With the first round of the SLO ended and a month until the new competition resumes, I am left with a portfolio in limbo. What do I do with "jaudio shorts"? Staying with the same strategy may work out with more troubles being reported every day, but that would be a bit boring. In real life, I believe that boring is the way to riches. In real life, I believe frequent trading is the express lane on the road to ruin. In real life, volatility can wreak havoc on emotions as well as portfolios. In the SLO, volatility is my drug of choice. I love volatility. It's a great way to make a boatload of money, but also a great way to lose big. The highs are high and the lows are real, real low. I am now in the testing phases of a new strategy and did some housecleaning on my original portfolio.

I stated back in August my belief that the market had up to 24 months of contraction before we hit bottom. I still stand by that belief, revised to 18 months from today. Several earnings reports are due and several economic numbers will come out before the new competition begins that will either confirm or deny it. The Ultra Short Financials (SKF) and Ultra Short Real Estate (SRS) have been very good to me, clocking between 25-30% before I sold portions of each. The Ultra Short Nasdaq (QID), Dow (DXD), and S&P (SDS) are just now back to the break even point. I trimmed DXD, and will trim QID and SDS soon in order to raise cash for my current strategy. I will describe more on the new strategy later.

Piling all of my cash in Ultra Short ETFs was insane, as I said a few blog posts ago. After all the insanity, I wound up almost in the same place I started, with a wild ride in between. The experience toughened me up to taking hits and tolerating volatility. There's only one problem, though. Where I once tolerated volatility, I now crave it. I'm addicted to high volatility.

This next round is one that could very well leave my virtual account near zero. If there was only a prize for finishing last, I would chase it to the poor house. Depending on how the market performs in the next month, I would like to keep between 30-40% in the Ultra Shorts. Some of the Ultra Shorts may have well made their money, so I may not buy. My price targets are all set, but the market's behavior will dictate the decision. My wish would be for a quick market rally before the competition starts, but the bad news is pretty heavy. As for the other 60-70% of my portfolio, I will risk it in the most volatile stocks I can find.

In the first round of the SLO, I employed a buy and hold strategy with the Ultra Shorts. In this one, I will be a frequent trader. Since January 4th, I have made 40 plus trades, and I will be making at least 30 per week once the competition starts. The Ultra Shorts are extremely volatile. It was not uncommon to have days when the ETF would go up or down by 6%, and there were even some bigger days than that. Just a few days ago REW, the Ultra Short Semiconductors ETF, had a 10% plus day, which has now put it at a 28% gain since Christmas. Instead of buying and holding, I am now going to be selling on strength and buying on weakness. I cashed out a good portion of REW, reducing the position to a "sane" level. My goal is to keep all of my holdings, including the Ultra Shorts, at 3-4% of the portfolio, with a maximum of 7% when buying on weakness. With the high volatility, I need to be what very few are and what I have never been: a correct market timer. Having a large chunk of cash in reserve to buy on weakness will help, and selling on strength will keep the cycle going. At least, that is the theory. You know what they say about the battle plan once rounds are being fired down range.

I also will be buying individual stocks and long ETFs also. Ultra Long ETFs aren't out of the question. After all, if I don't think the highly volatile short is going to make me money, then it's long counterpart can. The individual stocks will be more difficult, more risky, and could be cannonball that sinks the ship if the frequent trading doesn't sink it first. I want to buy the ugly, the really ugly. I want the black sheep, the puppy no one wants, the disowned, disavowed, and dismembered. Countrywide, Sallie Mae, Citi? They are all candidates. I'm really looking for individual stocks that have not only been hammered, but also that have a huge number of shares sold short. My hope is that I can capitalize on a "short squeeze". Those that have sold individual stocks short will cash out sooner or later to lock in profit, pushing the price upward. My challenge is to create a list of possible candidates, preferably 40-50, screen those candidates for the qualities I am looking for, and then strike when they get beat up 5% or more. CFC got hammered 28% on Tuesday . . .that is a short seller's dream. I expect that even though CFC may have further to fall, there will be short sellers who will "cover", sending the price back up temporarily. I bought a small amount, a little over 1000 shares, at the end of the day when the carnage was over. Will it get that bump that I am banking on or will it tank further? We will see. CFC is less than 2% of my portfolio, so it is controlled risk. I have a "bail out" price on all of the short squeeze candidates, so as to minimize my own damage. The insanity continues.

Like I said before, my tendency is to buy and hold, so frequent trading takes me out of my comfort zone. I believe that frequent trading is the fastest way to end up penniless. I should know soon enough.

****WARNING! Portfolio testing in progress!****

Comments: View Comments |  Tuesday January 8, 2008