"I made my money by selling too soon."
I doubt I made anyone money yesterday. I'd been selling into May's month-end markups last week, and I kicked off the new month making more sales. In the face of a pending US Dollar crisis, I didn't think that the US market could make higher-highs. That was obviously wrong.
The US stock market took continued US Dollar weakness yesterday and did with it what it has been doing for the better part of the US Dollar's recent -12% crash - it REFLATED. Fundamentally, that makes sense to me... in the immediate term.
So what do higher-highs mean? Well, for one, they provide one more rear-view reason for stocks to go higher. Although many market players like to call it something else, the reality is that since the 2002 lows, the US market has been populated with investors who literally buy high with the hope of selling higher. Where do you think CNBC came up with the name Fast Money?
Not recognizing that plenty of investors chase using a one-factor model (price momentum), is plain ignorant. Over the years, I have learned the lessons of price momentum the hard way. Today, I have my own process to measure price momentum within a multi-factor model that considers other critical data like volume and volatility. This isn't rocket science. It's math. And anyone who has proven to be able to make money in the last 18 months is using it, as they should, in order to proactively manage risk.
Risk, as the short sellers of everything Roubini Depressionista low can explain, works both ways. To ignore a +39.3% price move in the SP500 since March 9th and/or to waive it off as "not being based on fundamentals" surely provides the basis for one to have assets under management redeemed. Redemptions also work both ways - and don't underestimate the tail risk associated with an all-out resurgence of the redemption cycle in the hedge fund community where guys are getting squeezed.
I have had my fair share of dances with the bear. I have also been squeezed, royally. But I have learned from those experiences - live ammo leaves a mark. So what does that do for me today? Well, for starters, it makes me wait... acutely address the probability of risk versus reward... and deal with exposures at a measured pace.
In the last few weeks I have made one major move - selling longs. I have taken the number of long positions in the virtual portfolio down from 38 to 13. On the short side, I have done a whole heck of a lot of nothing, keeping the number of short positions I have held in the last 3-months in the range of 8-12. No, that's not a lot of short positions. And yes, that's why I have had such a good 3-month run. Not being short was actually a better call than being long. At this stage of the market's 2009 game, a clanging monkey could perform the former strategy.
Yesterday's game is over - today we are tasked with playing the game that's in front of us - so here are some things to consider in terms of how to manage risk from here:
1. In the immediate term, I have SP500 upside at 955 and downside at 906 - that's a negative risk reward on a very short term duration
2. In the intermediate term, I have SP500 upside at 989 - that's 5% left in the trough-peak intermediate term rally
3. In the intermediate term, I have a significant range of downside support for the SP500 between 828-895 - that's nowhere near the March 9th low
Altogether what does this mean? Well, top to bottom (989 to 828) I see a 16% trading range. And basically it means that, on both sides of the bullish to bearish debate, the BIG moves are behind us, for now...
The Volatility Index (VIX) and the TED Spread (3-month LIBOR minus 3-month Treasuries) are telling you the same this morning, and so is the yield curve. Managing risk towards an October 2008 risk management setup is, for now, plain wrong.
Can these facts change? Certainly. And I'll be right there changing alongside those prices. Every morning we hold an 830AM conference call for our Research Edge Macro subscribers where I go through all 27 factors in my macro model. Market prices are leading indicators, and they dominate that dialogue. There is responsibility in daily recommendation.
Right here and now, the US Dollar moving into crisis mode is what worries me most and I am not alone. Yu Yongding, former Chinese central banker and interviewer for the China Daily, told Investment Banking Inc. President, Timmy Geithner, point blank last night that "I worry about details. We will be watching you very carefully."... "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds"...
This is a game has gone global folks. Big time. Within it, higher-highs should be risk managed as acutely as the US Dollar and Treasury market's lower-lows.
Happy Birthday Dad,
CAF - Morgan Stanley China Fund- A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.
XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on 5/11 to get long the safety trade.
TIP- iShares TIPS - The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.
UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.4170. The USD is down versus the Yen at 96.0850 and up versus the Pound at $1.6397 as of 6am today.
XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser. TRADE and TREND remain bullish. We're wrong so far.
EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear. The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.