Rethinking my positions as markets get volatile

It’s been a volatile week. Looking at my weekly market performance, I’m down 2.1%. In fact, my peak valuation was back on Jan 30 and since then I’ve been down every week with a cumulative loss around 36.5%. I actually have less money tucked away than I did in October 2019, despite working full time and saving a significant sum in the interim.

I realize that plenty of people would immediately say I should throw in the towel, never look at a stock market again, and put everything into an index fund from here on out. Then they’d point at their fantastic gains from doing just that. All I can say is, that’s not my path. I simply don’t trust that plugging all of my money into SPY would yield me enough to retire on in 30 years – it seems more likely to me that it would be like plowing all of my money into the Nikkei back in 1990, adding in year after year, and trying to retire off that. Besides, with my path I have hope – serious hope that I can get somewhere some day.

I made a few notable trades this week, like buying 1-month puts in EEM and QQQ on Monday and selling them on Wednesday for a decent gain. Then on Thursday I rolled those winnings into 1-month calls on TLT thinking that there was an air pocket without much resistance for a ways. I should’ve looked before I leapt though, which isn’t always easy when you’re working full time, because there is considerable volume at the 138 level traded on Feb 25th, making that a significant near-term resistance. Still, there’s the end-of-quarter rebalancing, the tightening regulations on bank capital, and the purchases of the federal reserve – it could turn back.

Aside from that, my PVG was liquidated last week when covered calls expired in the money and I saw the silver miners get a major smackdown – so I loaded up my exposure in silver miners this week.

I suppose I must be wired to look for mean-reversion in a market that is strongly trending. Interesting to think about anyways, I certainly have plenty of room for improvement in my trading.

Last year I was dumb enough to think that the economy would suffer and the stock market would eventually reflect it, then I moved on to being dumb enough to think that the massive amount of liquidity chasing low yields and highly overvalued companies would eventually find it’s way into precious metals, then I moved on to being dumb enough to think that the deflationary forces of record high unemployment and record high levels of unproductive debt would keep a lid on long-dated interest rates – and that precious metals and commodities would be there if I was wrong.

My main takeaway from 2020 is that my biggest trade ideas were way too consensus:

  1. In mid 2020, my calls of a struggling market were way too consensus – especially given the massive injection of Fed liquidity which has proven time and again to find it’s way into the stock market.
  2. Betting on precious metals was also way too consensus. Everyone, bullish or bearish, thought that gold and silver would be a good place to hide late last year. Speculative investors were heavily long, but that didn’t seem to bother me because they had been long since 2019.

Currently, my main two trades are not consensus, or at least they don’t feel that way.

TLT: 20+ Year Treasury Bonds

Everyone seems to believe that long-dated interest rates are going higher. They’re trumpeting that message on Bloomberg, and I see it endlessly on Twitter.

I look at the COT report however, and I struggle to figure out what it means: CFTC Commitments of Traders Short Report – Financial Traders in Markets (combined)

These financial futures divide out the following:

  1. US Treasury Bonds – I can’t figure out what the duration is
    1. Dealers are net short, which is typical
    2. Asset managers are significantly net long
    3. Leveraged funds are significantly net short but covered a bunch of shorts last week
    4. Other (small investors) is slightly net long and sold some longs
    5. Nonreportables in treasuries (perhaps foreign investors?) are slightly net short but didn’t trade much.
  2. Ultra US Treasury Bonds – A google search says this is 20+ years duration
    1. Dealers are net short
    2. Asset managers are heavily long
    3. Leveraged funds are heavily short and reduced longs
    4. Other is significantly long and covered some short positions
    5. Non-reportable is roughly even and sold some longs
  3. 10 year US Treasury Notes
  4. Ultra 10 year US Treasury Notes – Google says that the difference between the 10 year and ultra 10 year is the range of maturities. So is the duration 10 year but the spread between 2’s and 20’s vs closer to 10? I have no idea.

I was hoping to give some analysis here, but I’m lost on that – all I can say is that the world of US treasuries is extremely complex and opaque. I’ve heard about the record net shorts in yield-sensative assets but I don’t see where it is. I even tried looking at short interest in TLT and it doesn’t seem high or at a particularly high point.

All I can say is that I really think the long term deflationary forces in our economy (high debt levels requiring servicing, high unemployment, low wage growth) outweigh our inflationary forces (government deficit spending) and that many of our current inflation measures are up due to temporary Covid-related restraints on supply and transportation. This should cause interest rates to roll over, though it could easily take a couple of years to do so which would make all my call options worthless.

I’m leaving this trade where it is for now, but I really need to look into it more and I don’t have time at the moment. The chart looks like it is still oversold after plummeting substantially in February, and it has a decent chance of testing the 50-day moving average or at least consolidating a bit below the 138 resistance before it continues on.

Gold and Silver Miners

This trade also has a remarkably non-consensus feel to it. Despite the gold and silver squeeze narratives, gold has been hammered down to bearish territory on the charts while silver has been hanging on. Despite this, I am used to precious metals consolidating for longer periods between upward moves so it doesn’t seem that shocking that the bull flag formation starting last June would continue on for so long. Even the great gold bull market of 2000-2010 showed year-long downward consolidation moves.

The COT report in gold is thankfully much simpler than that of treasuries. There is only one contract for GOLD and one for SILVER.

Producers – the gold and silver miners themselves – are always short because they like to hedge their positions to ensure that their mining operations are profitable.

Swap Dealers – the big bullion banks who routinely manipulate the market – are close to neutral on Silver but still significantly short gold even though they’ve been covering those shorts relentlessly in past weeks.

Managed Money – Big investment funds are still long both gold and silver, and they have become a bit more long gold and less long silver last week but not by big margins.

Other and non-reportables – Typically smaller funds and retail – are still long both silver and gold. They picked up more shorts in Gold last week and reduced a few longs in silver as they become more nervous about both.

This looks like a classic story of retail being shaken out of the trade while the big guys cover their shorts, and I am happy to be long here. In fact, I still strongly believe that we’re in a bull market in precious metals which could last a decade, that the downside risk is somewhat limited while the upside possibilities are big.

The biggest danger I see for gold is an actual liquidity event – which could happen if the dollar continues to strengthen, more emerging market currencies blow up, and more funds blow up, but this event would make my bets on TLT pay off big time as long treasury yields would plummet just like in March 2020.

I do plan to shift from Gold more toward battery metals and emerging markets after the re-opening starts. In my view, this will be initially bad for risk assets as money finds more real world investments and pulls out of the artificial market ones – and then it will set the stage for significant growth … but this is a shift that is at least 2 years out.

Here’s where my portfolio landed:

  • DOWNSIDE BETS (41.2%)
    • 32.6% TLT Calls
    • 6.0% IWM Puts
    • 2.7% EEM Puts
  • GOLD (20.5%)
    • 5.9% FNV, WPM, GOLD & NEM Calls (Large gold miners)
    • 8.0% EQX (Small gold miner)
    • 6.6% SAND Calls (Small gold streamer)
  • SILVER (17.5%)
    • 10.8% AG (Small silver miner)
    • 0.8% AG Calls
    • 5.0% SILV (Small silver miner/explorer)
    • 0.8% RSNVF (Really small silver miner/explorer)
  • COMMODITIES (14.9%)
    • 10.0% CCJ shares (Uranium miner with covered calls)
    • 2.1% ALB (Lithium)
    • 2.0% NMGRF (Graphite)
    • 0.8% NOVRF (Nickel/Copper)
  • CANNIBUS (4.9%)
    • 4.9% split between CRLBF, GTBIF & TSSRF (companies with significant US footprints)
  • CRYPTO (3.1%)
    • 3.1% split between ADA, LINK & LTC (Coins smaller than ETH that are in the top 10)
  • CASH (-2.1%)

I dipped in the margin a bit because the silver miners really got hammered this week and I had been meaning to load up on Silvercrest in particular for a while now. I do this from time to time when there’s a compelling buy, but not by much and I get back to positive cash fairly quickly.

A final note before I end my post today …

I started by mentioning my losses because I need to be honest about them. Last year I ended up losing 16.6% despite being up 4.4% from april to year-end because my views were more consensus than I thought. This year I am going for a different approach which involves significant risk using options to bet on non-consensus plays, so it shouldn’t be surprising that it goes down significantly before it turns back. These are long dated options with nearly 2 years to play out, and I’m diversified into a few other things, so my account won’t go to zero. However, if gold, silver, or long dated interest rates go my way then I will still be sitting on significant gains overall – provided I don’t cut out too early like I did with CCJ last week. I’m still relatively young and my expenses are low so this is the time I should be taking risk. Good luck, and happy trading!

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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