Saturday, August 19, 2006

Getting creamed

It was a terrific week if you were long the market. For me and my portfolio however, it was nothing short of harrowing. I don’t have all the numbers yet, but this month is shaping up to be the worst this year, worst than both March and May which should give you an indication of the beating I’ve taken. In a nutshell, both my short on the general market and my concentrated play on PMs went the wrong way. While I was always aware of this danger, actually watching the account balance wither daily was still a jolting experience.

As I noted on Tuesday, the short term rally had potential to go higher. On Tuesday, I sold both double short ETFs, QID ($68.11, -9.7%) and MZZ ($71.82, -3.7%). The chief consideration was that the position in QID was on the verge of going double digits in red. This “forced” sale makes me take another hard look at the macro picture and re-examine my assumptions.

Well, my opinion of a housing lead slowdown hasn’t changed. If anything, it is reinforced by multitudes of fresh evidence of an imploding housing sector and a very mature business cycle. Call me incorrigible, I bough QID back the very next day (200 sh @ $67.10). In addition, I sold half of my company shares on Wednesday (I still hold numerous options not counted in the portfolio).

Among the expert bloggers out there, I think Bill Cara captures the tone of this market the best:

I was thinking tonight that I have not seen a market like this one since 1981. The summer of 1981 was a time when we at RBC Dominion Securities sat around the bull-pen (a place for Bulls?) in Toronto and wondered when “Mr. Market” was going to drop both shoes. We had seen the market pullbacks in 1970, 1973-74 and a bit in 1978 and we had recently gone through the shock of inflation and rising bank rates. So it wasn’t like we didn’t know what was coming next. It was in our gut. There we were -- the Brian Kings, the Bob McWhirters and the Ian Woods. We all were asking ourselves that spring and summer the same question, “Who is going to choke first? Somebody for sure will.” It’s the doubts that settle in. That odd feeling turns to nervousness, then a pull back in trading volumes, followed by more focus on the Elliott Waves (and at that time Joe Granville). The fact is we – the market pros – all knew that the fundamentals were not there to support rising equity prices, but at the time (1981) we couldn’t switch to bonds because the rate market was going nuts and bond traders went home every day with their head in their hands.

It’s tough being a bear, especially in this market. I’ll continue to make bets that I can afford to lose. One day, one of those bets will more than pay off the small losses I take along the way. If I’m right, that day is not too far coming.

I’ve previously written about the ABCED triangle formation in the HUI as well as its temporary excursion above the upper rail line. It has now reached the apex of the triangle while the stochastics are still forecasting some downside. Meanwhile, gold spot has broken down from a similar triangle, although its stochastics seem to be turning up finally. Gold stocks have been lagging the general market in this latest advance and currently showing a great deal of hesitation. The best scenario I envision is a brief spike down that finally flushes out the weak hands before retesting the May highs. I’m watching a number of indicators closely and will write about it if a capitulation occurs.

This is not investment advice, please do your own due diligence. Good luck and be safe.