Bookkeeping: Weekly Changes to Fund Positions Year 2, Week 51

on July 27 2009 8:19 AM

Year 2, Week 51 Major Position Changes

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 86.4% (vs 70.2% last week)25 long bias: 11.0% (vs 16.3% last week)6 short bias: 2.6% (vs 13.4% last week)

31 positions (vs 31 last week)

Weekly thoughtsWow, just realized we are just days away from finishing up our 2nd year, and beginning year 3 - cannot believe it.

Let's go to the charts - we'll start posting NASDAQ since it's the golden child and houses the obvious go to sector for the next bull market: technology. I say that tongue in cheek as technology is mostly a bunch of super cyclical businesses that replace widgets with silicon widgets and therefore have a cachet. Real secular growth? Only in a few pockets folks.

There is nothing bad to say of either chart other than they are quite extended away from any meaningful support level. On the S&P 500 we have (a) broken over both the 200 day moving average (exponential in this case unlike the simple a month+ ago) and (b) broken over our double top with early June yearly highs. As I stated earlier this week we now have to lean bullish until we come back to retest the breakout level (just under S&P 960) and see how the market acts. Further, until a clear break back below the 200 day moving average happens the trend is up.

On the NASDAQ the picture is even better - as we add the golden cross; the 50 day moving average crossing over the 200 day moving average to the S&P 500 picture.

Flies in ointments? #1 The indexes have broken quite a far distance from any major support line and hence are overdue for a correction even if mild #2 Both charts now have a serious gap in them - for the S&P 500 906; for the NASDAQ a very easy to remember number 1800. At Friday's close to fill the gap the S&P needs to drop 8.4% and the S&P 7.5%. I am fully confidant this will happen, it is just a matter of when - maybe in 1 week, maybe in 10. Usually sooner rather than later on an index (as opposed to individual stocks where it can take years) When that gap fills on the S&P 500 our chart formation will not be quite so positive looking as we will have broken back below the 200 day moving average. On the NASDAQ we'll still be in good shape unless the 200 day moving average jumps over 1800 in the time between now and when the gap is filled.

Let me talk a bit about my positioning. For the portfolio we had an interesting week; we entered Monday with a quite hedged book with shorts we put on in the closing minutes a week ago Friday in American Express (AXP) and Capital One Financial (COF). That was 5% of our 13%ish short exposure; another 3% short in Prologis (PLD) [commercial REIT]. That was balanced by a bevy of long positions, most underweight in size. So we were net long but not by much. I started letting go of some of our big winners early in the week, while buying an insurance put with 3% of the portfolio that would do well if the S&P fills that gap by mid August - the most we could lose was 3%, the most we could make was many times of 3%. We added 3% short in BHP Billiton (BHP) that we had exited long Tuesday (mostly), and immediately went short. I had to exit 95%+ of my credit card short position because they were going to report Thursday and I don't want to be heavy long OR short going into any earnings report.

So by Wednesday we were back to about neutral (that was the only red bar on the S&P 500 chart this week) exposure - letting go of some sizeable long positions and punting 5% short exposure via credit card companies, but replacing it with SPY puts and BHP. We exited a few other long names mid week, mostly for protection from earnings knee jerk reaction reasons and then the Thursday morning breakout happened. There was not really any fundamental news story to drive the market up that morning (excitement over EBAY earnings? hah) ... and if you don't follow technical analysts the ferocity of the move would make little sense. I continue to believe this market has moved away from one centered on fundamentals, and more on technicals... along with one driven by computers. I've been on that horse for a year and a half and the mainstream media is finally picking it up (more on that in a piece later).

Anyhow, Thursday morning Mr. Obvious said it was a breakout [Mr Obvious: Looks Like It's a Breakout] once we cleared that double top with 1st half June 2009, and I took a good sized chunk of cash and went heavy into some S&P 500 calls around 10 AM. I talked about this strategy of trend days [Trend Days] 2 weeks ago and frankly if you get 1 trend day right a month, you can sit on your hands the other 29 days. Normally on trend days I allocate a respectable size portion of the portfolio (5 to 10% the past 5 weeks) of the portfolio on an intraday play. This time ,since it was a potentially serious move I went over and above with a 16% allocation on SPY calls. (SPY being the ETF for S&P 500). By 3:00 PM we were out in glutenous fashion after a 2% gain on the S&P 500 between 10 AM and 3 PM; never breaking the trend and sitting on hefty 40%ish gains with about 1/5th of the portfolio. Concurrent to that our 2 major shorts (6% of the fund) at the time (BHP and PLD) stopped out for miserly 4%ish type of losses that morning. So in terms of risk adjusted reward - protecting most of the portfolio in cash, but reaching for reward - it was a home run day. Even with the 3% allocation insurance puts we had bought Monday, losing 70% of value this week (currently down to a less than 1% allocation of course!)

Obviously chasing 'trend days' won't be a major part of the core strategy but when the market is handing out free money I won't say no. So for now, we still have huge cash exposure and a tiny amount of short exposure - half of it is actually betting against the long bond via a short, not even equity related. If the market drops from here - we're good, 80%+ cash. If it increases in a linear fashion we can try another trend intraday trade long. If it increases in herky jerky fashion we will lag in the near term since I don't want to chase a market that everyone is suddenly ebullient over - even if S&P 1000 now seems a foregone conclusion. We're trying to pick and choose some individual names of high quality that are showcasing strong earnings - i.e. we bought RFMD Friday post earnings when it was up 4% and it ended the day +15%! Wish I had bought more.

I see chart after chart very extended and nowhere near any support - chasing as we did with RFMD (and TQNT) Friday is the only winning strategy right now. That is great while it works; but when it reverses - since you have an absence of support; things tend to implode quickly. I am more than happy to rebuild most of the long positions we have sold off the past 2 weeks, but not going to chase them up 25-50% in 2 weeks. [Review of Recent Cutback Positions] Especially since we are beating the market by a large margin - no need to take outsized risks although you can almost hear the sweat pouring off foreheads across the country, by those institutional money managers who are under invested. Remember how quickly things change - not a fortnight ago we were coming into a Monday morning where the S&P 500 was about to break down and fear of head and shoulders were rampant. Now, the world is a sanguine place of butterflies and rainbows. I'll continue to monitor individual earnings reports and try to pick some out performers to add to the imminent addition list - on a pullback. Our list is hampered because I don't want to add positions ahead of their individual earnings reports. Meanwhile we're waiting.

2 name of interest right now already in the portfolio are Allegiant Travel (ALGT) and Quality Systems (QSII). The former reported this week and the market initially balked, but it is bouncing to fill a gap (upward in this case). We cut most of our position but I am monitoring it as it tests $44.50 area to see how it acts from there - fundamentally, I continue to like this story.

As for QSII strangely it has not participated in this rally - that is bearish. On the other hand it has become a coiled spring trading in a narrow range between $52 and $55 for a period of 12 days. The longer a spring is coiled, the harder it breaks. While it gives me great pause to watch a stock not participate in such a strong rally, I'll be looking to give this some extra exposure if it breaks upward, as it right at the top of its recent range. A relatively tight stop loss can protect us to the downside.

As for economic news - there is a lot this week. Just remember if its bad news it's backwards looking; if it its good news on the other hand, 4 hours of CNBC coverage. New home sales are Monday and Case Shiller housing index on Tuesday. As with every housing report we'll react in surprise that June is better than May which is better than April - which happens every year. We'll continue that charade until seasonality stops kicking in I suppose. The very volatile durable goods order report is Wednesday - remember if its BAD its volatile and hence we cannot attach any significance to it, however if it is GOOD, celebrate it by buying many stocks. Friday is our Q2 GDP print (first pass) - as with all US economic reports nowadays there are so many adjustments it is not worth parsing. We just have to be aware of it because of the knee jerk reaction to it... but just remember the logic of if its bad it doesn't matter - it's in the past.

Aside from that, it's another heavy week of earnings... by the end of this coming week we'll have well over 300 of the S&P 500 companies done with and soon be moving to the smaller and domestic based companies who rely more on Americans versus Chinese. The main hope is they fired enough Americans to beat expectations to they can continue the joyous path that their more international brethren have laid. Based on what I saw Friday after not so good reports by Microsoft (MSFT), Amazon.com (AMZN), and American Express (AXP) - I guess we can add earnings to the litany of things that don't really matter much anymore by a market driven by program trading guided by computers from a small cabal of financial institutions. Heck it has become so obvious even the New York Times is now printing articles on it. Since I've been talking about the effect of HAL9000 on the markets almost since day 1 of the blog, I am heartened to see this is yet another issue I am not the crazy old man on the bench with his whiskey, dreaming up things. That said, this high frequency trading that has exploded as an issue in the past few weeks is just a new layer of HAL9000 - as I explained through 2007 and 2008 I don't know half the things going on behind the scenes. HFT? News to me. All I know is I've been around since mid 90s, learning more each year and I've seen things increasingly acting different the past 2 years [Aug 6, 2008: Computers Run the Stock Market - Why Your Stock Doesn't React Normally]

For those who have been around a while you know I constantly refer to the supercomputers at the hedge funds controlling things or at least being the marginal decider of prices. As a participant in markets for a while now I have to say some of the things we're seeing the past year or so are beyond compare.

My thesis has been the quantitative hedge funds really have changed the nature of the markets and trading. The most successful and famous is Renaissance Technologies, led by Jim Simons. The track record of success there has been fantastic, and it's all computer driven. Success begets copy cat behavior - and a flood of funds trying to replicate the grand chief have been born. Hence when I refer to algorithms dominating trading, I am speaking to this bevy of pooled capital, all doing (or trying to do) almost the exact same thing and taking stocks farther (both higher and lower) than makes any logical sense. And this, in my opinion, is simply crowding out people who use fundamentals or logic. The machinations of August 2007 really was the first time this hit me in the face as I was seeing action that were in no way explainable by any reasonable data point.

So even without specifically knowing what is happening in the dark crevices of the market, simply by watching day in and day out for many years, I could tell things have morphed to a different feel (and action). Now in retrospect as these things begin to dominate the markets, they are being exposed. Unfortunately this change has made a lot of what you learned the previous 10+ years mostly moot.... I am adjusting on the fly to think like an algorithm. If you can't beat a market regulated by a toothless SEC and captured politicians, you have to join it.

Boo Yah - it's not your daddy's stock market anymore. Another financial innovation that is improving liquidity and making the market even better than before. For a few highly placed firms at least.

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