PORTFOLIO RECONSTRUCTION: INTRODUCING MY NEW HOME
A complete revamping of the portfolio took place today. I exited all short positions mostly in the pre-open and then the remainder of SPXU was done shortly after the open.
The equity markets are an enigma to me currently. There is massive pessimism and massive weight in terms of poor fundamentals. Over the past couple of weeks massive pessimism has won. The poor fundamentals don't seem to matter for the time being.
I KNOW there is massive overhead supply in terms of anxious longs who want to get out and I KNOW there are short sellers who are waiting to pounce just a little higher. I am skeptical that the market is pulling down its pants for all these sellers. She seems a little bit too loose to take home to mom, in other words.
I'm staying away from equities until we reach either an extreme on the upside (over 1300 on the S&P) or an extreme on the downside (under 1050 on the S&P). In between is no man's land for me as of today.
I am currently long DZZ (double short gold ETN), long EUO (double short Euro/long Dollar ETF) and long TMV (3X long 30 year yield).
Before we get to the charts, a brief fundamental explanation behind each position:
- DZZ - Gold, as I mentioned in the posting from 8/21/11, is at a point where either a bullish or bearish fundamental scenario will derail the bubble. The only way it continues meaningfully higher is under a disaster bearish scenario, which I don't think will come to pass anytime soon. The elevation of gold also seems to be signalling that people are still remarkably risk averse and pessimistic. Perhaps rightfully so. I don't think the gold investors will get away unscathed before seeing the Armageddon trade go south.
- EUO - there is value in the US Dollar. There is no value whatsoever in the Euro. The Dollar seems to be sitting at a point where the same scenario as gold applies. If we get a bullish economic scenario going forward, the disparity in value between the Euro and USD will narrow and the USD will appreciate in value on fundamentals. If we get a bearish scenario, real fear will show up and the USD will be the last resort of the frightened, as it always seems to be...2008 as one example. In either case, there is a substantial risk/reward play here that is worth taking.
- TMV - bonds are pricing in absolute economic disaster. There is a serious divergence taking place between what bonds are saying and what equities are saying. I usually believe bonds. However, I'm beginning to believe my "usually" may be misplaced. Again, bond yields only break recent lows if something catastrophic occurs in the economy. Yields have discounted the worst case scenario possible and it seems that investors haven't been willing to budge from their positions despite the recent rally. I think bond investors will end up allocating towards equities before all is said and done. Higher yields coming.
Here are the charts:
click to enlarge
SPY
CRB (COMMODITIES)
GOLD
TYX (30 YEAR YIELD)
US DOLLAR INDEX
