It’s been a rough month for commodities in general. My last 4 weeks of performance were -10.8%, +2.9%, +0.4%, -0.9%. It looks even worse when you look at the miners:
I own all of these names above, and they make up more than half my portfolio, so it’s a wonder I wasn’t down more.
I sold some more TLT calls this week to pick up miners on some of these dips. I’m trying not to overdo it though, because bonds are currently working, and I am still selling them at a loss compared to my own buy-in back in mid February. One short-term trade I got right though … last week I had reduced my holdings of TLT calls roughly 25%. I expected a high CPI reading on Tuesday, so I looked for a dip in bonds and got 5 shorter dated TLT calls (Jan 2022), then sold them 2 days later for a decent gain.
Still, my performance has been downright lousy as my account balance is roughly the same as it was late 2019 even though I’ve been putting money in from every paycheck in between.
What can I say, I cut my teeth in markets that did this:
I started trading in 1999 and learned hard lessons about bubbles, cycles, and fundamentals. Stocks were mean-reverting beasts and you needed to take profits on any significant gains.
I never expected that markets could start doing this:
The hard lesson I’ve been learning is that fundamentals don’t drive prices – it’s all about cash flows. Who cares if earnings are roughly flat, as long as money piles into passive funds while interest rates are pinned at zero and corporations borrow like crazy for ever-bigger stock buyback programs.
It’s easy to think that this is a mega-bubble destined to pop at any moment. Everyone wants to be Michael Burry from “The Big Short,” proving that fundamentals actually do matter at some point. It’s a very compelling trap thinking “I’ve been wrong so far, but I’m really smarter than everyone else, just wait till this thing blows up!” Unfortunately, that simply leads to trading on emotions which will absolutely kill your performance.
My trading on the miners so far this last year actually wasn’t bad. I managed to get longer at the right times, owning more long-dated call options and such, and to get shorter at the right times by selling my call options down and selling covered calls on my shares. My performance was killed by my hedges … buying too many index puts at just the wrong times, then buying too many TLT calls too early.
I’m still thinking of these mining stocks as being in a beaten-down phase of a multi-year bull trend. These are capital-intensive cyclical businesses which take years to get more production on line. Bear markets (2012-2018) lead to underinvestment, which leads to tighter supply, which leads to rapid gains when demand goes up.
Right now the economy is about to face enormous headwinds as government stimulus programs die off while the total number of jobs fails to recover. The mining shares can be beaten down a lot more. However, I’m still more comfortable holding those than I am holding most other stocks with their extreme valuations. I figure that as long as I’m careful – meaning that I don’t use leverage, I stick mainly with shares (call options expire and must be considered trading positions), and I diversify or offset my risk a bit, these things will eventually start moving.
Here’s where my portfolio ended up:
- DOWNSIDE BETS (35.0%)
- 23.0% TLT Calls
- 6.9% IWM Puts
- 3.7% QQQ Puts
- 1.5% EEM Puts
- PRECIOUS METALS (42.4%)
- 10.2% AG (Silver), mainly shares some calls
- 8.4% SAND (Gold, Silver & others), all calls
- 4.9% EQX (Gold), shares & calls
- 4.3% SILV (Silver)
- 4.0% MTA (Gold & Silver)
- 3.3% SILVRF (Silver)
- 3.2% LGDTF (Gold)
- 1.6% WPM (Gold, Copper & Silver), all calls
- 1.3% RSNVF (Silver)
- 0.5% SSVFF (Silver)
- 0.6% GOLD (Gold, Copper), all calls
- OTHER COMMODITIES (13.5%)
- 5.6% NOVRF (Nickel/Copper)
- 4.2% CCJ (Uranium)
- 2.3% UUUU (Uranium, Vanadium, Copper)
- 1.4% BQSSF (Uranium)
- CANNABIS (5.7%) split btw CRLBF, GTBIF & TRSSF
- CRYPTO (3.0%) all ADA
- CASH (0.4%)
As you can see, I re-built my Uranium portfolio. On my May 29 post, I had 10% of my portfolio in CCJ and another 1.1% in UUUU. By June 20, these positions were totally gone because my covered calls expired in-the-money triggering a sale. The stocks continued higher for a time, but I waited it out, finally adding a little bit in early July. This week I added considerably, particularly on Friday.
Here’s the big reason for weakness this Friday, and why I bought into it:
This Friday was a significant options expiration. Certain miners like CCJ and AG have very heavy options volume – both in calls and puts. Options dealers sell these positions to retail, and hedge them by purchasing more shares as the price goes up and selling more shares as the price goes down. When these options expire, the dealers need to sell shares at the strike price if it’s in-the-money (for calls) or buy shares at the strike price if it’s in-the-money (for puts), and they automatically buy or sell shares in the market to cover these positions. The result is that share price moves are greatly accelerated into expiration – this time to the downside.
We’ll see how things move forward in coming months. My guess is that interest rates continue lower and bottom in the fall (TLT rises), and that commodities continue to struggle but their downside from here is somewhat limited.
We might see a turn in the major US indices, but I’m thinking of selling off my QQQ puts next week (at a loss) and getting what I can out of those. Big US tech has enormous market power and government support, they get the bulk of any index-fund inflows, and they buy back their own shares like crazy. Also, low interest rates are considered good for the tech sector. I’m more comfortable sitting on puts in IWM which is mainly supported by meme stocks like GME and AMC, but I’ll stay wary as I’ve learned not to overdo it with puts.
Good luck and be careful, these market forces are dangerous, powerful, and quick.