Momentum Book Update: Into The Wild

Oh it’s going to be a wild week.  Josh Brown walks us through all of the festivities on tap Monday through Friday here.  My two cents, get smaller and know exactly what you are willing to risk.  That means taking a hard look at stops on your current positions and doing all the math, ALL THE MATH, get the exact number down to the penny, just so that you are crystal clear with yourself in regards to what your risk is.  When you are done with that, take a walk around the block, and look at it again.  This week is not about getting it right, it’s about not blowing up if you get it wrong.  I’m not going to go through all the scenarios, you know them, you don’t need me to tell you what could happen with each data point.

The key this week will be to keep your head about you while all others lose theirs.  And in the event that you are wrong, walk away and say good game, next week starts fresh and things will likely be a bit calmer.  I will be raising all of my stops to protect great gains from last week, and won’t be sad to see more positions taken out of my hands by the natural order of profit taking.  This week is going to be about playing the game the right way, as they would say in baseball, good solid fundamental move runners over and play good defense baseball.  This is not the week to swing for the fences with two strikes, we have made a lot of money in the last few months and have a good lead on the market this quarter, there’s no need to take a great deal of risk by letting stops slide and big red P&L days pile up.

So what’s been going on in the book lately, last week was pretty busy.  Turnover was high last week as more positions were closed due either to profit taking or stops being hit.  In general I wanted to take my risk level down and that’s exactly what happened.  We’re now positions 60% long and 5% short with 13 positions in play, one of them ($SLV) a systems trade which will only stop out on a new 2o day low, it is not a discretionary trade.  So I’m really only managing 12 positions at this point, dramatically down from the 18 at the end of last week and 20 the week before that.  As I said, we wanted to cut the number of positions to better manage risk due to what looks to be increased volatility ahead and the result of natural profit taking.

It looks as if we were shaken out of the materials trade the past few weeks, gold, silver, and everything linked to the metals surged this week.  Although materials positions make up about 9.4% of the book, that total is way down from the 25-30% it was a few weeks ago.  I’m a bit confused regarding the materials trade at the moment.  After their pullbacks, gold and silver seem to have resumed their uptrend quickly and forcefully with the dollar failing to rally.  I still don’t believe that we are going to see a major breakdown in the $DX_F below 77 for too long a time and believe it’s more likely we see 80 before 75.  The long term chart just doesn’t favor more downside for the dollar right now, it’s too oversold.  Now that doesn’t mean we can’t go lower, it just reduces the odds, and with the Fed announcement on Wednesday regarding interest rates and quantitative easing, everything is on the table in terms of dollar movement.  All you can do is play the odds and manage risk, isn’t that what we always do?  The scary thing I’m seeing, a lot of gold miners have now set up ridiculously bullish weekly patterns.  Our holding $BVN has already broken out of it’s big weekly pattern, but other stocks like $GG and $IAG have not yet.  Where is gold in 6 months if these patterns play out to the upside, 1,500? 1,750? 2,000?  Who the hell knows, but I can tell you this, it’s going to be a lot higher.  It’s a scary prospect, it would most likely mean dollar death, rapid inflation, and a literal race for real assets around the world.  At some point I believe dollar destruction is going to have a negative impact on risk assets, at some point it becomes an issue, at which price or time is anyone’s guess.

Any way it plays out, we’ve got to trade it, so leave your policy feelings at the door and react to what is given to you, it’s not our job to make the rules, we’re paid by the market to move with them in the right direction.

The book is now very tech heavy as emerging market bank positions have all been cut.  It’s not that I don’t like the bank trade, in fact I really do, it’s just that we had great gains in those positions and it was time to cash in.  $GGAL went vertical in a blow off time this week and I had to sell out.  $IBN is putting in an intermediate term base and I am willing to wait for it to play out before getting back in, this sell was part of the “take risk down” move.  There’s nothing technically or fundamentally wrong with the position.  I also sold out of these positions and did not add others in the theme because I don’t want to be heavily involved in financials going into Wednesday, it’s just not worth it for me after the big runs these names have had and the possibility that traders will be making big moves this week given policy decisions.

So our exposure is in tech, small and mid cap tech to be precise.  The semiconductors are breaking out of a longer term range and I believe there is the distinct possibility that they lead this market much higher.  It’s great to see tech lead, but last week we witnessed a few other industries really join the financials in the “do they matter category”.  Along with the domestic financials which I have screamed to avoid forever, steel is looking very bearish, the homebuilders are going nowhere after building decent bases (if they continue to stall those bases can become big bear flags), and energy still doesn’t look good.  Why is oil lagging so badly behind the rest of the commodity complex?  These are things that concern me with this rally.  The generals (tech) can not move this market higher without the infantry holding their own (financials, homebuilders, steel).  Market breadth has gotten a bit worse over the last few weeks, the leadership is thinning a little and I’m seeing less of that “rising tide lifts all boats” type of market.  This is natural, we’ve had a big run.

All of these things add up to equal why I’m a little more than half long, with tight stops, willing to sell out more if the market tells me to do so.

For the week the momentum book put up 375 basis points of absolute return and 260 basis points of alpha, a great week.  We lead the market by about 285 basis points for the quarter with an absolute return of 670 basis points.  More than the return itself, I’m happy that we’ve stayed with the trend, focused on not being too smart, too wild, or too risky, and have taken profits, rotated well, and generally haven’t seen that much volatility in the returns even after the great run the market has had.  I can only hope those things continue and I’m focusing hard to make sure they do, the returns take care of themselves if you play the game the right way.

Positions sold this week include $GGAL, $PANL, $AGP, $NKTR, $SVR, $LZ, $IBN, and a cover in the $STRA short.  As I said earlier, I had to sell out of $GGAL as it surged this week, it was a classic blow off top.  That stock need a lot more time to set up now and I’m just more interested in looking elsewhere if I want back in to emerging market bank exposure.  We sold the lions share of that position up 57% from the weighted average price paid.  $PANL broke down below the 20 early in the week and we were out before that took place, it was an ugly bear flag.  Now, it bounced hard at the 50 and I was tempted to add the position back on Friday but did not do so in favor of keeping risk down.  It could be a nice buy on Monday with a stop below Friday’s low.  $AGP was very similar to $PANL, $NKTR just could not get going and I got frustrated and sold out for even.  $LZ reported decent earnings but chemical names have been greeted by massive sellers this earnings season.  The earnings move took away good profits and then some, the one loss I’ve had this earnings season.  $SVR got bought out this week, it was our second largest position and we closed it for a 29% gain.

Positions added this week include $DGI, $DMAN, $EBIX, and $SMTC, all tech.  These are fresh breakouts and I’ve got tight stops on all.  We also added to out position in $OSIS.  This is going to be the most interesting one for me early this week.  The company makes the airport body scanners, and with what took place after the market close on Friday with the failed package bombs, the stock could get some significant interest by fast money early in the week.  It is our biggest position and the bull flag setup is beautiful.  Everything points up for this stock.  On a funnier note, I was informed last week by my colleague that I was in a sense, long terrorism by being long $OSIS.  I got a little chuckle out of that, but then gave it some real thought.  I’m not long terrorism, of course not in a traditional sense in terms of wanting it to take place, but also in terms of thinking it will on a massive scale.  I am though long “the fear of terrorism” and have been for a long time.  Our media and politicians have a way of blowing this stuff way out of proportion in the public sphere.  Gone are the days of our government taking care of things the way they need to be taken care of, behind the scenes.  Bad shit happens to people all over the world every day, you can’t stop all of it, and there’s not always someone to blame for every one of those terrible things.  Sometimes, they just win, hopefully it’s not often, but to walk around every day worrying about it is asinine to the 10th degree.  Either way, I’m long $OSIS because we are paying for these machines hand over fist, and it’s a pure play on the fear of terrorism, I’m long that fear, rational or irrational.

$PWER and $IRBT both reported blow out earnings.  Both opened in similar fashion, but closed very differently.  I’m still long both.

This week is going to be a roller coaster, my advice, don’t eat too much exposure before hand or you might puke, figuratively and literally.

Good hunting.

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.

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