity indices on thursday/Friday was pretty bullish, by my reading. A crash was widely expected and it did not happen -- instead we bounced off the approximate lows of 2 weeks ago. I think a lot of people that were playing for the bounce are now out and scared. There is still talk of a crash.

It is difficult to remain bullish in this environment but I think that the large rally may finally start tomorrow. Sentiment is very negative. But if there was going to be a crash, it would have happened by now. Crashes are very unlikely when all the fast money is already positioned for it. Plus, the seasonal factors are against it. Most of the big crashes happened in Sept/early Oct. We already had 2 in that time frame. Anything more is wishful thinking on the bears' part.

What I would like to see is a slow, steady grind upwards -- climbing the wall of worry. The economic data is likely to remain very bad over the next few months and this will keep sentiment from becoming too positive too quickly.

But I still believe that this will only be a bear market rally. There will be lower lows at some point next year.

My new favourite position is long energy equities. With the collapse in oil prices over the past few weeks, these stocks are pretty beat up. But they formed a nice bottom last week, and now look like they could jump significantly higher in the short-run. I added to this position on Friday.

Market positions: EQUITIES: LONG CDN EQUITIES (2 units); ENERGY (3 units); US (3 units); EAFE (2 units); CASH (8 units)

A funny thing happened on the way to the crash...

...I became a bull. After about 18 months of being a bear, I became a bull. When SPX was about 1120 i.e. way before the crash that I had been waiting for, for so long (e.g. see http://cdn-trader.blogspot.com/2008/06/end-is-nigh.html). Ironic? Yes. Annoying? Slightly. But, in fact, it has not been so bad. My account has performed well regardless (up another 17% this week). And the reality is that, just as there is no bell rung at the top of the market, there is no bell rung at the bottom either. The returns following shortly after the bottom of the market can be large, but, once it becomes obvious that the bottom is 'in', it is too late. One needs to take a controlled amount of risk and put some capital on the line. The key is practising good risk management. Mine has been OK, certainly better than it used to be, but far from perfect. Something to continue working on.

A quick review of trades over the past week. The HUGE rally on Monday scared me, it was too big a rally for a bull market -- it was more of a bear market rally. My initial reaction on Tuesday morning was to sell all my long positions, and I started to do that, selling my entire Japanese equities position, but then I got a case of the 'what ifs', as in, "what if the market keeps going up and I sold everything" -- regret, greed, etc -- and sold half of everything else. Of course, in retrospect Tuesday morning was the greatest time to sell and go short, and it almost appears obvious, but it was not at the time.

I debated re-entering the long positions Wednesday and again early Thursday, but it was not until late Thursday, when I saw the successful 'test' of last Friday's lows with a strong rally following, that I re-entered most positions (did not do Japan, though).

I am not an experienced chartist and do not know the names of patterns, but what we saw this week must constitute a pretty bullish pattern. A massive crash on Wednesday (one of the largest in history) followed by early move lower Thursday, subsequent rally, and a small loss Friday.

I think we are setting up for a nice rally over the next few weeks. Sentiment is pretty negative. Last week was really scary, and I bet that a lot of people who still had some money and 'cajones' jumped into the market on Monday / early Tuesday, and were then burned on Wednesday / Thursday. Those people were reminded that bottom-calling is not easy. A lot of people were probably thinking of buying and have since drawn back. They are in 'wait and see' mode. A a lot of people are expecting the market to resume its downward slide next week, but it has now been 5 sessions since the most recent bottom. The slide is probably over for now.

Some other supporting factors: VIX was over 70! for several days. EUR/JPY has been at panic levels but has not made new lows. Also, the 2-year note yield has not hit new lows, suggesting that the fixed income market is not expecting more interest rate cuts. In fact, the longer end of the yield curve was hit, causing the yield curve to steepen considerably. A lot of people have suggested that this is because the market is worried about the large amount of supply from all the extra debt that the US Treasury is going to have to issue. But I think the real reason is that the market is starting to discount a normalisation of economic conditions. A steep yield curve will also help the banks strengthen their balance sheets. The policy response from governments around the world has been overwhelming the past week, and it appears that they finally "get it". They will do whatever it takes to protect the financial system. Finally, there are tentative signs that the money markets are starting to work again. In fact, we could see LIBOR decline very quickly in the near future as people realise that the global financial system is NOT going to implode, and the interbank markets re-start.

One of my best positions, however, is my short gold equities position, which is up about 50%, and constitutes a significant chunk of my portfolio (over 25%). I still love this position. Gold has fallen back to near its most recent low, and I think it will collapse over the near future as people realise that the crisis is over and inflation is not coming back for a while. Even with the recent panic buying (and media stories about shortages of gold coins), gold never got near $1000/oz. Most other commodities have collapsed. This sucker is going down!

I am long energy equities. Oil came down to $70/b, even lower than my expectations ($80), and energy equities have collapsed. This is a short-term play -- I am looking for a sharp bounce. HEU came down from $30 to under 5$. Looking at the chart, and the fact that $75 oil is still a pretty good price, HEU at $15 is not out of the question.

On my long index positions, I think that the indices may rally for a few weeks, maybe longer. There is a strong possibility of a re-test of the recent lows in the next few months. I will have to decide at that time how to play it (whether to hold on or try to time it). But I think we could see a nice rally after that for 3-6 months. But this economy is pretty sick, and stocks are still not cheap. Eventually we will probably break the recent lows. It will be important not to get caught up in the hype. Once it becomes accepted wisdom that the market is going to be fine -- it will be time to go short again.

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

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)

Yikes!

A quick look backwards before considering the future: portfolio performance in September was excellent. Unfortunately, I do not have precise figures now (so the charts will wait), but I estimate the one-month return was 37.6%. The portfolio is now comfortably above my long-term performance objectives.

Quick thoughts on today's market: I purchased the EAFE ishares (EFA - non-leveraged) when they were at $54 - down almost 4% on the day and SPX was down about 2.5%. I was wanting to broaden my long equities exposure to the rest of the world -- did not feel right being long only US & Canada, especially when EAFE markets have declined so much. At the time, seemed like a good opportunity to pick up some more long exposure at a reasonable price.

The markets sold off pretty heavily into NY close, with SPX down 4%, S&P/TSX down almost 7% and the Transports off 8%. A major blow-out. Economic data was bad today, and it seems to have finally dawned on people that the economy is in a major recession, and it's not ending soon. Plus the interbank/money markets/fixed income markets are badly damaged. Despite the passage of quarter-end yesterday, spreads are extremely high, companies are paying heavily to borrow (when they can), and banks are forcibly deleveraging.

The big question is: Are we sitting on the edge of a complete meltdown? Or is this dislocation now priced into equities? I will admit that the situation looks very bad. Perhaps the worst since the Great Depression (as many others have said). But I am inclined to believe that we are at a short-term bottom. First, my market 'fear metrics' are at very high levels: EUR/JPY, the VIX and 2 YR US Note are all showing extremely high levels of fear. Second, equity markets are down a LOT already over the past 3 months. History would suggest that a bounce is in order. This is confirmed by the failure of SPX and DJIA to make new lows today. We have finally seen the popular tech names (AAPL, GOOG and RIMM) break down.

Although I am rather uncomfortable with my long equities positions, history has shown me that it is often the times that I am most uncomfortable that the portfolio performs well. Comfort is gained from going along with the masses, which is usually a bad strategy. A meltdown is impossible to rule out, but is the low probability outcome. But risk management is very important, of course. And for that reason I have not made large bets -- cash levels are still high, and the new position is non-leveraged.

BTW, I am kicking myself for not increasing my short gold position, which I seriously considered adding to a few days ago. It is up about 30% since then.

MARKET POSITION: I still have not got around to accurately re-calculating my positions yet, but it should be close to: EQUITIES: Long Cdn S&P/TSX (2 units); long SPX (2 units); long EAFE (2 units); short gold sector (1 unit); CASH: (5 units)