Wednesday, December 31, 2008

Long time, no post

Happy New Year to all two of my readers!

OK, it's hard to work full time, do the trades and think aloud in public. A lot of things kept me from writing... health and work issues.

I look at where I stood back in September and now, all those positions are gone.

Sitting here on the last evening of the year, the trading account is +26% for the year.

It's not really relevant, since I'm only writing about my trading account, but the gains don't come close to balancing out the ass-kicking my value-oriented advisors took on my behalf in a separately-managed account. The next time we sit down together, we are going to have to have a frank discussion about the value of trailing stops for winners and stop-losses for losers.

Let's fast-forward...

I went into October in pretty good shape. I was short basic materials (SMN) and gold (DZZ) over long Dow (DDM).

If you pull out a 1-year chart, gold was a head & shoulders top with the neckline at 850 that should've resolved to about 750. I had one batch on at that right shoulder in July about 950 and another batch when it broke the neckline. I put on a third batch when it pulled back to the neckline in August.

I took off the position when the physical metal hit 750, just a matter of discipline. This was a nice, tidy trade. It did just what it was supposed to do.

I had a lot of SMN on. That was my big, secular bet that the Chinese buyer's strike leading up to the Olympics wasn't going to end. If you looked at a broad range of commodity charts, you could see the world just fell off a cliff starting in early July.

It got up to 1150 shares at one point. Every day in the fall, just doing money management, I'd put what I thought were outlandish ask prices out there to take profits on the position. I'd put 100 out there asking +15, +20%... and get hit.

The problem was, as I took profits, I lost my hedges and started getting my ass kicked by the Dow longs. Should've taken them off at the same time, but I was still playing the overbought/oversold oscillator game that had worked so well for 15 months. It completely broke down in October.

I had two good trades in SDP (short utes) and EWV (short Japan).

If you pull out the utilities index XLU on a 2-year, they did a head & shoulders with a neckline about 36 and a target about 29. I couldn't figure out a thesis for it at the time, thought maybe they were predicting inflation? Of course, now we know it's because they're all debt monkeys and were going to have to pay much higher coupons for their paper. So I put on SDP in August. Same situation - as I took it off, I was left exposed on the long side.

Japan just had an ass-ugly chart. Nikkei broke longstanding support back in July. I sold this one really well into those gaps in October. Looking at it, Nikkei is trying to fill that same gap. Starting to look tasty on the short side right here.

The volatility all through late October and November was insane. At my best point, mid-late October, I was up 34% for the year at $202K, but I wound up taking off all my short-side stuff and giving back 10% of that in about a week in November.

I took a deep breath, got completely back to cash, and started playing for volatility. That worked for a week or so.

Bid on the long side -5%, ask +5; bid on the short side +5%, ask -5%, playing for lunch money. In the depths of November, I'd come in net long and get my ass kicked all over again. The newsflow seemed to be driving things. There wasn't a rational strategy you could play that didn't involve foreknowledge of events.

OK, so, where I am today...

Half cash. $95K

- After losing it once to a stop, long TBT, the double-short long bond. As manipulated as this crap is, owning TBT feels like walking up and slapping a cop. I have about $28K of this on. After yesterday, I'm basically flat.

I have no edge on what the Fed will or won't do. I'm just looking at TBT's inverse, the chart for TLT. Textbook exhaustion gaps. So I am long 800 TBT now at various points in that big floating island over the past couple of weeks.

- Long gold, watching that downtrend line very carefully, though. About $16K. Basis of 15.25 on DGP.

- Long a wee bit of gold microcaps (NXG, AGT). About $5K lottery ticket.

A few years back, I did some research on the gold bubble from '76 - 80. Until the final year, you were far better off owning physical metal than miners. The same has been generally true since 2002, due to extraction costs.

In the 70s, gold ran from 35 to 200, got cut in half to 100, then went parabolic at the end of the decade.

In the last year of its run, the best vehicle was stocks on the Toronto Venture Exchange, Canadian microcaps. It's hard to get good data from this period, but from what I've been able to piece together, the *average* junior miner on the TVE had a gain of 350% over the final year. If you could pick a single stock in the top 10% of performers, you had an average gain of 2800%.

A caveat: whether due to mergers, bankruptcy, whatever, not a single one of those tickers existed as of 2003. You have to be willing to take your profits.

So I decided on a strategy of building a basket of junior miners. They had to be cashflow-positive and have low or no debt. Any rate, I wound up with NXG from 0.65 and AGT from 0.18.

There were just some pretty, pretty setups in this group.

- Speaking of pretty setups, biggest (and best) position is long 4000 SLW from 2.73. I got interested because I'm aware of the difficulty obtaining physical silver. Watch how it behaves around that 8 resistance.

- 300 DDM, about 10K

- 300 FXP, about 10.5K.

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