Current Portfolio

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Happy Small Cap Halloween $IWM

Markets are continuing beautifully with small caps taking the lead on this second day for the first sub-Small Cap Power Period of 2014. My portfolio is working nicely although volatility is still keeping its hands in the cookie jar. This move higher has been as fast and furious as was the move the lower, once it stables out for a couple of days, I expect that volatility will collapse further. I am happy with my current positions and I will take some partial profits in ESI since it is up over 10%. Here is the IWM chart. 



Seasonal Trading in 2014 - The Small Cap Power Period

For a several years I have written about this seasonal phenomenon that is used by several hedge funds to gain an edge. Tomorrow (Thursday) is the first buy day of the first of three 2014 "sub-periods that occur in the fourth quarter; (we call them 'power periods') which are especially potent and consistently positive. They are:

Power Period #1: The last two trading days of October and first two trading days of November

Power Period #2: The last six trading days of November and first three trading days of December

Power Period #3: The last seven trading days of December"

I first read about this some years ago as it is described by AlphaIM for their Alpha Bonds Strategy. They use index funds that give them a beta of 1.5. Quotes/italics in this post is the work of Alpha Investment Management. There are plenty of ETF's out there that track the small cap index fund - The Russel 2000 or the RUT. The directly correlated index fund that can be traded is $IWM. I have previously used $TNA successfully which gives a beta of 3x. This strategy can also be played by finding bullish patterns of small cap stocks that are likely to have a stronger edge during this period. In my experience, it is best played with all three sub-periods.

"These three periods exploit other lesser known "sasonal factors" in addition to small cap dominance at year end. For example, it is well established that the market does better during the month-end and month beginning period than other times. Also, the market tends to produce above-average returns around holiday periods (Thanksgiving and Christmas).

AlphaIM has been tracking these statistics since 1979. Over the past 35 years, "the 1.5 Beta Statistics shows that the two historical losses have been minor while the average trade has generated gains of 3.2%. Overall, the three power periods have produced an average gain of 9.6% per quarter while exposing assets to market risk just 8% of the time each year.

We know of no other market-based factors which come close to delivering this kind of return with such unerring consistency.

Disclosure: Past performance is not a guarantee of future performance. The Russell 2000 is an index and cannot be used in actual investing. Index funds which replicate the index may not produce returns exactly matching the index. The data presented does not take into consideration fees, expenses or trading costs. Hypothetical or model portfolios also cannot reflect management decisions which may deviate from the methodology presented."


Daily Report from Carmel By The Sea $SPY

Markets are hanging in there finding some sideways action to let the 8 ema catch up. Crude oil is still low but seems to have found support in the $80 area as it bases out. I don't expect it to move higher very quickly, but as long as it doesn't go much lower, I think we are in good shape.

The action in the indices will set up some nice entries and was the action I have been looking for. I notice stocks are starting to set up better for entries.  SPY is consolidating it's move higher and crunching the 8 ema below with the 50 sma above.

Meanwhile, I am holding what I have and setting hard stops today as I spend the day with my family as we have taken a couple of days off together. I will set hard stops for today and will update them tomorrow. I have posted the stops on my front page portfolio which are 17.83 for TOUR which is continuing to set up nicely, and 34.23 in TRN. TRN took a dip this morning but has recovered nicely thus far. The stop is below the morning's low.

Here is the SPY chart.



The Daily Report- Rally of Fear $SPY $VIX-X

Indices are rallying nicely but volatility is holding ground at fairly high levels. Plenty of stocks are putting in higher prices on earnings but others like AMZN are taking a hit on missed expectations. These divergences in earnings coupled with a continual release of bad news are keeping fearful market players on their toes. While my timer is green, I have not found any set-ups that I wish to enter in equities. I will hold the positions I currently have as they are holding their respective 8 EMAs.

It's a good time to sit on hands.

The Vix chart has taken a breather from its recent collapse, but volatility is still at a high level. The CNN Fear index still reads "Extreme Fear" even though it has climbed significantly from where it bottomed last week. Here is the Vix chart. Note that it is not dropping with today's rally. I have no doubt that it will collapse as fear can only stay elevated for so long, but I have no way of knowing how long it will take to get there and for the moment volatility is just going sideways. 




The Daily Report - Setting Up $SPY

Yesterday's pull back in the indices allowed stocks a chance to start setting up again. It is difficult to enter stocks when they are putting in a "V" shaped recovery. I prefer to wait for a pull back and inflection to invoke bullish patterns like flags and JHooks. Price does not move a straight line and until those patterns pullback and inflect, they are potentially bear flags.  Today I added two positions to my portfolio and I continue looking for set-ups that match my needs for entries. Here is the SPY chart.   



The Daily Report - My Timer is Green $SPY

The reversal to the upside in the indices has been enough to turn my timer to green but I still have not added any new positions. It is not for lack of a bullish environment though, it is for lack of finding the setups that will keep the odds in my favor. I am still in 80% cash. Stocks were beaten down fairly quickly and as such most set-ups find themselves under previous support now acting as resistance. I am looking for strength in liquid names to build up my portfolio in the coming days. The SPY chart is very strong here and may take a breather while components set up for moves higher. Here is the SPY chart. 




The Daily Report - The Process of Bottoming - $SPY

Markets appear to be making a turn after flushing out the bottom over the past two days. Indices are up significantly today while working on their respective 8 EMAs.

After leading the charge the past couple of days, IWM small caps are holding just above the 8 ema while letting the other indices catch up.   SPY, DIA and QQQ are working on getting through that level, but they are not there yet. A close above the 8 ema in indices along with stocks going in the right direction on Monday morning would give me a green light to go long stocks. However, indices may not get through that level today and may need some more time before they are ready to confirm a green light. Bottoming can be a process and I must wait for confirmation before buying into it. As such, my timer is not green yet and I am still hand sitting.

Here is the SPY chart.



I Did Say Correction $SPY

There really is nothing else to say here. Market is in a correction as I highlighted in the title of my post yesterday. I am wearing my bear suit and hold a large cash position while my XIV sits in the abyss. Markets continue going lower on bad news in the global economy, oil deflation and fear of Ebola. The SPY is down nearly 10% from it's high and over 6% just this week, and it's only Wednesday. The CNN fear and greed index is at zero. Can it go negative? Are we on the verge of another 2008 type crash? It's hard to see that right now as we certainly don't have the bubble we had then, but it is clear that hedge funds are liquidating on volume. I can tell you with a fair amount of certainty that there will not be talk about rate hikes anytime in the near future. I even wonder if the Fed will stop tapering.

Is this overdone? Of course, investors are emotional creatures who give in to fear easily. There is not even discussion about good earnings reported by many companies. INTC, for example, should be up today not down.

Most of the news is not new. We knew Europe was in trouble. We knew about turmoil in the middle east. But when you combine all the bits and pieces that attribute to the fear (oil, Europe, China, Ebola) after a stable upside for a few years and the regular calls for a market top, perhaps this sell off was inevitable when you study it from a psychological perspective. In any case, the trend is down. If you are trading, trade predominantly to the short side, otherwise, cash is your friend and there is nothing wrong with sitting on the sidelines and waiting for this to settle out if you are not as comfortable with shorting. The good news here is that a real correction such as this, will allow for a a real rally from the bottom. There will be money to be made with patience. Remember, embrace the bear and don't fight the trend. 




The Daily Report - Afternoon Update - Market in Correction $SPY $XIV

A Correction has definitely taken root in the markets and I have been wearing my bear suit for a couple of days now. The only position I hold is XIV (short VXX) but I definitely jumped the gun on that trade. I intend to rethink my strategy for shorting volatility to keep myself from sitting on a position this far underwater. My exception to the rules have left me in a foolish position.

That said, the only time I have lost money shorting volatility was in 2011 and I noted after that if I had held on, the trade would have been profitable. Why? Because volatility always collapses. It has to,  but it can stay volatile for sometime longer than I would like to sit in a position that is underwater. I am not worried about it which is why I am still holding it but that is no excuse to break my rules. I should have closed it early on and waited for a better entry.

As I watch markets bounce today, I note that SPY is either putting in a relief bounce to work off oversold conditions before it heads lower or it is finding support with volume at price from this past spring and putting in a bullish harami before it recovers. Either scenario is possible and so I am just waiting it out.



The Daily Report - Market Update $SPY $DIA

Markets are continuing to the downside. The 200 day sma is a clear target for the DIA as it has regularly found support there over the past year. In SPY, that 200 sma now fully coincides with the August low so again, that is the level I am looking to hold before I zip up my bear suit.

The tech industry has been hit hard today due to a message from MCHP's CEO who warned of a slowdown in semis. This has affected tech stocks across the board and TWTR is no exception, so I will have to drop my TWTR before the end of the day unless it recaptures the 8 ema.

As far as XIV, I will wait until Monday to see if the 200 does provide support in the indices. As I have said many times, volatility does and will eventually collapse and XIV will see new highs but if fear persists, volatility can continue to spike for a period of time, however I believe there is a strong case for the bottom to set in. If the 200 day provides support in SPY, it will become a double bottom on the SPY weekly chart with the August low.

On the other hand, there are a lot of correlations to 2011 right now. Congress members hinting of government shut downs and the S&P downgrading France. A volatile couple of months like the ones we saw in August/September of that year could prevail and I will need to take it on the chin with XIV until it settles out.

Here are the daily charts.

dia110 spy1010

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