Tuesday, March 16, 2010

My Scrappy Little Portfolio

I want to call this piece "My Scrappy Little Portfolio" but after reading it, you might decide it is "My Crappy Little Portfolio".

In a nut shell, my current portfolio is positioned rather defensively. I am short the Yen, long Treasury bonds, short equities, and long crude oil - all via various exchange traded funds.

I have discussed some supporting evidence for being short the Yen, and you can read about this in the following articles: "USDJPY: It Isn't Correlated" and "Short Yen, Long Dollar". The technical picture is best summarized by the weekly graph in figure 1 of the USDJPY cross rate.

Figure 1. USDJPY/ weekly

USDJPY remains above 3 key pivots (purple and black dots) and this is bullish and a precursor of secular trend change. The most recent key pivot at 88.092 is support. A breach of this level is reason enough to believe that the Yen has lived to see another day.

At present my most promising position (although I don't want to jinx myself) is the i-Shares Lehman 20 + Year Treasury Bond Fund (symbol: TLT). Most recently, I discussed the technical picture in this article "Treasury Bonds: The Correct Play Is To Be Long". Here we are betting on the fact that TLT is 1) putting in a bottom; 2) equities are putting in a top and Treasurys will be a safe haven; 3) the "smart money" is long bonds; 4) the "dumb money" is short bonds or long Treasury yields.

In my opinion, this trade is great for those reasons, but more importantly, I have very well defined risk levels, and this can be seen in a weekly chart of TLT in figure 2. The key pivot is at 89.38 and a positive divergence bar is highlighted by the pink price bar (i..e, look for the price bar with down red arrows). The low of this price bar is 89.19. A weekly close below this level -i.e., a close below a positive divergence bar generally means lower prices- and the key pivot point at 89.38 would mean that this trade is a bust. It should be noted that while the major stock indices are breaking out to new highs on declining volume, TLT is not falling part. I am just throwing that observation out there.

Figure 2. TLT/ weekly

For those wondering, I am short US equities in a somewhat meaningful way. My reasoning is this: extremes in market sentiment plus extremes in the trends in gold, crude oil, and yields on the 10 year Treasury bond equals a major headwind for the equity market. I discussed this in the article, "Danger, Danger Will Robinson".

I am essentially short the S&P500. The trade was initiated over the previous week and I am underwater by about 1.75%. This is still within the realm of the maximum adverse excursion (MAE) seen with previous trades. If you remember, MAE is how much a trade moves adverse to your entry position before it is closed out. Because no one picks the exact low point of a trade, MAE is how much you have to angst about what a dummy head you are for making such a trade before the trade either moves in your direction or you take the stop loss. Right now, I am just a little dummy head, but I am still sleeping at night.

My last major position is in crude oil, and it is via the United States Oil Fund (symbol: USO). The rationale for this trade was purely technical, and it was discussed in the following article: "The Bullish Case For Equities". (As an aside, have you noticed that 3 out of 4 of those ETF's mentioned in the article "have been on fire" as one blogger wrote it?). The lone laggard has been USO - figures, that was my choice. See figure 3 a weekly chart.

Figure 3. USO/ weekly

The breakout remains intact. A weekly close over the negative divergence bars at 41.70 would get us to $50. A weekly close below the most recent pivot high point 39.37 would be reason enough to assume that the breakout is a fake out. In addition, as crude oil is tracking the major equity indices rather tightly, it wouldn't surprise me to see crude oil go whichever way the equity markets go. In addition, short term sentiment measures, such as the Market Vane Bullish Consensus, suggest that USO might be a bit extended. Despite today's 3% gain, I am a little less sanguine about USO than the others in my portfolio.

As mentioned above, the portfolio is positioned somewhat defensively and some would say negatively in the sense that an unfavorable outcome for equities would be a favorable outcome for the portfolio. The defensive posture can be seen in the low beta positions in currency and Treasury bonds; without a reason - like lower prices - to be in equities, I view the current environment as risky. This is also how the strategies or models have worked themselves out. Making such a one sided bet - being long Treasury bonds and short equities - is just the dynamics of our current market environment.

Before ending this article, let me answer a few questions. Is this a real portfolio? Yes, this is a real portfolio that is being traded with real money. This is an actively managed global tactical asset allocation portfolio that I have developed. Why publish this now? In a few weeks time, I will be heading to a more transparent platform where I will be posting my trades in real time. There will be good news to follow. I promise.


Anonymous said...

Very interesting. The jury on TLT is, I would say, still out, but you are looking more right than wrong at this stage. I might follow you in now, although TLT has burned me recently! I'm not so sure about Yen, although FXY does look (short-term) a lot like TLT. I have just started subscribing to your premium content...this is a pivotal moment, isn't it, regarding your system? (And Asia is up, up, up this morning, 17 March). Interesting times.

Guy M. Lerner said...

One question on Asia -except Japan, where are the emerging markets in this rally?

Anonymous said...

A bit transparency about your own position is nice. It lends your opinions more respect and credibility. Due to the lack of transparency of their own positions, many writers out there have no reservation about changing their tunes as often as they take showers.

Guy M. Lerner said...


Thanks! Once the portfolio is up and running you will be able to see allocations and real time changes.

This is what I do!