Category: Trades

We’re in Palermo today, will be trying to catch a hop on hop off bus and maybe see the crypts.

 

Not much to report on the markets. Futures are up.  I might rebalance a bit today. Back home on Wednesday, looking forward to it.

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.

The pre market is up a boat load on comments from the euro zone on Implementing QE. We will likely look at taking off our hedge if spy breaks 205. It cost us a bit but it was worth the protection. The TLT hedge we implemented will still actually profit as TLT remains high despite the rise. Our trade is now doing well, Actually our entire portfolio is. It’s neat, our portfolio responds to all upside and barely falls on downside. Can’t ask for more than that. The most sensitive portion to downside is the spy TLT pair trade. Our protector portfolios experience downside when the market moves down but only temporarily. It has challenges only in whipsaw environments that are prolonged, though the most complicated part of that strategy is how to mitigate whipsaw risk. It’s the part I worked on for years (how to sell the weekly puts etc). I had tried so many things in back tests. Then a member of a forum had a brilliant idea that really helped solve the whipsaw issue. I took his idea and made it better. It’s kind of what I do. Leech other ideas and make them better 🙂

Valencia is nice. The streets are littered with orange trees. See the picture below. Not much of interest to post really. We just walked around. I’m a fan of Spain. We may do 6 months here in July when our lease is up before heading back to Cayman. Depends on a few things re business. But would be nice to experience the mainland before heading back to our dream world in cayman.

Market open Update (5:22pm)

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.  We’re setup quite well for any directional move (up or down).  As of writing this, SPY is at 201.15 so I am glad I did adjust the portfolios a bit. I was uncomfortable with SPY at 199.25 yesterday. So if it should happen to fall again, I’ll be better setup.

Current Holdings

SPY/TLT  (Feb 20th Expiry) – Credit Spread Pair Trade

205/200 SPY  & 123/118 TLT

204/199 SPY & 123/118 TLT

203/198 SPY & 124/119 TLT

202/197 SPY & 125/120 TLT

201/196 SPY & 125/120 TLT

199/194 SPY & 126/121 TLT

Additional Hedge

TLT 127/121 (10% of portfolio)

SPY 199/197 Jan 30th Debit Spread (20% of portfolio)

Momentum

50% TLT and 50% VNQ

Volatility Trading

NFLX Calendar spreads

GOOG Calendar spreads

Normal Protector Portfolio

Short weekly SPY Puts (instead of RSP) + Hedge

Alpha Protector Portfolio

**Secret sauce** 🙂  I use about 3-4 different things to obtain additional alpha. I don’t list them here. They’re my only secret sauce. They’re a mix of momentum picks, mechanical investing and quantitative analysis. They’ve got the same market risk in a bear or correction so our insurance will protect them.

Market Commentary/Summary

So the volatility continued into Tuesday. The spy fell to ~199.2 from 203 and rebounded to 201 intraday only to close at ~200. Our spy TLT trade and protector portfolio is suffering a bit and I added a hedge of about 20% jan 30 debit spread and an additional bit of TLT. Overall though it’s doing well considering the huge 5 percent movement in the markets since NYE. Our momentum plays have been a godsend hedge to our protector portfolios. The entire combination of strategies has proved to be handling the decline well. It’s a bit unfortunate we had a 5 percent decline the exact day we started but hey it was a nice test and I think we’re even despite. The momentum portion is up a lot and is responsible for the result. I missed entry on one portion of the momentum picks for the month but successfully added two of three ie TLT and VNQ (I missed LQD on New Years) And those have compensated for the temporary loss on the protector and spy TLT pair portion. It is likely that we will bounce here and then see another let down probably to 197. The downward momentum is strong. However, it is also possible we have another v recovery like has been the theme as of late. Today the futures point to a bounce. They are up about 12 points on the es.

We are in Barcelona today. I’ve spent about 20 days here over all in my life and can safely say it would be the city I’d vote as my favorite place to spend time. IE I could live here more than any other city in Europe.

We visited eze and Monaco rock yesterday.  Eze is a medieval town outside of Monaco which reminds me of an extremely miniature castle version of Mdina.  It’s got shops and restaurants nestled within the stone.  We only had an hour there so we enjoyed some Provence rose and headed by bus to Monaco rock which is the old Monaco district where the palace and church are.  Also where Grace  Kelly is buried.  She died untimely on the roads of Monaco many years ago (she was married to prince Rainer). A tidbit:  Monaco means monk.  The reason why it’s monk is because of Grimaldi who disguised himself as a monk and knocked on a monastery, slaughtered it’s inhabitants and took over the area.  For some reason this seems celebrated here.  Whatever.

Today we visit Sanary and le Castellet

The market had its first four day losing streak since 2013.  It was a solid 2 percent down day.  It’s approaching over sold but the downward RSI is strong so we should expect more down ahead after perhaps a little bounce.  You need some positive divergence in the RSI before reaching a bottom. There is none -yet.  We’ve seen violent unrelenting bounces before without divergence but it feels different this time around.  A lot more geopolitical events now (Greek exit, insanely falling oil, euro/usd fall)

Our spy/TLT trade isn’t doing terrible considering but it’s still down.  As time passes and upon any VIX reduction and upwards move we should profit well.  I  entered at multiple times and as well even some was entered yesterday during the strong down move. We’ve got 205-200, 204-199, 203-198, 202-198 and 199-194 now.   So we added ours all the way down.  It’s better than having entered them all at 205-200.  TLT is acting well as the pair trade.  Over all we should do well enough.  I may add 10 percent more TLT On a bounce in spy and fall in TLT as a slight hedge.

 

We’re in Monaco. We’ll be touring Eze village and Monaco Rock today.  We left Rome on the 3rd and stopped in Livorno yesterday, however, we never got off the ship, so there is nothing to report on Livorno. We used yesterday to relax and catch up. The kids spent probably 7-8 total hours in the kids centre, which was awesome and they loved it. They didn’t want to leave, they even wanted to sleep there. That was an unexpected perk of the ship. We had no idea that the kid center was that good or that you could leave your kids there while on excursions or while at dinner, breakfast or lunch. A definite perk and while I wouldn’t use it all the time, it’s nice to use it sometimes.  I spent the day kidless – reading, working out and relaxing.

Rome was meh, not a fan. It’s kind of a shit hole.  We ended up staying at an Airbnb that was a distance away from the city center but we found a cool neighborhood in walking distance that we spent most of our time at. We didn’t find that neighborhood until after NYE and we never went out for NYE because it was below 0 temperatures and we were tired. Plus, we had no idea where we were in Rome and all around us was a complete ghost town. We heard the bus took 45 min so we just ditched out on the idea and watched “A Midnight in Paris” and drank GTs instead.  The next day we went into town and were accosted non-stop by those street vendors that try to sell you magic bouncing balls and now “selfie sticks”.  I’m not kidding there has to be hundreds of these guys in the Colosseum area alone. Every few feet you’re nearly hit by these guys pointing their shitty sticks at you. Ash was about 2 inches from one hitting her in the eye. It’s unpleasant. Rome is unpleasant. Graffiti is everywhere and you know what they say “A city gets the graffiti it deserves”. I think that fits Rome.  Don’t want to come back. I’ve spent probably 15 full days here on various trips and I’ve never liked it. Venice is the same.  Probably the only two cities I’d call shit holes.

Yesterday, I bought a book called Dual Momentum that won best investing book of the year.  I’ve been reading a lot about momentum trading (maybe it should be called rotational investing?) lately (Faber etc) and am convinced of its merits.  Though the returns are only slightly higher on a per annum basis (expect 15-17% per annum)  the reduced risk, compounding benefits and drastically reduced drawdowns make it epically better.  We’re using some momentum in our portfolio constructions.  The key is removing large draw downs and with that you can compound year over year so much more efficiently. We’ll be rotating the best 3 out of a set of 15 ETFs on a monthly basis with our momentum strategy.  Our Protector Alpha portfolio also has momentum built into its mechanism.

Trading is going OK, I am trying to get all the trades entered for the month of January but had a bit of an issue with IB on Friday when I tried to enter them at open.  I had delayed quotes (no idea why, some sort of bug) and couldn’t update the settings in the IB account center because it was ALSO down for a few hours. Essentially I was flying blind and the market moved a bunch (down).  I couldn’t see pricing and I got on the ringer with IB but by the time that was all corrected, the market fell a solid 1%. I had opportunity to get way better pricing on some insurance rolls that I missed out on. I also had some better pricing on TLT that I missed out on. I would have entered all of those at market open but this prevented me from doing so.  Ah well. It cost a bit but it is part of the business.  IB account manager being down was out of my control.  Though, I doubt there is any lasting loss as I’ll enter the rest on a slight up day and I rolled to even lower strikes. I mean, I did do some market orders just didn’t get everything.  Either way, history shows that there is little difference to the day you enter (1st day of the month or 8th) so I am not so worried about the TLT and bond purchase miss but I am annoyed by the Rolls.  It’ll probably end up being net zero (or a small loss) but still quite annoying.

At the time of this writing, the ES futures are quite volatile, they’re up right now but had reached about 2037 before rebounding to 2048. Shanghai index surged to five year highs which seems to have caused the bounce. Good data in China.

 

 

 

We’ve arrived in Rome for New Years Eve. It’s damn cold. Yesterday was the coldest day in Malta in 22 years. We’ve got no concrete plans for NYE. We’ll likely make our way to the centre, find a nice pub or wine bar and check out the colosseum around midnight. We depart for our cruise on the 3rd of January.

On the plane I was reading about global CAPE ratios. CAPE stands for cyclically adjusted price-to-earnings. It’s just a way to look at valuations of a specific market.  The US is at 26.5. That’s quite high. That means that VTI or S&P is trading at 26.5 x its current earnings. The general idea is that investing in a basket of countries with low CAPE will return more than  investing in a basket of countries with a high CAPE. It is shown that through history that investing in countries with CAPE levels lower than 7 returned a 30.1% CAGR the following year. Even recently, people who invested in Greece when its market collapsed and it was trading at a 2.x CAPE would have enjoyed a 30-50% CAGR the following year.  It’s a hard thing to do, as a country with a low CAPE likely has a LOT of very current negative press like Russia and again, Greece right now. You’re going against the grain.  However, there is likely more return opportunity in those two markets than there is in other countries.   You’d definitely want to buy a basket of country ETFs not just a few.  Like they say, “How do you get to a 90% loss, lose 80% and then lose half of that”  Just because something is low, doesn’t mean it can’t get lower!

Aside from that, not much practical things there for me, at least not yet.. I don’t think I’ll be looking at investing into low CAPE countries anytime in the near future. If I do, it’ll require a lot more research and planning.  Russia (ERUS or RSX) and Greece (GREK) do look attractive

I’m still entering portions of the 2015 portfolio. I have yet to enter the momentum and protector (Standard or Alpha) part and I’m only partially in the new SPY/TLT trade.  I am waiting to do this during the 1st week of January when there is more volume and I can get a better sense of things.  I might add a bond rotation portion to the overall portfolio as well. We’re targeting 4-6% a month with a bit of leverage (1.6x)

 

 

SPY/TLT	25%
Protector *Standard	15%
Protector *Alpha	15%
Momentum Trading	25%
Volatility Trading	15%
Opportunity + Adjustment Purse	5%

I’ve started constructing my trading portfolio for 2015 as listed above. I’ll be using 1.6x leverage for the Protector and Momentum portfolios.  We assume an average of $800 per unit of SPY/TLT and we end up with a historical expected value of 4.91% per month in returns.  Let’s see how we do.

 

Below is based on a 10k Unit

 

	Portion %	Expected per month	Expected $ per month
SPY/TLT	25%	11%	275
Protector *Standard	15%	1.6%	24
Protector *Alpha	15%	2.13%	32
Momentum Trading	25%	1.6%	40
Volatility Trading	15%	8%	120
Opportunity Purse	5%
			491
			4.91%

 

 

Sorry for the lack of posts lately, I came down with a throat/chest and ear infection combo deal that had me bed-ridden for days.  Luckily it subsided with some antibiotics right before Christmas day.

I’ve been spending a lot of time reading about active portfolio management. I’ve got three books on the go and one in particular that I’ve found quite interesting is  “The Ivy Portfolio” by Meb Faber that talks about Ivy league endowments, and most specifically the Harvard and Yale endowments. Further to that, I’ve also spent time reading some research journals on momentum and 13F Cloning  which are all quite interesting ways to obtain additional alpha.

13F cloning is basically taking the top 10 holdings of a hedge fund etc. These funds (over 100M) must report their holdings every 45 days. Since most aren’t actively traded, you can gain by copying their holdings and you don’t have to pay the 2 and 20 fees they usually have. Research shows that because you save on the fees and though its 45 days late, you can still generate around the same return.  I’ve got a list of fantastic funds to follow, and thus I am interested in creating a fund of funds using the top 10 holdings of the very best funds like Baupost (Klarman),  Appaloosa (Tepper) etc.

What makes me excited is our little insurance tool that we use in the Anchor strategy. This protects us in crashes (well really any market downturn). We usually only use a basic ETF like SPY or RSP but with the case of 13F cloning, mechanical investments and other methods of creating alpha that I am looking at, we can combine this insurance method and create more return with absolute protection in any major correction.  That has me very very excited.

I am gearing up to setup a nicely diversified active trading and portfolio combination for Dec 31st/Jan 1st.  I am excited about it.  It should be a great 2015.  Well diversified.

And for the first time on the blog, I’ll be finally doing some traveling! We’ve booked a cruise on Jan 3 till Jan 14 around the Med.  We’ve done most of the stops before but it was cheap and we’ve got our Au Pair. So it should be awesome. I haven’t had a vacation in years where I wasn’t actively managing stressful trades. I am quite looking forward to it and doing a lot more heavy reading/research.

Expect daily updates from here on in!

 

 

As I look now the futures are at 2071 suggesting a 2076 open @ fair value.  Just a few days ago we touched 1976.  That’s nearly a 100 point or 5% rise in a matter of what 10 trading hours?  Incredible. I think the most market participants are jaw-dropped.  It’s the way 2014 has been – the year of the V-Shaped rallies.    Look at the chart below. That down was something else, but that up was even more sudden. I explain below the likely reasons for these rallies.

 

These types of rallies are by in large caused by a few things

1) short-selling and subsequent covering.  It’s momentum.  Once the bull starts to run, you get panic shorts hitting the stops and being forced to cover (buy stocks back) which further fuels the rally. As long as you have a large amount of skeptical bears in the market, you’ll get these violent rallies. This is typical of a bull run that has a lot of negative sentiment accompanying it ( i.e. like we’ve had the last few months : weak data, oil problems, Ruble problems). There’s a lot of shorts and if they break their stops, this causes violent upswings.

2) In the October fall, you had a lot of funds/institutional investors underweight equities after the very sharp reversal. It gave few any time to get back in and many waited for the typical pull back after the first fall. Most of the time on a downtrend that strong, you’d get a second leg or at the very least some stalls and retracements at fibonnaci resistance levels. They can only go so long for the predicted pullbacks until conceding defeat. This pullback did not happen in October, the up was relentless and broke all sorts of records. The under-weighted institutional investors perpetuated this rally as they chased it.  The pressure to buy was strong. Simply put, the pressure to at least match the market is strong for these types of investors and they simply can’t underpform the market or else they look foolish. That fueled the rise in October and likely fueled this one as well. This fall was a gift for the ones still underweight and as soon as the selling pressure stopped you got a massive up-swing like we’ve seen the past few days.  Everyone was hoping for a dip, they got it and the old adage ‘fool me once’ probably played a role in the even more sudden V-rally this time around. On just a bit of strength everyone pounced in. Nobody wants to miss the next V-rally especially after they’ve been praying for a large pull-back.

At close there was a p-bar that touched 212.97 on SPY. Likely that’s the target for this bull run. The season favours the bull as well. They call it the santa claus rally. I’d expect strength going into the end of the year.

I am out of the MIC and in just the SPY/TLT and Anchor trades at the moment.  Yesterday was a good day for the anchor.