Narratives and Rotations

I’ve done a lot of thinking about the market in the last week – where we are, where we’re going, and how to play my hand.

A few weeks ago, I decided to bet half of my holdings in TLT calls that expire in Jan 2023. Much of the market seems illiquid and fragile, as prone to a crash down as a crash up. This trade has been going against me these last few weeks as it is expensive to hold, yet it is also a large offset to downside risk. As such, the remainder of my portfolio needs to embrace proper upside risk. Gold miners were clearly not seen as a successful counter to this, as they are still on a long downward consolidation.

The question then is what works, and for that it’s often best to find and follow the overlying narrative.

In the charts above, you can see a trend from one narrative to the next. After the pandemic and the initial lockdowns, there formed a powerful narrative around tech. Work from home, zoom meetings, and the rapid acceleration of online shopping adoption. This was the main narrative until the turbulent shift around September. By November, the vaccine re-opening trade took over big time as the Russell 2000 small caps roared higher along with casinos, cruise ships, airlines and so on. Big oil like XOM was part of this narrative as well. Then the narrative shifted again from reopening to re-flation which fed all sorts of commodity trades including Uranium (CCJ), Copper (COPX), and Agricultural (MOS) as shown above.

I have been playing the commodity trades by looking for companies which paid significant premiums for covered calls with 1 month or less duration and then selling covered calls on them. The big ones I’ve been using were AG (silver), CCJ (uranium), and PVG (copper & gold). This left me with significant cash at the beginning of the week as a lot of these calls expired in the money so my shares were cashed out at the given strike.

We saw some significant market turbulence this week as long dated interest rates were rising at a rapid clip and there were significant pullbacks in different areas.

I decided to keep a relatively low proportion of money in gold miners, but I wanted to leverage it a bit to gain when these eventually turn – which got me first into a significant number of 2023 calls in the gold streamer SAND, and more recently into 2023 calls in the big players – FNV, NEM & GOLD. I skipped on WPM there because I’m still sitting on a significant number of shares, on which covered calls just expired.

On Friday morning the markets were kind of amazing. They opened high and steadily drifted down over the next couple hours. Everything was going down at once, which said to me that it was probably a liquidity event where the previous winners often get oversold to de-risk while taking profits, and I figured that the re-flation narrative would remain dominant. Commodity stocks were correcting down hard in everything from Uranium to battery metals.

My TLT position threw my risk management upside down here, because if everything kept tanking it would spark Fed action which would certainly be in the long bond – so my risk was the correction ending and everything starting a new leg higher. With that in mind, I wend nuts allocating all of my cash into CCJ, several battery metals stocks, and even a small position in US Cannabis companies just to diversify a bit. I didn’t sell covered calls on any of it because I’m playing for a sharp reversal. As the day went on I was shocked to see that I actually bought around the bottom and everything went up in a sharp V. I’ll probably sell covered calls on it again Monday morning. These are often valued the highest about 15 minutes after the open due to the retail traders at that time, so that’s when I’ll be selling these.

Here’s how my portfolio ended up:

  • DOWNSIDE BETS
    • 41.1% TLT Calls
    • 7.0% IWM Puts
    • 2.9% EEM Puts
  • PRECIOUS METALS
    • 4.8% WPM (Large gold miner)
    • 2.7% FNV, NEM, GOLD Calls (Large gold miners)
    • 2.7% EQX (Small gold miner)
    • 6.1% SAND Calls (Small gold streamer)
    • 5.3% AG (Small silver miner w/ covered calls)
    • 3.2% PVG (Gold/Copper miner w/ covered calls)
  • COMMODITIES
    • 10.4% CCJ (Uranium – I still love the growth story there)
    • 1.9% ALB (Lithium)
    • 2.0% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS
    • 5.2% split between CRLBF, GTBIF & TSSRF
  • 3.9% Unallocated cash

I changed my headings a bit to reflect my current thinking on these things. For example, my Hedges would previously range between 10-20% of my portfolio. Calling a 51% allocation of anything a “hedge” is disingenuous – that’s a downside bet. Also, as much as I talk about diversifying from precious metals I am still a bit of a gold bug, and I’d be really frustrated if I ended up selling the bottom.

As a final note, a friend of mine was telling be about the massive changes and renovations being planned at Dana Point Harbor. It really got me thinking … we’re in a time where many small businesses have closed their doors for good while the big guys are stuffed to the gills with cash. As a result, I wouldn’t be surprised to see massive construction projects going forward as many areas go through renovations and repurposing from shopping malls to office buildings to shopping centers, movie theaters, restaurants … if this happens then it could definitely give some life to the commodities boom, even as supply disruptions disappear in the post-pandemic world.

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 gluskinsheff.com. 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
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