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I am continuing to track my performance against the Strategy Lab, and have retained my portfolio from SLO1-2. I am still still carrying large unrealized losses on my bond insurers MBI and ABK, but my strategy modifications and plan of recovery made in February are developing favorably. For the past month, the portfolio is up 39%, driven by a strong recovery from my two problematic investments.
I had been operating on a pure value strategy, with poor results. The change was to add consideration of momentum to my thinking. I started to add and remove stocks based on value criteria, which I supplied, and momentum criteria, which I got from the rating scheme used by my brokerage, Schwab. A stock had to satisfy both criteria. MBI and ABK, which had huge unrealized losses, where left out of this strategy as I expected them to recover. Broadly speaking, the combined value/momentum approach worked well, and the expected recovery in the dynamic duo has started to materialize.
Looking at my portfolio from a sector point of view, here is where it stands:
Financials - 52.00%
Informatin Technology - 26.50%
Industrials - 9.77%
Consumer Discretionary - 7.52%
Health Care - 3.86%
There has been much debate as to whether we have seen the bottom on Financials. I think we have, based on my view that the Case/Shiller housing index overstates house price depreciation or appreciation, as well as reviews of servicing agency reports on troubled CES, HELOCS, and subprime portfolios, which suggest stabilization in delinqency trends. The recovery in financials has a long way to go. However, now would be a good time to start reducing my exposure to this sector: I will be gradually whittling it down, and putting the proceeds to work elsewhere. I recently sold a few shares of ABK and MBI as they rallied off their extreme lowpoints, although I continue to believe they both have ample room to increase.
The Information Technology sector has been good to me. My largest profits are from JBL, and I have started to pare that position.
I have no Energy positions. A feature of current markets which I dislike is the prevalence of what I call negative momentum strategies. Once anything starts down, short-sellers pile on and pummel it mercilessly. Fundamentals are brushed aside, creating extreme value entry points. You don't want to get in front of this process while it is steam rollering everything in its path, but following along in the wake of the destruction there is money to be made. I will start easing my way into Energy, because I see the upward movement of oil prices as a long term phenomenon driven by supply and demand. I missed the boat the last time around and I will start accumulating a position during this pullback.
I will look at COP, APA, DVN, XOM, OIS, SU, BJS, RIG, DO, FTO, VLO & TSO. Most of them are stocks I have owned successfully in the past, a few are recommendations from other investors whose opinions I value. I expect to develop my positions slowly, as funds are liberated from Financials, hopefully by not making any sudden moves I will achieve a smooth transition and avoid any large timing type losses.
Other ideas are in auto parts & supplies, JCI and MGA. These are quality companies that have made money for me in past automotive downturns.
The short financials/long energy and commodiities trade has broken down and reversed itself. Thre were so many hedge funds and other momentum players doing the same thing, it is not surprising that the shift has been sudden. From where I stood in February, I think I played it right, to sit and wait for the turnaround. But I wound up fighting the tape for a long time, very painful. My goal is to get ahead of the rotation, rather than fighting it: hence the cautious and incremental approach to the transition.
Aside from that, I have a lot more positions than I usually carry. I will cull, using the combination value and momentum approach, and add using the same criteria.
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