Momentum Book Update

Wild week eh?  Before we get to the action though, I want to talk briefly about an aspect of money management on the psychological side that few experience.  The momentum strategy I run is at the end of the day a relative return strategy.  I’m not shooting for an absolute return each year of 12-15% regardless of market direction and volatility.  But, I take pride in the fact that there’s no way in hell I’ll ever be riding a market down 20% and saying to clients, oh, well, I only lost 15%, so you should be happy with the alpha I’ve captured for you.  Oh man have I heard that story before, wayyyyyyy too many times, it makes me sick, along with wanting to punch the money manager in the face.  As I wrote last week, managing money is about one thing, not losing it, if you can accomplish that you’re half way there, I’m serious, it’s sounds hilarious but I’m not kidding.

So when you measure your returns to some extent against an equity index benchmark, your relative performance is always in the back of your mind.  I don’t normally pay much attention to it on a day to day basis, except in times of market volatility, both on the up and down sides.  I usually take a good hard look at it each week, which is why I write this post, I’ve always said it’s more for me than it is for any of you.

Anyway, getting to my point here.  An interesting thing happens psychologically when you’ve built up a large amount of alpha in any one year, especially if your absolute return is quite nice as well.  The best way I can explain it is by comparing it to having the large stack at in a poker game.  Now I am far from being a great poker player, I wear my emotions on my sleeve which means that I have to dress up in a parka and grandma’s sunglasses to keep people from knowing I’m holding a flush, it really is quite sad how easy to read I am.  Anyway, when you’ve got the big stack, you can play a little bit looser, take a few more calculated risks, use your intuition a little more, and stay in that hand until the river when you’re looking for that straight.  Trading against a benchmark is very similar.  With a big lead like the one that I’ve built, I’m able to do two things.  If I want to go to cash, like I’ve done, I don’t have to worry about the market taking off without me, if it does, so be it, I give back some of that alpha on the upside while maintaining my absolute return.  This is similar to poker where as the big stack, if you want to sit out a bunch of hands and let other’s fight it out, you can, and maybe you lose a few bucks in blinds, but it’s relatively insignificant.  Being able to go to cash and not worry about losing alpha is sooooo important.

So when I got back from playing hockey last Sunday night and saw the futures were flying as I was in cash, I sighed, and went to bed.  I woke up the next morning and we were up 4% by the open, I had just given back 400 basis points of alpha and the market hadn’t even open yet.  If the last few months had gone differently for me, my mood might have been much worse not being involved on the long side.  But because of the cushion I’ve built, I was able to wait it out.  On Tuesday I decided to get a little involved on the short side, I felt the risk reward was too good to pass up, the technical patterns were all super bearish, and fundamentally I believe this market is broken now.  Events like the one which took place two Thursdays ago are huge warning signs.  I took short positions in the Retail ETF $XRT and Banco Santander $STD, a Spanish bank.  The short position in XRT represented about 20% of my capital, and the STD position about 10%.  So I was 30% short and willing to give those positions until this coming Monday to play out, or see a large volume move back up through the head and shoulders neck line we broke down from in the indices.  My short positions squeezed me a little mid week as I began to bleed alpha, but the rising wedge patterns in the indices were classically bearish.

On Thursday afternoon the market rolled over on high volume and broke from its rising wedge pattern.  At this point I should have added more to my short positions with stops about the high of the day, but didn’t.  On Friday XRT and STD collapsed along with the rest of the market.  I covered half my STD on Friday for +11% or so, and 1/4 of my XRT for +2%.  Given the large allocations to each position relative to what I would normally allocate on the long side, these were pretty big wins for me.  Intermediate term, I believe XRT trades down to 37 to test a MAJOR level of support.  If it breaks through that, watch out, we could be in complete collapse a la 2008, but I doubt that happens.  I’ll peel a little more of my position off down around 39.80 and hold the rest.  I’ll also peel a little more of STD off around 10 and hold the rest, like an option, in case Spain completely collapses and the bank goes to zilch.

Just remember that I hate playing the short side, I hate it from a trading perspective because stocks don’t trend down well, down equity markets are volatile and that leads to getting shaken out of your positions.  Stocks collapse on a short time frame, then squeeze hard.  If you’re trading from the short side and you have profits, TAKE THEM QUICKLY.  The same is not true for commodity markets, they can trend up or down nicely, this is in my mind because commodities have no intrinsic value.  The other reason I hate trading from the short side is because every day you’re short you come in hoping that the world is going to end so you can make a few bucks.  It’s really a terrible way to live, that I need to hope a certain bank I’m short collapses, that the Spanish economy goes to shit, that the riots in Greece continue.  I hate it, and I don’t know how some large fund managers can live with making such large bets, like Chanos being short China, how does he sleep at night hoping for a collapse.  After reading The Big Short, it was even more obvious to me that this type of trading is not healthy for a person’s psyche, the characters in that book who were cast as the heroins, in the end were not only all reviled by their peers for having made money as the whole economic system collapsed, but they suffered emotionally from betting on the downfall of the system.  Cudos to them for being able to hold their shit together long enough to see the trade through, but I don’t believe I’ll ever have that mentality.  A trade is just a trade, until it becomes more than just numbers on a screen for a few days or a few weeks.

For the week the momentum book lost 60 basis points of alpha, but picked up 180 basis points of absolute return thanks to the short positions.  I also exited my position in gasoline on Thursday for a loss of about 6%, it was a small position, and I believe energy may be entering a bear market, I will write more on this later in the weekend.

You will not see the short positions posted in the spreadsheet on the momentum book because of the fact that when I designed the excel spreadsheet I did not do so with the ability to calculate short positions, and frankly, I don’t feel like wasting the time to rework it.  I have added them off to the side and they are included in the performance numbers shown, you can view them on the trading book page of my blog as always.  In the book, I still hold 450 shares of XRT at the entry price of 41.74 and 400 shares of STD at an entry price of 11.68.

Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security.  The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.


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