Friday, April 30, 2010

Portfolio Review: April 30, 2010

This is a real time portfolio managing real money. The portfolio is managed by ARL Advisers, LLC, the publisher of TheTechnicalTake blog. The ARL Advisers investment strategy is a global asset allocation strategy that is strategic, balanced, and targeted. The portfolio is designed to produce equity like returns with bond like volatility.

This is an actively managed strategy where investment funds are allocated toward asset classes with the highest potential for appreciation and away from asset classes with greater potential for loss. In essence, an element of market timing (i.e. using proprietary models) is added to a simple asset allocation model.

The portfolio is constructed with highly liquid exchange traded funds (i.e., ETF's). Our universe of assets includes: 1) international and domestic Treasury bond ETF's; 2) corporate bond ETF's; 3) currency ETF's; 4) commodity ETF's; 5) US Equity ETF's (i.e., style and sector); 6) foreign developed and emerging market ETF's.

The portfolio has been live since January 1, 2009, and it is currently being monitored by kaChing, a website that brings investment managers to the public. To view the performance of the portfolio and the current holdings, please click here: PORTFOLIO.

To invest with ARL Advisers, LLC via the kaChing platform and mirror this portfolio, you can click here: INVEST.

As always, if you have questions or would like to discuss your individual investing needs, please contact me via E-MAIL.

General Comments

When I last presented the portfolio review on April 5th, I stated that the portfolio was positioned rather defensively when it came to equities as there was an over 50% weighting in currency and gold. Three to four weeks later, the S&P500 remains in a trading range. There have been more day to day gyrations than previous months and certainly, there has been a lot of useless analysis on the bullish and bearish merits of this rally.

Technically and this is what I do, a correction is overdue and highly likely. In my play book, adding to risk when "everyone" is on the same side of the boat is the risky play. Right now with regards to equities, "everyone" is on the same side of the boat and it is a crowded trade.

Once again, the portfolio remains defensive with an almost 65% weighting towards gold, treasury bonds, and currency. The major risk position remains an equity index short. I have been betting against the S&P500 for several months now.


Proshares Ultra Short Yen (symbol: YCS) has been a portfolio holding for sometime. Back onJanuary 29, 2010, I stated the following:

"The US Dollar should outperform the Japanese Yen, which is on the cusp of a secular down trend."

Over the past month, this outlook for the Yen has not changed. I did reduced my position. However, this is a function of taking profits. I am looking to add to this position to increase the weighting in the portfolio. On a cash basis, YCS has an 8% weighting, but being a 2x leveraged ETF the effective weighting is 16%.

My other currency position is in the SPDR Gold Trust (symbol: GLD). This represents about 20% of the portfolio. Of late, gold is acting more like a "safe haven" and more like an independent currency. It is up on days the equity market is down, and it is up on days when sovereign debt issues are in the headlines. Sovereign debt issues imply currency debasement and gold does well under these circumstances.

Since the last portfolio review, I sold my position in the Ultra Short Lehman 20 plus Year Treasury Fund (symbol: TBT), and I started a position in the i-Shares Lehman 20 plus Year Treasury Bond Fund (symbol:TLT). See this article from April 13. This position has a 28% portfolio weighting. This is the ultimate contrarian play in the sense that many are expecting yields to rise and bonds are clearly unloved. Technically, TLT appears to have found a bottom and it has the potential to "run" for several months.

The United States Oil Fund (USO) remains in a trading range, and it has the potential to "breakout" over a very well defined base. Sentiment towards oil isn't too bullish, and a "breakout" could propel prices to $50. I would like to increase my exposure on any pullback provided prices remain above the 40 week moving average.

The Ultra Short S&P500 ProShares (symbol: SDS) is my most controversial position as it is the one that elicits the most feedback from readers. This is a 2x leveraged product that "tracks" the S&P500. This position has been nothing but angst (for 2 months) as the market only knows one direction: up. The rationale - overly bullish sentiment + extremes in the trends of gold, crude oil, and Treasury yields = bad outcome -for the strategy remains sound. The draw down on the trade is still within the limits of past draw downs, and the reality is that the S&P500 remains at the top of a three week trading range. It is my belief that I have already sat through the worst of the draw down on this trade, and it will only be a matter of time before the market sells off and the trade moves in my direction (i.e., wishful thinking supported by the data at least).

On the other hand, the market hasn't tanked despite the bad news from Europe and out of Goldman Sachs. There is a persistence to the market and I certainly cannot rule out higher prices or that investors won't continue to speculate that the markets have entered some sort of investing nirvana.

My plan with this position is to sit tight for now. I would consider closing out this position if the S&P500 has a break to the upside. However, I would not consider that an option to go long the market, and I would only consider doing this provided I have a clear plan to re-enter the position. That is, I would bet against the market here, and I would wait for technical confirmation.

In analyzing my mistake or where I went wrong on this trade I would point to two things: 1) the trend is up (and this is obvious), and any trade to capture profits on the short side was going to be counter trend in nature; 2) I wasn't specific enough with my entry price; the position was initiated on the fact that the market was facing headwinds from overbullish sentiment and from the trends in gold, 10 year Treasury yields, and crude oil. These headwinds still remain, but as we know, trends can continue to further than most expect.

In the end, I find it compelling to short the market here. Take advantage of my mistakes. The dynamics that got me into this trade haven't gone away. It is my expectation that this position will recover, but in the end, I will suffer a loss on the position.


Anonymous said...

Market ambivalence is nicely typified by the vacillations of TBT and TLT. It certainly looks as if TLT is about to break out long-term; the question is: Why? If there is inflation (gold up, presumably) then TBT should be the way to go. Yet it is not (currently). If the US market is about to fall, then FXY (not YCS) should-traditionally-be the buy. But it is not. So...lots to ponder.

Toplight said...

I think you got nice reasons behind every component in your portfolio. Good job, a few months later the outperformance would show itself.

Guy M. Lerner said...

Lots of times and one advantage of focusing on price is not asking why something is happening but to trust that it is