Quick Updates on shorts

A violent bear market rally started 3 days ago, just after I built a comfortable short position.  The S&P 500 is now up 11% from its lows.  Although my shorts are getting hammered, my longs are doing OK, so I don't feel much pain.

I still think its a bear market.  It is going to take more than a quarter to work off the stimulus excesses of 2021.  The rally's job now is to convince as many people as possible that its a bull market.

Bear market rallies of 20% are historically common.  I'm currently 33% short.  Aim to go up to 37% if we get a 20% rally in the S&P 500 (to 4572), and 40% if we get a 40% rally (very unlikely).  I don't think the duration or height of the rally can be predicted, so just guess based on history.

Quick Updates: shorts and gold

Sold all my gold at a small loss.

Overall, now I am 29.5% short vs 98% long.  The shorts are: 

• Low beta stuff, HYG and JNK.  Easy to hold, they usually just drip down.  
• Some higher beta stuff: Q's and IWM.  I've been lucky.
• Some Europe ETFs bought recently.  This position is currently at a loss.
• Plus small positions in Korea and copper miner ETFs.

Comfortable with these short positions, they partially offsets declines on down days.  I could increase it a bit, but no longer feel pressure to.  My portfolio should be OK, no matter which way the winds blow.

Quick update: shorts and gold

I've increased my shorts, buying on the small 1-3 day bounces.  Now I'm 24% short.  Most likely we get a crash into the next month.  Lower prices beget selling, as hedge fund redemptions start, till finally everything gets sold.

So I'm still looking to short more on bounces.  We are so oversold, we could get a rally first.

I've cut my gold position, from 10% to 4%, taking a small loss.  Gold has not been doing well, even in a falling market.  Maybe its because interest rates are rising.  Maybe fear from the Ukraine war has died down (sell the news).  I don't know.   Sell first, ask questions later. 

Sometime, it will be time to buy stocks.  Don't know when.

Miscellaneous Links (Doom and Gloom Edition)

Miscellaneous points, tangential to investments:

• Perun: Reservists and Irregulars in Ukraine: Ukraine may win the war.  Russia treats it as a 'Special Military Operation', meaning no conscripts.  Their initial invasion force was only 100K men.  Because it is a war of survival, Ukraine has fully mobilised.  Unless Russia treats it as a real war and does a general mobilisation - possibly on May 9th - the numbers will turn against them.

• Peter Zeihan discussed Russian oil two weeks ago (starts at 10:22) describing how, if the Russians can't sell their oil, they have to cut production permanently.  4-5m bpd offline for good, and no one can replace it.

• Which may be why WTI still has three digits, despite the current China shutdowns and US stock market crash.

• This Micheal Pettis tweet got me thinking: If the US no longer benefits from having a reserve currency, they can stop it by banning all foreign investment.  That will instantly balance the trade deficit.  Better than Trump's trade war.  In effect, anyone holding USD can no longer buy US treasuries, stocks, land etc, and  is forced to buy US goods and services instead.  How would my portfolio exist in such a world?  I have no idea. How would Asian countries (plus Germany) - who have been running trade deficits since WWII - change the structure of their economies?

• How World War III is likely to be a series of small, contained wars, similar to the Thirty Years' War.  WhatIfAltHist: is WW3 about to start?

• Finally some good news: Nearly half of Hong Kong's population has already caught covid.  They are more than halfway through it, and are easing restrictions.

• On the other hand: Xi Jinping sends warning to anyone who questions China's zero covid policy.  I don't know if zero covid containment will be successful.  Or if they eventually sweep it under the rug, ignore the cases, and adhere to it in name only.  Xi is reelected in November, after that they may ease.

Increased My Short Positions

Been shorting the bounces for the past week, now am 15.5% short with all positions nicely profitable.  Still bearish.  The fed is tightening into a slowdown.  Like a train heading off a cliff with the fed pressing the accelerator.  

The market probably bounces next week, I'll load up on more shorts.  15.5% short is small compared to 98% long.

Theres a small chance the market crashes next week, if that happens I'll hold my shorts, not trade around them.  They are a hedge.

Real money in the markets is made by being long.  These shorts are just a trade, maybe 2-6 months, to help me survive until its time to go long again.

Going short

I think the market keeps correcting in the next 2 months.  Maybe 6-8 months.  Economic growth is slowing, the Fed is tightening, and the market internals are crap.  Should be at least as bad as Dec 2018.  Right now its like the market has run off a cliff, but hasn't dropped.

I added some shorts on Friday's open, which are now nicely profitable.  This market cycle is my first attempt at shorting.  This piece describes how I'm trying to do it.  A value investor trying to turn into a short seller.

How do professionals short?  Risk managing shorts is tough.

John Hempton at Bronte Capital described how they do it as fundamental long-term investors.  They search for fraud.  Like companies with mysteriously high margins, or where the products/numbers don't make sense in the real world, or ones run by previously fraudsters.  These stocks can go up several times on the way to zero - sometimes ten times  - so they manage risk with a lot of small positions.  Around 50-200 positions for a short book thats 50% of their longs.  They avoid heavily shorted stocks.  And continuously monitor positions to avoid gamma squeezes.  Its not possible for an individual investor.

Short-term traders risk manage by watching the screen all day, recognising when the position starts acting against them, and cutting their losses quickly.  They might be successful with a 2-to-1 failure rate, with failures typically cut a few hours after being placed, while successful shorts run for days.  I don't know how to trade, and I'm asleep most US market hours, so I can't do this.

Why am I going short?

I don't wanna sell my stocks because:

• We are living off the dividends (my salary gets added to my portfolio every month).
• Inflation should drop from 8% to maybe 3-4% this quarter.  Holding cash with 3-4% inflation, is still losing.
• The commodity producers I'm holding (oil, copper & palm oil) have not yet fallen with the market.  Some have wobbled a bit.  These stocks probably get hammered in the next few months.  But they might not.  I'm still bullish on commodities/inflation long term, selling them now to buy back later is a risk.  For oil, for example, there are good reasons why it may go higher in the next few months (starts at 10:22), 

So I'm shorting to hedge my longs.  So I can stay long for longer.

How am I doing it? 

First, I'm using Hedgeye's risk range and following The Macro Show to determine what and when to short.  Basically, they look at what has historically gone down in the current economic conditions, confirm that is it going down now, then look for times it is overbought to short it.  They trade a lot, far more frequently than I can, so I have to adapt their process for my needs.

So I've got to be more of a trader when shorting.  When I buy something, there are hundreds of reasons: the company has a moat, its undervalued, or management is god-like.  When I short, its because the price is going down.

Second, I'm only shorting ETFs or funds: index, country or sector funds.  Hedgeye's individual stock shorts are often too quick for me, sometimes covering on the same day.  And individual stocks can move too fast: better than expected (or less worse) earnings results can make them gap up.  Or maybe Musk decides to buy them over.

Third: I hope to hold these shorts for a few months, or until the market turns.  Won't be doing much trading in and out, since I'm not a good trader, even when I'm awake.

The main lesson I've learned is how fierce bear market rallies can be.  I shorted Q's in March.  QQQ had been dropping a while and was overbought, it was a good day to enter the short.  But it moved against me:

It was a 2% position, which was too big for a volatile instrument like QQQ.  Should have started with a 1/2 percent or 1% position, then added to it if it moved against me.  Need to keep my short positions smaller half the size of my longs, and remember that bear market rallies can rip your face off.

Right now my positions are:

• 98% invested in stocks (....the 2% cash is my last few month's salary).  Around 80% in low beta dividend payers, the remainder are commodity producers.
• 10% invested in Gold.  Yes, on margin.  Gold should go up when the market falls.  
• Offset by a total of -8.5% short positions.  Q's, Russel and Junk Bonds. Half these were added Friday.   May add more country shorts, eg: Korea, HK, Europe.

This piece is all I know about shorting.  If you've got this far, you'll realise I don't know much.  Its more a learning experience and probably too small to be a serious hedge.  Maybe it gives me some extra pocket money to buy more shares after the market has crashed.