Making some decisions and assessing my portfolio

As you can probably tell from my last post, I’ve been struggling with a position that was all too bearish during that monster rally we just had this past 6 weeks.  Overall, my portfolio value is down 28% since it’s peak value on 2/17 so I’ve got my work cut out for me here.

Who would’ve thought that the S&P 500 would be valued roughly flat YOY after the entire world goes on lockdown?  Obviously there is more to the story.  A few things I noted when I sold off my massive holdings of August puts on SPY (the S&P 500) last week:

  1. The S&P 500 is comprised of the largest companies in the US, which benefit the most from the largesse of the federal reserve.
  2. 25.5% of the S&P 500 is in Information Technology, which has been growing in leaps and bounds.  Add in the next two biggest holdings – health care and communications – and that’s over 50% of it’s holdings.  This is not a good tactical short.

What I ultimately decided was to focus on a 3-prong approach to my portfolio:

  1. Heavy cash balance both for safety and to stay nimble in case opportunities arise
  2. Focus on gold miners particularly which benefit from low oil costs and high gold prices.  These should disproportionately benefit from Fed largesse as a place for investors to hide.  Note that I’m sticking with the largest miners only here – they will not only be bid up first, but they will also benefit from the enormous access to capital a big company has in a world of easy central bank money.
  3. Longer term in-the-money puts on the IWM (Russell 2000) in case the market heads back down at some point.

Basically I figure if the market goes up it will most likely mean strong activity from the federal reserve, which should boost gold – so my gains in gold miners should outweigh my puts in the Russell 2000.  If the federal reserve tightens or deflationary waves hit, then my puts in the Russell 2000 should gain considerably to offset damage to my precious metals portfolio.

After my experience using long-dated in-the-money puts so far, I have found them to be very reasonably priced and to hold their value quite well even when the market turns against you.  I was surprised that after weeks of pain, my SPY puts only lost 23.5% of their value.  As such, I decided to use them on the long end as well, particularly focusing on the longest date available which is January 2022.

That being said, here’s the portfolio allocation I built up to date:

  • Cash: 44%
  • Long plays, total: 37%
    • Gold miners, 2022 calls: 22%
    • Silver (SLV), 2022 calls: 14%
    • Other, 2022 calls: 1%
  • Short plays, total: 20%
    • Shorts, Various, 2020 expiry: 2%
    • Shorts, Russell 2000, 2021 expiry: 10%
    • Shorts, Russell 2000, 2022 expiry: 8%

I’ll admit that the allocation to silver is mainly because it seemed a good opportunity.  Silver has been struggling and is currently about even YOY – but that isn’t why it was intriguing.

If you look at the commitment of traders report, the swap dealers are just about neutral on silver, whereas they are heavily short gold:

At the same time, the managed money interest (speculators) are a lot less long then they were only a few weeks ago.

With gold I’m going with the heavy investor sentiment because you have a really tight physical market, massive central bank expansion, and a rough economy – plus central banks have been accumulating gold for quite some time now and it seems they’re likely to continue.  Also, investor portfolio’s have historically low allocation to gold and negative real interest rates with a rough economy should convince many that a bit more gold is warranted.

With silver, I don’t think it will be accumulated by central banks or become an allocation class in a typical portfolio – I’m just thinking that the speculators who left that market are likely to get back in at some point here.  Gold sentiment is crazy bullish, and so are the gold miners.  This is already starting to spill over into the junior gold miners and could easily spill back into silver.  Silver is extremely popular with physical bullion collectors after all, and is always on the radar for gold traders.

Anyway, good luck finding trades that work – and don’t be too stubborn to admit defeat on those that don’t.  The markets are extraordinarily complex, and as far as winning trades are concerned, being early is equivalent to being wrong.  Happy Tuesday.




About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
This entry was posted in Uncategorized. Bookmark the permalink.

1 Response to Making some decisions and assessing my portfolio

  1. Pingback: My trading scorecard: decisions traced through the pandemic | Market Thoughts – What I’m doing and why

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s