jaudio shorts

As I look ahead to the next month or two, I am stuck in a bind with my Marketocracy portfolio.

Most of my trading has always been with ETFs and very few individual stocks. I have been able to successfully trade through a lot of the ups and downs of the Financials, the Industrials, Energy, and Commodities. I was able to slowly exit a large position in SKF just before it dropped almost 50%, while buying long individual banks (C, HBAN, and BAC) before they popped. My position in SMN, the Ultrashort Basic Materials ETF increased and has erased my earlier losses. FXP, the ultrashort China ETF has been great with a few buys and sells moving up from $70 to $90 while hedging with FXI. I was able to get into BUCY and MAS before their pops and have since exited.

All of this self-congratulations comes along with some badly timed picks with SEPR, RIG, JOYG, CHK, and YHOO, but the damage has been minimal so far. Though I have kept a significant amount of money on the short side of the market, I have been picking a few stocks long while trading in and out of short positions. This has lowered my losses with the wild jerking of the market. This is also what brings me to my current bind.

I have about 20% of my portfolio in cash, with several limit orders to sell positions that could potentially get me close to "out-of-compliance" at 25%. There's so many clashing market signals that it seems best to keep a large chunk of cash ready to deploy at a later date.

Clashing signal #1: This is a bear rally that will send the S&P to 1370/We are about to begin to retest the July lows again because of the Financials.

I don't buy the current rally in Financials. Though I exited a large portion of my SKF position, I have since bought and sold small positions several times since. I have done the same with SRS, Ulrtashort Real Estate. Both SKF and SRS have rewarded me greatly and bit me hard in the past year, and for those that own either, you know what I am talking about. If you buy into the idea that the naked short sellers are what ground the financials down in July, then it would make sense to buy SKF expecting the same thing now that the short selling ban will be lifted. With continued weakness in the financials coupled with doom and gloom headline stories about the latest woes, it may be a good play. I don't believe the naked short selling myth, so I won't be adding more until it drops below $110. It is too lukewarm for me right now, but I would like to see a good 2.5% one day rally in the S&P to start rebuilding the shorts.

Clashing signal #2 Lower oil price = good for the markets/ lower oil price = strengthening dollar and weaker exports

Commodities have been getting clobbered as of late, with oil and food dropping big and the dollar gaining strength. Even so, I have cut my position in UUP, the Bullish Dollar ETF, to just 20% or my original position. I believe the dollar rally is short lived, although I have not transitioned to other currencies; I have just kept everything in cash. I'm looking for UUP to drop to around the $22.50 mark before getting back in. I am going against the grain buy putting money in Gold (GLD).

How low will oil go? I originally thought $90 a barrel back during the parabolic rise. I am now long on oil in the short term(UOY), and short on oil in the long term (DUG). Let's have a nice recession in China take its toll on the price of oil. Let me take this time to say that we should all call up those wonderful people known as "Short Oil Speculators" and thank them for lowering the oil price. Due to their diligent hard work in selling the market short, we are able to buy gasoline for 30 cents less a gallon this month, with further decreases to come. Long Oil Speculators = Evil and Short Oil Speculators = Good. At the same time, Long Financial Speculators = Good and Short Financial Speculators = Evil. That's the Kool-aid we are supposed to drink, correct?

Will the sinking oil price help the markets? Will the strengthening dollar hurt exports, our only gem in the misery of '08? It depends on who you read or who you watch. Lick your finger, lift it into the wind, then decide.

China has to be one of the most confusing of all trades. I own both FXP and FXI, with FXI being the hedge. I originally planned to dump FXI once the Olympics started, now I am not so sure. The China markets have been deflated more than 50% from the 52 week high. Does that mean it is time to buy China long? How much are companies worth in China anyway? I have always thought that mixing communism with rotten capitalism was akin to the cobra and the mongoose sharing the same cage; a lot of intense moments, some controlled chaos, but the ending isn't pretty. A few blogs ago I mentioned how I was taking a position in FXI because I thought the Chinese could follow the Pakistani lead and ban short selling. Little did I know, the Commies were laissez-faire and the red, white, and blue were the ones to sell and implement the snake oil. I believe it is a matter of time before the Chinese economy gets hit really hard, and I don't think the Chinese markets have fallen far enough. That being said, I am not adding to my FXP position since it already is over 12% of the portfolio. I am comfortable with this position, although I will be selling if it continues higher. Even so, I continue to read articles bullish on China as I have for the past year. The China markets always seem to be two heartbeats away from a major turnaround.

Overall, I am in a holding pattern. I would like to see the rally continue toward S&P 1370, and the VIX sink below 17 before going on a short selling (buying) spree, but as with many of my predictions, it may be best to do the exact oppisite. So is the nature of the market.

---Jonathan

Comments: View Comments |  Saturday August 16, 2008