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)

FINALLY!

The day that I have been waiting for, for so long, finally came today. The big downside wash-out, that has been eluding the markets for over 1 year, arrived. I will not go into major details as I am very short on time. Even more important than the markets -- my son was born this morning. I am extremely grateful that he and his mother are both healthy and happy.

I closed out ALL of my short positions except for my short gold equties position. I sold the short EAFE position very early and then the rest in the last hour as the indices slipped. I made huge profits on the short energy position. We did not exactly get to my 1100 target on SPX but it was close enough. And close is good enough in these situations.

Gold rallied today as fear was very high, but all other commodities have collapsed, and I think it is just a matter of time before it falls. It is now very 'overbought' and deflation fears are rising.

Some one (or some people) managed to forced SPX down 20 points in the last few minutes of trading. Will be interesting to see what happens tomorrow. I see two options: 1) the market open sharply lower but then rallies through the day, closing much higher; 2) the market opens sharply higher, then falls, but today's lows hold. I would be VERY surprised to see the market close lower tomorrow.

For that reason, I went long S&P/TSX and SPX indices near the close today. Even if I am wrong about tomorrow, today was a major day of fear. It's unlikely to last. I see the markets rallying for the next month or two, maybe even longer. In the short-run, the time to be aggressively short is past.

MARKET POSITION: I Have not been able to accurately re-calculate my positions yet, but it should be close to: EQUITIES: Long Cdn S&P/TSX (2 units); long SPX (2 units); short gold sector (1 unit); CASH: (7 units)

Short energy and gold

(I am late with this post -- I made the trades several days ago.) As I mentioned in my last post, I am negative on energy after the quick snapback in oil prices last week. On Monday I purchased some HED, which I sold a couple of weeks ago at over $20, at a little over $16. There still seems to be a lot of long-term bullishness about energy prices, despite the rapidly slowing global economy. Oil prices over the past few days have been stable but it feels like they are struggling to keep their head up. I except that once the $100 level is breched again we could see oil fall to $80 or even $75.

After much humming and hawing, I decided to go short gold equities too a few days ago. The chart is rather compelling -- the jump up to $900 from $780 marked a rough 65% retracement of the previous decline from $1000. With growing evidence of a global slowdown and no sign that deleveraging is going to halt anytime soon, the short-term fundamentals for gold are also negative. On the other side are risks that gold could jump higher again if the crisis deteriorates much more, plus, with all the money and government spending that is being thrown at this crisis, inflation is bound to become a serious problem in the long-run. But who knows when that might be. In the end, I decided that the short-term factors won out. I think the big OMG moment for gold was last week, and now it will decline again, probably below the $780 low.

On the broader markets, I am starting to get nervous again. As expected, a large proportion of the big rally last week reversed on Monday and Tuesday. Yesterday stocks surged higher on hopes that a bailout plan would be released, despite terrible economic news and a profit warning from GE. I still expect that SPX will go lower before it goes higher, but I am losing confidence in my long-standing prediction of a bottom in 1000-1100 range. There is not a lot of time left -- the bottom should happen in the next couple of weeks (if you look at bear market lows in history, most of them have been in September or October). So I will probably lighten up my shorts again on any sharp declines, and may even look at going long. But it is foolhardy to try and pick the exact bottom.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3 units); short real estate (2 units); short energy (2 units); short gold (2 units); CASH (1 units)

What a week

Wow, that was a crazy week. Equity markets plunged, snapped back, and in the end had slight gains. Fixed income and currency markets were somewhat similar, as were many commodities. My portfolio ended the week with a 3.7% gain, which is not bad given the volatility. At Wednesday close I was up about 12%, but most of that evaporated in the massive rebound on Thursday and Friday. Looking back on the week, I was both unlucky and lucky (let's face it, luck is an important component of short-term returns). On Wednesday evening I closed out my long gold equities position for a nice 25% one day return. Gold looked like a nice buy on Tuesday, but I had no idea it was going to spike like it did. I also closed my short EAFE (EFU) position near the high.

On Friday, I had bad luck. I wanted to re-enter my short EAFE equities position. My first quote on EFU was about 108.50, and after 15 mins of system problems with my broker, I was finally filled at about 113.50. This is about $20 less than I sold the same position for earlier in the week, but it also turned out to be the high for the day, as the price slowly slid to about $105. The result was even more annoying as I broke one of my rules -- do not trade in the first hour after the markets open. Sometimes lessons have to be re-learned.

Overall, however, I amhappy with how my portfolio performed, and I am happy with my positioning for next week. Apparently, Thursday/Friday's rally wasw the biggest gain in the DJIA since October 1929, in the middle of the great crash (in 1929, the market subsequently sold off another 25% or so). Classic bear market rally. Although the bulls are back in the limelight, after that sort of rally, I do not see the markets gaining again this week. The technicals are also still bearish. SPX bounced nicely off its previous support at 1260. MACD is still negative. The only two sectors up this week were the two that were most oversold previously -- energy and financials. Despite the massive gains on Thursday/Friday, neither day had >90% of stocks up. Volume was not great.

The fundamentals also remain the same. Sure, we are not going to have a financial meltdown now, but that was never priced into the markets. The economy is just as bad as it was last week, and the government/Fed bailout is not going to have much impact at all in the short-term.

To be clear, I am not predicting a crash, and we may not see a break of last week's lows. But the market is almost certainly going to go lower again before it moves higher.

I am generally happy with my positioning. I -may- re-enter my short energy equities position Monday as the stocks have rallied considerably over the past few days. But, at this point, I do not feel particularly strongly about anything else.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3 units); short real estate (2 units); cash (5 units)

Not as fun as it should be

This gradual collapse in the markets is not as fun as it should be. It is what I have been predicting for months. Yet now that it is happening, I am finding it stressful. Portfolio performance continues to be very good -- it is probably up about 10% over last week. Yet as I am still holding many positions, and the market is very volatile, it is too early to consider these gains as permanent.

After yesterday's swoon, the market opened today rather weak and I liquidated my short energy equities position at a good price. Oil got close to 90$/barrel, which was my target price, and the ETF spiked up through its previous high. Later in the day, I purchased the gold equities ETF HGU (again). There were a few reasons for the purchase: 1) it had fallen significantly from the price I was stopped out a couple of weeks ago. The chart was also good -- a bottom last week followed by strong gains, and it did not get near its previous lows yesterday as the broader market sold-off. 2) The same reason I bought this ETF last month -- risk management. I was worried that the FEd might goose equities again by cutting interest rates, and I wanted a position that would act as a partial hedge for my index shorts. At close the position is uip about 5% from my purchase price, so it has helped in that regard.

Of course, the big remaining question is: when to cover my index shorts? I have been holding on to these positions for what seems like forever (some more than a year), waiting for the market to finally reach my target price range (1000-1100 on SPX). The window is getting smaller -- seasonally, the market tends to bottom in Sept/Oct and then rally into the new year. After today's rally, I am slightly worried that the market may not get to my range this year. On the other hand, today is only one day, and based on the preliminary advance/decline stats, it was a rather narrow rally. Yesterday we had a large, broad drop through previous support. In this case, the technicals are unclear. And there is little value in fundamentals when the market is primarily driven by sentiment.

The best option is probably to gradually reduce shorts on weakness when possible, with a view to having them all closed within the next month or so.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); long gold (1 units); short real estate (2 units); cash (3 units)

The trend is your friend

A lot has happened since I last posted. The weakness in global financial markets that was just beginning at the end of August has spread. The main stress indicators have increased: EUR/JPY now around 151, 2 year US treasuries at 2.2. The CP discount rate is still in the 80 bps range. VIX has increased to about 25 but that is still not signalling severe pain in the equity markets. Clearly there is still some more downward moves ahead. As I mentioned in June/July, I am looking for somewhere around 1000-1100 on SPX as a near-term bottom. That should set-up a nice rally over 3-6 months.

My portfolio has performed very well since end-August, with nice gains coming from EAFE weakness (EFU) and the weakness in commodity prices has finally pushed down the S&P/TSX. Falling energy prices gave a shot in the arm to my short energy equities position (HED), which is up about 60-70% from my first purchase. On that, $100/barrel oil keeps getting mentioned as a 'line in the sand' that should not be crossed. There are still some energy bulls out there, although the numbers are dwindling. I like situations like that. Once the line is crossed, it should lead to a strong, final drop as the last of the weak longs capitulate. I plan to cover at that point, although if I see some good prices early I might liquidiate half the position.

I mentioned in my last post that I wanted out of the long gold equities position. Unfortunately, I did not sell HGU at 17.25 in this portfolio a couple of weeks back due to a technological problem. I decided to wait for the bounce, and eventually got stopped out last week at 14.25 The price is currently 10.60, so I am happy at being stopped out, but annoyed that I gave up a nice profit and ended up with a $1.30/share loss. This was always intended to be a short-term trade. I learned that such trades need to be managed very closely and acted on quickly.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units); cash (2 units)

Performance Aug 2008

Performance in August was good. It was my third consecutive month of positive returns. I am trying to improve the consistency of my performance instead of always shooting for the moon. Moon shooting is great when it works out, but it can be nasty if you are wrong. My little bit of risk management earlier in the month helped out, as the TSX and gold both rose after that point. I am looking to off-load the gold on any strength. I was going to do it mid-week but, alas, I was not able to trade so missed the opportunity. So far the bounce has been tepid, but I expect at least a minor surge before it turns lower again.

As for the broader markets, they have been pretty directionless, as any look at a chart shows. The conditions seem to be building for another leg downwards. Sentiment had a boost with the revised US Q2 GDP numbers on Thursday. There seems to be a growing sense that the US may have dodged the recession bullet. Meanwhile, European and Asian data has been pretty bad, threatening the exports that have kept the US afloat. Mortgage rates are still high due to the problems at FNM and FRE, which should prevent the housing market from recovering quickly.

Some of my favourite indicators are starting to suggest an increase in financial stress. EUR/JPY is below 160, US 2 year treasury yields have fallen by 23 bps in the past month, and the CP discount rate has ticket up a bit. VIX is still low at about 20, however, indicating that the pressure has yet to have too much impact on equity markets (although european and asian indices were weakish this week).

From a psychological standpoint, the market may need to move sharply higher in the near term in order to increase the bulls confidence and shake out the weak bears. This would set-up a sharp decline over a few week period to much lower lows. This is a low conviction prediction, but if the market DOES move much higher over the near term I may increase short positions.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units) ; long gold (2 units)

Hedging some bets

Last week was a good one. Despite the fact that SPX rose fairly strongly, and I have a strong bearish bias in my positions, my portfolio rose in value, reaching its highest point since early March. With this in mind, and with SPX moving higher again in early trading today, I thought it might be a good idea to hedge some bets. The primary reason for my good performance the past few weeks has been the fall in energy and commodity stocks (I am short both the S&P/TSX index, which is heavily weighted towards commodity plays, and the S&P/TSX energy index).

Looking around for a cheap hedge, gold stocks seemed like a good candidate. The price of gold has fallen by about $150 over the past month or so, and gold stocks have been crushed. HGU, the Canadian ETF that tracks gold stocks, has declined by almost 50% since July 14. I previously owned HGU earlier this year, but sold my positions at levels about 50% higher than here (which was tough at the time, as it then went up about 25%, but I feel vindicated now). Although I am usually wary of trying to "catch a falling knife", a small gold position seems like a good way to offset some of the risk that my short S&P/TSX and energy positions might turn around after strong runs. Enhanced risk management is also part of my new strategy. I reduced S&P/TSX to partially fund the purchase, raising a bit of cash in the process.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (3 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units) ; long gold (2 units)

Summer Doldrums

After my best month yet (June), I managed to follow-up with second positive month, making 2 consecutive positive months for the first time. This fact, plus that my portfolio is barely even 12 months after starting this journal may indicate that risk management has not played as strong a role as it should have (although many have done much worse, I suppose). So I plan to try to have a greater emphasis on risk management this year. This will mean more stop losses to ditch losing trades, more closing out of positions when the risk-adjusted return wanes, a greater attempt to find trades where some of the risk is offset, and higher cash holdings in times of uncertainty.

Economic news last week continued to be poor, though not terrible. Internationally, there is growing fear of recession in the UK, some smaller eurozone countries and Japan, and the economies of Germany, Canada, Australia and India appear to be slowing. Even the Chinese are now more worried about growth than inflation. In the US, the initial unemployment claims hit almost 450k, a level consistent with a recession. Q2 GDP numbers were lower than expected and Q4-07 was revised to negative. ISM came in at 50, though the forward-looking components were weak. The employment report was viewed as positive because jobs declined by 'only' 50k or so. The Baltic Dry index is down.

On to the markets: bond yields are rangebound, though down from their peak several weeks ago. Nothing really interesting in the FX markets. Commercial paper spreads remain wide, as is LIBOR. Mortgage rates are about the same as they were 12 months ago before the credit crisis even started and the Fed funds rate was much higher (not good for the housing market). Commodities prices are weak. Oil is $20 off its highs, as are many industrial metals.

The rally in equities may have petered out. There was a failed attempt by SPX to break above the 1290ish mark set 2 weeks ago. This is negative as bear market rallies need to maintain momentum, otherwise they die. I took a quick look at most of the rallies following sharp declines over the past 5 years or so (using SPX). I did not see one where the rally stalled for longer than 5-6 days. Pull-backs were always very short. There is nothing scientific in this, but it suggests that we may not be seeing 1325 anytime soon as many pundits are suggesting. Many people see April-May as the model for the current rally -- a gradual move higher over 2 months or so. The market rarely repeats itself so cleanly.

I continue to believe that we will see a major market bottom in the near future, either this month or early next. This may be followed by a brief rally and a re-test of the lows, and then a sustainable rally for a considerable period. One can then assess whether the global economy is out of the woods, or if their is scope for further declines. As there have not been any changes in my strategy, there have been no changes to my portfolio.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units)

Waiting again

After some excitement last week, it is back to waiting again. Waiting for the markets to finally collapse. Last Tuesday there was a brief moment when it looked like it might happen, but then the markets pulled back from the brink and rallied fairly hard the next 2 days. Despite my concern that a bounce was near, I elected not to cover my shorts. I had set a few indicators that I wanted to see before I covered (sharp falls in 2 yr note yield and EUR/JPY, VIX above 32/33, SPX near 1100). And although all of them started to move in the right direction on Tuesday, they were never close to what I was looking for. This shows that there was relatively little panic amongst institutional investors, suggesting that the bottom is yet to come. I mentioned a few weeks ago that I thought the bottom would come in August or September, I am going to stick with that for now.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (2 units); short real estate (2 units)

Strange

More of the same in equities today: open higher, grind lower through the day, and another new low at the close. What I find strange is how little volatility there was (relatively speaking). With the Indymac and GSE announcements, I expected either a strong rally or a collapse. Difficult to see this trend going on for much longer -- it seems that everyone is bearish (especially on financials). Either there needs to be a bounce to clear the oversold condition, or there needs to be a collapse to bring valuations to a more reasonable level.

Although I am increasingly uncomfortable with my short index position, I am not going to cover unless there are either some signs of capitulation or valuations get to a more reasonable level (say, below 1100 on SPX). I also took advantage of the strength in energy equities today to add one unit to my short energy position. As mentioned before, it seems that the price of oil is now squeezing the global economy so badly that demand is suffering, so the price should decline soon. However, if it does go higher still, the position is well hedged against my short index positions, as an even higher oil price would put severe downward pressure on global equity markets.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (2 unit); short real estate (2 units)

Classic Bear Market

Equities have been in a classic bear market the past 6-8 weeks. Sometimes jumping higher, investors constantly waiting for a bounce, but prices gradually moving down, down, down. It is amazing that SPX is down about 200 points from its recent peak and still there have not been any days with drops of 3% or more. On the contrary, whenever the market does drop a lot intra-day, it usually recovers some or all of the drop by the close, just to keep people in the game. There have also been lots of the classic bear market pattern of higher opens and lower closes.

Performance last week was good; portfolio gained 2.7% vs. losses of about 2% on both SPX and the S&P/TSX indices. However, the portfolio has still not re-gained its level before the March lows. Looking at some past trades, the decision to clear my long gold position my probably correct but clearly poorly timed -- gold shares have since rallied nicely. I am happy with the short energy position and may add to it on a pull-back. The short real estate position has finally recovered to close to the purchase price, and should do well from here.

Economic news was pretty light this week. Initial claims pulled back but the previous week was a holiday and the non-seasonally adjusted number was about 400k. The trade balance improved, which some people saw as a positive but is pretty negative from my perspective -- weak imports mean weak domestic demand and lower exports from the rest of the world. Consumer sentiment was more or less unchanged at very depressed levels. The decision by the regulators to close Indymac will certainly have repercussions for the US housing market, given that the company was the 3rd largest mortgage company in the country.

In other parts of the world, the BOE remained on hold despite an economy that appears to be on the verge of recession. Note that sterling and euro yield curves are very slightly inverted at the 1Y/10Y levels, indicating a high probability of recession. China export growth is decelerating, which should be no surprise given slowing demand in the major developed economies. The Japanese economy has also been producing some weak figures, but I think that the return of -inflation there should mean higher asset prices over the medium-term (a good trade to consider after global equity prices fall a bit more).

I have been short equities for a while now, and my faith that the market was always going down did not waver much -- until now. This is for a number of reasons: 1) Sentiment is starting to get pretty negative. It seems everyone and their dog is a bear now. The news on the economy is getting bad, and a recession is starting to become widely accepted (again). Those people who think the market may go up are only talking about a short-term bounce. 2) short interest is very high by historical standards (though this is not as objective a measure as it appears on the surface). 3) the market has been oversold for a while. In addition, there might be a post-Indymac bounce just as there was a post Bear bounce in March, plus there is the rumour of the Treasury injecting funds into Fannie and Freddie Monday morning that should alleviate concerns there for the short-term anyways.

On the flipside, there has still not been a real capitulation. No large down days in equities, JPY/EUR is strong at 169, and the 2-year US bill closed on Friday at 2.58, hardly indicating fear (although treasuries were supposedly weak due to concerns that the government would have to take on the GSE's liabilities -- these seems extreme). VIX has remained comfortably low, again closing well below 30 (although this signal's value may have declined significantly since everyone appears to be watching it to time a bottom -- e.g. Bloomberg story last week). Finally, valuations are still much too high. As I mentioned last week, SPX aggregate earnings are probably about $70 right now. Assume a typical market bottoming p/e of 12 or even 14 would put the index in the 840-980 range.



What is needed is a steep enough decline to bring valuations and expectations down and also knock oil off its pedastal. This would probably set-up a nice rally that could last for 3-6 months, if not longer. Although a bottom in August in September still seems the most likely scenario, there is the possibility of a major decline in the next few days given the recent events. I plan to watch the price action closely to try an anticipate if it is worth taking some money off the table, if only for a short period.


MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (1 unit); short real estate (2 units); CASH (1 unit)

Performance to 4 July 2008

Quick post. On performance, June was my best month so far, but this was off a terrible April/May, so does not account for much.

On the markets: equities globally are down, a lot in most cases. Many people are calling for a bounce here, based on three factors: the markets are very oversold, markets have touched a few important technical lines (e.g. the Jan/March lows on SPX), and general sentiment seems to be getting pretty bearish again as investors realise that the US probably has NOT escaped a recession.

I agree with all of these points, yet I still do not see the conditions necessary for a sustainable move upwards. For me, the most important indicators are those that point to a high level of concern or panic, and I do not see that yet. Vix is still in the mid-20s, the Yen is softish, there has yet to be a 3%+ down day nor a large downside gap at the open.

I remember the old trader's maxim: do not sell a stock just because it has gone up. I also remember that over the past 6 months, there has been many times that the market looked like it was very overbought, and then it went higher still. I also remember that in bear markets, the last few days/weeks can account for over half of the fall in prices.

The combination of factors weighing on this market are very strong: housing crash, credit crunch (which spreads indicate is still with us), a weakening economy (unemployment up 1.1 pp over the past year), and ridiculous oil prices ($140+ last week). And valuations are not reflecting this. The P/E on SPX is currently a little over 17. Given the poor earnings outlook + bouyant (if not rising) inflation, the p/e should probably be more like 14, if not 12. I remain short.

There has been no change in my positions but I have re-tooled the weightings to reflect changes in market valuations.

MARKET POSITION: EQUITIES - short SPX (5 units); short S&P/TSX (5 units); short EAFE (3.5 units); short energy (1 unit); short real estate (2 units); CASH (1 unit)

Orderly slide

This recent slide in the equity markets has been perfect. Fairly steep, but orderly, gradual. No large gaps or sudden slides. I suspect this is because many participants are a bit shell-shocked. They thought that the economy avoided a recession, or they thought that it was going to be short and shallow, and therefore the bottom in the market was already in.

There is a large and growing bear contingent on the web, and this worries me a bit. But many of them were talking about a bounce last Friday, and it never came, so maybe they were as surprised as everyone else by the markets over the past 2 days.

I think that as long as the decline remains fairly orderly and VIX stays at reasonable levels (say, below 32/33), we could have an acceleration of the decline over the next few weeks. I am looking for about 1100 on SPX. And if concerns about global growth continue to rise, then commodities should fall, and the TSX could fall pretty hard and fast with them. I am going to watch VIX for a sign to cover, plus for a large downside gap on the open.

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