Wednesday, August 02, 2006

Random musings

Due to both my day job and the listless market, I haven’t been blogging for a while. This entry may be better titled “brain dump”. I'm simply going to let loose whatever on my mind.

Big picture

  • Last Friday saw Q2 GDP was only 2.5% down from 5.6% in Q1, worse yet, PCE was up 4.1% with the core up 2.9% (link with commentary from CalculatedRisk). This is the very hall mark of stagflation. How the market could rally in the face of this bleak news is beyond me. The “one and done” crowd should re- read this Ticker Sense post on market action after Fed pauses.
  • I don’t want to sound as if I’m bitter the market is not doing what I consider “rational”. It didn’t make new lows as I was predicting by drawing a parallel between now and the bear market in Sept 2000 (link). Nonetheless, the volume was lacking in the most recent rally and its occurrence at month’s end couldn’t help but bring back memories of the two previous failed rallies at month’s end.
  • The futures market is pegging the probability of one more Fed raise at a measly 30% even as more inflationary evidence keep rolling in. I’m not going to be so audacious as to guess what the Fed is going to do, but I won’t be surprised in the least if Bernanke keeps his word and raises at least one more time before elections, especially since the sacrifice ratio is high.
  • The other interesting tidbit from Ticker Sense is that the instances for searching “stagflation” by Google have been on the rise.

Portfolio direction

  • I may give off the impression that I’m heavily shorting the market since that’s what I have been talking about even before May. In fact, my current short exposure is less than 25% of my actively managed portfolio since closing out the puts in June, although I use the double inverse ProShares funds for leverage. The Nazdaq is in a bear market but the Dow and S&P are only down around 5% from the peak. My overall short positions have been profitable. As more signs of an economic slow down appean, I’m planning to increase the short exposure by using the inverse ETFs, adding to my shorts in BZH, shorting some other consumer discretionary name, or combinations of the above.
  • One thing I didn't do very well in the past couple of months was not to hold on to more base metal and energy related shares. I'm looking to re-enter these sectors at the right time for long term holding. Of course, I have to recouncil that with an economic slow down already underway. I continue to believe Chinese growth is not as dependent on the US as many think, so commodity prices will remain firm, consistent with the stagflationary picture. Perhaps the major miners approach their 200 dmas next time I'll try to establish a position.

Recent buy/sell

  • PMs I was expecting the current correction to trace out an ABCDE triangular formation with ABC already completed (link). Well, it didn’t go that far and the HUI has just broken above the upper rail of the triangle. With momentum indicators still pointing up, a re-testing of the previous high of 401 may be in the cards. I picked up some TRE for myself (1600 sh @ $7.60) and some GDX (100 sh @ $40.03) for my wife today. I don’t expect the re-testing to be successful on the first try, as that would mark a correction of only three months – a little too short after a 12-month run-up. However, as I have stated, I ‘m now in a mind set of regular accumulation in preparation for the upcoming wave 3 of III. In the 02-03 correction, there was also a triangle resolved to the upside, failed at the first try, and succeeded on the second (see chart below). I have the same pattern in mind right now.
  • I closed out my short in HDI (200 sh @ $57.24 for a 5.2% loss). I didn’t at all handle the position well, failing to take profit when it bounced of its 50 and 200 dma by simply not paying enough attention. I had a mental stop at $55.50, the previous high; however, I convinced myself that it was going to reverse down soon because it was short term extended. Although HDI experienced strong foreign sales growth in Q2, there was some increase in the inventory that I thought would worry investors (8-k). I was also hoping for a negative “wealth effect” in foreign markets following the crash in May. Well, I was left with more loss to show for that brilliant piece of reasoning. I'm taking a small loss for now.

As usual, this is not investment advice, please do your own due diligence. Good luck and be safe!

Update, August 4, 2006, 10 AM
My order for 400 sh of GG (@ $30.05) went through yesterday. With this morning's NFP number of 113k (consensus was 150k), everything has gone berserk again in anticipation of the Fed pause. The upside break out of the ABC triangle in the HUI should be confirmed today. I took larger positions in GG and TRE than I normally would. If the HUI goes on to make new highs I'll be more than happy. Otherwise, I'll sell half to reduce my cost basis as I often do.