A Rough Week for Risk Assets

It’s been a rough week for risk assets. My portfolio is down 9.9% on the week, and 18.5% on the month. In a less ominous sign, I drove with a friend up Big Bear yesterday morning only to find the tickets for Bear Mountain resorts were all sold out. We looked online and immediately bought tickets for Mountain High, where we rode the longest run in Southern California.

Going down fast can be exilirating.

Anyway, my portfolio weightings changed a bit this week:

  • HEDGES (11.7%)
    • 11.7% TLT Calls
    • 7.8% AG (Silver), shares
    • 6.5% AG (Silver), calls
    • 3.1% SAND (Gold, Silver & others), calls
    • 4.0% EQX (Gold), calls & shares
    • 4.3% LGDTF (Gold)
    • 4.5% SILV (Silver)
    • 4.2% SILVRF (Silver)
    • 3.8% MTA (Gold & Silver)
    • 3.2% MGMLF (Gold)
    • 2.1% RSNVF (Silver)
    • 2.3% SSVFF (Silver)
    • 2.5% HAMRF (Gold)
    • 0.9% DSVSF (Silver)
  • URANIUM (29.0%)
    • 13.3% CCJ, mainly shares & some calls
    • 6.7% UUUU
    • 2.7% UEC, shares & some calls
    • 1.8% BQSSF
    • 1.5% DNN
    • 1.5% URG
    • 1.4% ENCUF
  • US CANNABIS (16.3%)
    • 2.0% AYRWF
    • 2.0% CCHWF
    • 2.2% CRLBF
    • 2.0% CURLF
    • 2.0% GTBIF
    • 2.0% TCNNF
    • 2.1% TRSSF
    • 2.1% VRNOF
  • CRYPTO (1.0%)
    • 1.0% XRP
  • CASH (-7.1%)

Stocks dumped big time Monday morning. I tapped into margin a bit more, buying mainly Uranium miners all the way down my list, including adding another one. I also did my thing with US Cannabis, looking for anything that hit below my current market cap value threshold and adding shares to top it off. Then I sold some of my CCJ back at a small gain on the Wednesday morning bounce to reduce my margin back a bit. I also sold off the last of my XOM calls at that time for a decent gain.

As for AG, I did not intend for it to be such an outsized position for this long. I sold barely in-the-money covered calls on all of my shares to get an immediate 5% reduction and still sell them at a reasonable price, but they expired worthless on Friday as AG got hammered enough to put them firmly out of the money. Doesn’t matter too much I suppose, its a great company and there’s no way I’m dumping it at current prices. I ended up selling off my MARA shares to reduce my risk exposure a bit.

Right now markets are very oversold, making me expect a bounce.

Many are saying that we are firmly in bear market territory, which certainly makes sense given this chart:

If we are firmly in a bear market, then we can expect high volatility with huge drops followed by massive rallies that fail to break the new high, oversold conditions will not necessarily correct immediately, and the 200 day moving average should pose significant resistance.

In both the 2000 tech bubble peak and in 2020, we saw a volatile January followed by a run-up in February and a collapse in March. However, someone posted another scenario to consider, which is the 1994 market where the SPY peaked in January, then struggled lower through March before it collapsed. That was also a year where the 10 year yield jumped from 5.5% to 8.0%, which is worth considering given the recent pressure on 10-year rates and the hawkish tone of the Fed.

For now, here’s my prevailing view…

  1. Bond yields can’t get that high before they cause significant damage to the economy. Our corporations are deep in debt, the vast majority of which is in junk-bond territory. Of the small amount considered investment grade, almost all is at the last notch before junk. If they struggle to roll over their debt as it matures, it could cause a cascade of fire-sales and bankruptcies that quickly spirals out of control. The federal reserve knows this, and significant trouble in HYG and JNK should mark the end of policy tightening. For now, both indexes are at the same level as they were in early March 2020.
  2. Powell is under a lot of political pressure to do something about our high CPI readings. He can’t produce more oil or LNG or fix our supply chains, but he can raise rates and reduce the size of the fed balance sheet to crimp down on risk asset valuations so that’s what he’s doing. As I said above, he knows the dangers, and his preferred method of attack is through “forward guidance,” or warning the market about the above so that they start pricing it in immediately. This gives him maximum flexibility as he can shift views on a dime if financial conditions deteriorate saying that he never even started tightening, while no one will claim he’s easing if the stock market is struggling lower. This will most likely continue, and I still think the big inflection point will be in March when we see the end of QE and potentially the first rate hike. Once that happens, I will want to load up on TLT calls assuming I have any money available to do so.
  3. At this point, I really need to take advantage of rallies to reduce position sizing in order to get my margin back to zero. It is downright stupid to use margin at all during a potential bear market.

That being said, I do still expect that my core holdings will ride through whatever downturn as their products have solid demand in any market. Precious metals are considered a hedge for anyone who is worried about losing value in stocks and bonds, Uranium is a small but necessary cost for expensive base-load power plants that will keep running, and people will buy Cannabis no matter what the economy does – In fact, the long-awaited federal legislation for safe banking (essentially federal legalization of cannabis companies complying with state laws) will only continue to get pressure as the US Government seeks a new source of tax revenue. All of these should see significant upside in the next 5 years. However, they can all go significantly lower in a liquidity crash like we saw in March 2020.

As of now, I don’t think we’ll see a big crash before the end of March. I also believe there is a significant chance we see a big rally in February. If that happens, I hope to reduce enough to get a decent cash position ready. If February chops lower, into March, I’ll need to reduce exposure at that point regardless of price … there’s no way I’m going into March/April with margin debt this year.

Good luck and be careful out there – bear markets have a tendency to hit bulls and bears alike. It will certainly be interesting to see how much the massive retail investor presence will react as big price moves will encourage them to trade, just like they do with me.

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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