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)