Jan 24 – Portfolio Update

So far a fantastic month for the portfolio. It’s been volatile but we’re doing very well despite all of that and having ended up right at about 205 at the time of this writing.  As I wrote a week or so ago:

Markets have been quite volatile since the start of the new year. The dow has had several 200 +/- points days. Price discovery amidst all of the uncertainty. What effect does low oil have on the economy? What effect does an extremely strong dollar have? Will companies report lower earnings due to the lower euro?  There is the potential greek exit, the potential QE from ECB on the 22nd. Just a boat load of uncertainty and markets hate uncertainty.   Through out all of the swings from 208 to 198 my overall portfolio moves about 2% up or down.  This is why I’ve constructed things the way I have. Most of the 2% movement comes from the on/off volatility in the options of the SPY/TLT pair trade.  If the market moves slowly down my balance barely changes but if there is a quick jolt to the same place and VIX goes up drastically, I see the balance change due to heavy pricing of the spy options.

To summarize:

Protector (Alpha + Standard):  This is the all-weather portfolio. It’s a completely hedged equity portfolio. We purchase year-out ATM spy puts in the amount to 100% insure the equity and then we purchase about 30-40% in additional puts of which we sell against on a short term basis with enough extrinsic value to pay off the hedge over the course of 1 year. In essence, we purchase 140% 1-year out ATM puts, sell 40% short term puts with enough extrinsic value on a weekly basis (approx 65c) to cover the entire cost of the 140% long puts. It’s been backtested to death and works well with a very very low max draw down. A great strategy that can take on a little leverage. In essence, our portfolio is completely protected and performs in any bear markets though does slightly under perform in a prolonged bull market. Essentially, It performs in all market types but does have challenges in an on-going whip saw environment. The way I sell the puts is quite complicated and combats the whip saw weakness. This method took a few years to fine tune. All the complication is in how the weekly puts are sold.

We do a split where we have the regular old market via RSP and another half of alpha generating equities that do have correlation to the regular market so as to be protected in any bear market. The alpha generating equities is where I have some “secret sauce” ways of finding alpha. In general the alpha comes from some momentum analyis, quantitative analysis (mechanical trading) and even some 13F cloning. Our current portfolio is neutral to slightly up for January.

Momentum: This component rotates through 15 ETFs (bonds, equities, treasuries, some commodities and REITs) by selecting the top 3 which are above the 200 DMA and rotating on a monthly basis. It has a max draw down of 10-15% and expected to return 15-18% a year. It naturally avoids bear markets by selecting non-equity ETFs like TLT and VNQ. We’re currently in TLT, VNQ, LQD.  Those three have provided a 6.8% return in January alone.  A perfect additional hedge to our protector portfolio.

SPY/TLT pair trade: This is an option based strategy where we do a pair trade of debit spreads of SPY and TLT which are negatively correlated.  We’re doing very well in this for the current month. Up about 20%.  This is the highest variance portion of the portfolio and does have a smaller allocation.

Earnings Volatility trades:  We’ve done a few earnings volatility trades this month (GOOG, NFLX, FB, MSFT, BABA).  These are volatility based trades and are completely unrelated to any of the above.

 

Jan 23 – Munich (No market commentary)

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Above: The Window where Goebbels gave the “Broken Glass” order. That night thousands of Jewish store fronts and homes were vandalized.

Below: The Beer hall where hitler gave his speech to German worker party laying out 25 point plan in 1920 and subsequently renamed the party to the nationalist socialist party or nazi for short

Interestingly enough, JFK also came here as a young lad in the late 30s. He sat next to a few SS officers who told him that if he drank four liters he would be able to keep the stein. This, of course, was a lie. He did drink them and ended up wasted trying to leave with the Stein. They caught him and subsequently banned him for life. The SS officers laughed at him as he was apprehended.

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Most epic day of travel. We stumbled upon a free walking tour (pay in tips at the end whatever you think)

It was the best tour I’ve ever had in terms of quality of information, engagement and just plain epic. Most of Munich history is tied together by beer and of course later the formation of the nazi party. So the tour took us to sites related to those things.

Hitler had started as a spy and was assigned to the workers party when there were only 50 members. Not being a great spy he was outraged by comments that he heard and stood up and gave a speech. The workers party loved him and asked him to join. Soon it rose to 109 members when he gave another speech and within one year 1200 members. So much for being a spy. The rest is history.

We stood in the square were he gave many speeches and apparently doing a nazi solute is illegal to the point of 2500 euros and instant deportation. It’s a famous place for neo nazis

Picture below

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Jan 22 -Munich and market update

Surprise. I am going to Munich this weekend. My SO had arranged a weekend getaway without kids. It’s the last time we will have someone (thanks guys) to watch the kids for Probably at least a year. Really the last opportunity to get alone time for a while. So yah, I Guess I am traveling again at least for a few days. Should be a nice romantic getaway. May see eagles nest and stop in Salzburg.

Today ECB will announce QE. The amount leaked was 50bn a month. So the bond and equities market should be quite volatile today. TLT is currently down about 3 percent from yesterday with 135.3 to 131.5. That puts pressure on the TLT portion of the trade but an equal rise in Spy will offset that. Obviously our momentum portion which includes TLT should also suffer but our protector portfolio should benefit.

Jan 20th – Market and commentary

Lately I’ve been listening to some pod casts at night. There’s about 300 interesting ones under Covel on iTunes. They’re free. Worth checking out. Yesterday was Meb Faber and the day before that was Tom Basso.  Both worth listening to. Meb Faber is the author of Ivy Portfolio and a well respected momentum expert.  Some of the portfolio we follow is based on his work.  Tom Basso is another momentum guy, he started TrendStat back in the 80s.  A lot of these podcasts are about life in general as well as trading and the relationship between both.

Tom Bassos most recent podcast was a bit eye opening and inspiring.  He’s a very well respected manager and he determined that sitting in from of the screens and doing discretionary trading above and beyond his already set system ended up being net zero. They tracked it. No benefits, so he fired himself from actually actively trading in front of the screen. It’s not quality of life to always be glued to the screens and the market. It’s something that I struggled with a bit after leaving the more active trading style that I had last year. I was so used to having to be connected and monitoring the markets that it was sort of hard to disconnect from it. I started asking myself the question, like what would I do anyways? I mean there is a few hedges I could add and things like that but really, those aren’t time sensitive and any timing used intra day would probably be net-zero over time.   I still find myself wanting to know whats going on in the market and still being glued to the screens during events like the Fed meetings or the jobs reports etc etc.  There’s no need. I am slowly adjusting to that, it’s a challenge but it’s coming. It’s part of the game when you get into something like this, you feel like you want to control it. But the point of moving to the new style was to get away from having to actively trade on market events and movements in an intra-day manner.  I’ve got portfolios constructed that are hedged and complement each other. We’re set and we can handle any directional movement.  A funny note: You know what’s funny and sort of irrational. I find myself putting on a hedge or something similar and then hoping that the hedge itself wasn’t an error and that in of itself almost makes me want the market to go with the hedge even though I put it on to protect a much bigger position in the opposite position. Why? Well it was a discretionary trade where I had to use my best judgement, and well, I don’t want to be wrong on those as it can cause some stress BECAUSE it was based on a decision I made that was not part of the pre-determined system. It’s irrational and of course I don’t really want the market to move those ways but the thought enters the mind all the same. The psychology of these things is quite funny.

Jan 16 – Market Update

So as per my post on Jan 7th

“The market bounced up to about 202.2 and I proceeded to add some insurance in the form of additional TLT equity AND credit spreads. I rolled down a few of my SPY short puts (from 207.5 to 204 and moved them a further two weeks out).  I fully expect the market to test the December lows  and subsequent 200 daily moving average in the next while. I used the bounce to better balance myself in the event of another down leg. “

It looks like we’re on our way to testing the Dec lows. I’d almost consider it fulfilled in after hours trading but we’ve not seen spikes in the TRIN or put-call ratio which usually marks bottoms.  SPY (S&P 500 index aka the market) has been down 5 days in a row which usually calls for a bounce (if you bought at close you have nearly 90% chance of eventually making money).  A spike down towards the 200 DMA and Dec Lows would give us the conditions for an oversold bounce and would likely be accompanied by the usually spike in TRIN and Put/call ratio. Ironically, It’s the most bullish case (a quick down movement to 200 DMA) for a subsequent bounce.

Our SPY/TLT trade will be pressured quite a bit here. I expect it to head towards break even as we test the 197 area.  Our momentum trades are doing very well and our protector standard is down and our protector alpha is doing worse than our standard due to the OCN beat down but I consider all of those temporary.

 

Jan 15 – Market Update

 

Back at work.

Markets have been quite volatile since the start of the new year. The dow has had several 200 +/- points days. Price discovery amidst all of the uncertainty. What effect does low oil have on the economy? What effect does an extremely strong dollar have? Will companies report lower earnings due to the lower euro?  There is the potential greek exit, the potential QE from ECB on the 22nd. Just a boat load of uncertainty and markets hate uncertainty.   Through out all of the swings from 208 to 198 my overall portfolio moves about 2% up or down.  This is why I’ve constructed things the way I have. Most of the 2% movement comes from the on/off volatility in the options of the SPY/TLT pair trade.  If the market moves slowly down my balance barely changes but if there is a quick jolt to the same place and VIX goes up drastically, I see the balance change due to heavy pricing of the spy options.

Update: 1:30pm GMT

Market isn’t even open yet and the volatility continues. A 41 handle swing as ES hits 2027 and falls to 1986 on the Swiss/EU unpegging bombshell. It’s now trading at 2010. That’s some large volatility for after-hours futures trading.

As for a review of the current portfolio and how it works:

We have what I call the protector portfolio which comes in two flavours (standard and alpha). This is a completely insured portfolio of equities that performs in all market types. It “may” slightly lag the market in prolonged bull markets in exchange for absolute protection and even very large profit in a bear market. It’s an all weather portfolio that has extremely low max draw downs. It’s the cornerstone of my portfolio.

Next we have is the momentum rotation portion which also has low drawdowns. It’s somewhat based off of the work of Meb Faber and closely mimics the Harvard and Yale endowments. We’re rotating between 15 ETFs based on relative strength and absolute strength. This provides some diversification as it is not very correlated to the market and can be hedge. This last month it’s been an extremely effective hedge. We’re in TLT, LQD and VNQ and all three are up very largely offsetting any down movements in SPY/TLT and our protector portfolio.

Next we have SPY/TLT pair trade.  This is our monthly option trading strategy. It’s essentially OTM pair credit spreads. We expect about 15% a month from these.  These can be volatile. It’s a small portion of the portfolio but provide large returns. Backtested 8 years shows very strong results (~12%-15% a month). But you can also have drawdowns in market declines as the credit for the TLT spread won’t offset the loss in the SPY spread. We do roll the TLT spreads to mitigate this. If the TLT spread becomes worthless, we roll to a higher strike. This can mitigate most of the downside effect on the SPY portion. We’ve only backtested without rolling so the returns should be higher though I don’t count on it.  I also add some hedging if I feel it needs it. I have a signal to increase or decrease the ratio of SPY to TLT. This month we’re at 60/40.  We’ve just had a market decline from 208 to 200 and the trade is handling it quite well mostly due to the fact that I’ve staggered my entries over a week, I’ve used a ratio of 60/40 TLT to SPY and I’ve added some hedges.  If I hadn’t the trade would be down about 2.5% but instead it’s up around 10%.

Finally we have volatility trades related to earnings. This is a completely unrelated trading strategy based on the fact that volatility increases the closer you get to earnings. We use straddles and calendars to capture the increase.

 

That sums up our portfolio method for 2015.

Jan 14 – on way to Malta + market update

The big news today was waiting for the ECJ to rule whether QE would be legal to implement by the ECB. They said at 830 GMT that it may be legal. Thanks for that. This could ignite the markets. But likely we wait till jan 22 when the ecb meeting will reveal intentions. Draghi says risk of deflation in the eu is not likely though more likely than last year.

One of my 13f clone picks from baupost is having issues (OCN). Down 35 percent in one day on news that California might pull its mortgage license. Annoying and why it pays to have small positions in these things. I am looking at ticker ALFA as a replacement to 13f cloning.

Glad to be getting home. I think I’ve accomplished all the EU traveling I came to Malta to do. Especially the Med. The next 6 months will include just a Cayman trip and that’s about it. Time to get back to heavy work with my day job.

Jan 13 – Naples + market commentary

We had a tour booked today that we ditched on. Wanted to relax more before departing tomorrow and it was a nine hour tour. We decided to venture in and check out the castle and shopping district and grab some Napoli pizza.

Been reading a lot on managed futures trading as an eventual diversification strategy and also just out of interest. It’s completely unrelated to equities (no correlation) so it does interest me and the rules and mechanisms behind it are quite mechanical which I like. They’re momentum based.

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Jan 10 – Sardinia + Market update

We had a sea day yesterday and spent a lot of time laying in bed reading and watching the news on the Paris attacks.

The markets started off higher in the am with a positive job report but then lost a lot back closing at 204.19. Is the bounce over? Are we heading to test 197 (Dec lows)? Or is this going to continue up? Who knows. We just need to be positioned appropriately for any event. The volatility collapse and stability of TLT really put our spy/TLT pair trade in the profit zone. All is going well RIGHT NOW in this volatile environment.  However, I do have concerns if we start heading down again as then I fear that this will be an actual correction. The bearish reversal bar on Friday is not a great bar to see. (Bearish reversal = open higher, falls, and closes red). We just went down hit 199, it bounced, bulls feel relieved, but if pressure mounts again, we’ll have a lot of towels being thrown in as this marks a turn in the general momentum of the market, the end of the V rebounds. There will be less defence and more fear and it’ll likely go down to test the Dec lows. That’s a failed rebound and the march to the Dec lows would affect our SPY/TLT trade. If we start going down again on Monday, I might add more TLT to the spreads. We’re up about 7% on that trade so far. Aiming for 20-25% but are at risk if a significant downtrend occurs.  We’re up a lot on the momentum portion and down a bit on the protector due to the whipsaw experienced.

With the momentum portion of our portfolio, we look at 15 ETFs that include bonds, small caps, large caps, REITs, treasuries, foreign treasuries and equities and some commodities. We take the the top performing three from the previous month so long as they are above their moving average.  We rotate once a month. In weaker periods we end up in treasuries and bonds and in stronger periods, we naturally end up in equities.  This rotation system provides a 15% return with max drawdown of about 10% measured from 1972 to present. Quite good numbers. We miss all of the big draw down periods. Our momentum portfolio is a nice addition to our protector portfolios, bond rotation and SPY/TLT pair trades.

Sardinia was OK, the segway tour was awesome but the city of Cagliari was so-so. Not a whole lot of interest besides this 13th century tower (the building that looks like its a new building under construction :))  This was used as a prison and also as a place to hang the severed heads from the executed.

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