Last week I finally bit hard on the lead bullet and Closed (bought back) a large part of the FTSE100 Short Position that I have been battling with all year. If you skip over to the ‘Trades’ page which sits on the WD1 website then you can see more gory details and I have put some reasoning there with regards to why I have taken the action.
I will get on to the Charts later in this Blog as per normal but the key driver for my decision to reduce the Shorts is because most of the Major Indexes and now the FTSE100 as well have done ‘Bull Crosses’ on the 13/21 Day Exponential Moving Averages and I find that this is a hugely reliable and predictive Indicator that suggests weeks of gains ahead. It has been obvious to me for most of 2019 that Autumn would be my best chance to reduce the Shorts if we did not see a significant drop before then (I was expecting some drama around the original Brexit date of 31st March but of course the Government and Parliament bottled it and gained an Extension which they then went on to waste with their constant bickering).
With Autumn only doing a fairly mild Sell-off and with the Technical Indications that more upside is highly likely, I made the decision that carrying the Shorts for more time was unlikely to make my life pleasant and the simple reality is that I can add more Short very quickly if I feel the need to. That is the beauty of Hedging a Portfolio in this way in that you can move very fast and in a large scale which is something you simply cannot do by Selling Stocks and moving to Cash and then having to move back into Stocks again. The reality is that this process would take ages and incur a lot of Cost.
On the subject of Cost, I have taken a huge hit to my Portfolio of around 4.1% which is extremely painful. However, it of course needs to be realised that this is not a Loss as such and it is in fact better described as ‘Gains foregone’ – clearly this is not ideal but I made a conscious and well thought through decision at the start of 2019 that I wanted to massively reduce the Risk on my Portfolio because the potential for Brexit Disaster is immense and that is what happened. The problem is that in removing so much Downside Risk I also removed most of the Upside Risk !! That gets to the crunch of the problem with my Hedging Strategy as it has played out this year and it is a mistake I seem to be able to continually make without actually learning !! I made 2 errors with this Hedging – the first and more minor one was to Hedge in too large a size and the second and critical mistake was to ignore my carefully planned Stoploss Levels and to let the Trade run. If you look back at my Blogs from early in the year (I suspect late January would be the time) I am sure I mentioned in them that I was keeping the Hedges running (and over-riding my Stops) because I still saw Risk from Brexit and that was the same situation as was the case when I first put the Hedges on. However, I realise now that this is probably not the best way to do things – although my ‘thinking’ Brain was telling me that the Risk was immensely high still, what I was missing was that the Market was clearly telling me that the Risk was perhaps lower than I thought – and ignoring what the Market was shouting at me was a huge cock-up. Perhaps I was right to think that Brexit had the potential to be a right flipping disaster but what I should have done was to obey the Stoploss and Close the Shorts and then once I got more signals that there was trouble afoot, then I should have Re-Opened the Shorts. It really is that simple and my over-thinking and lack of discipline is the real culprit here. On the Position Sizing I most definitely had Shorts that were too big but that is partly due to the mis-match between my Portfolio of Shares which are a mix of different things from the various Indexes from the FTSE100 down to the AIM stuff and these matched in a bad way with the FTSE100. There is no doubt a Short on the FTSE250 would be better but this has drawbacks in that the Margin Requirements for a Spreadbet are ridiculously high and that you cannot trade it out of Market hours. I still have a Short Position on the FTSE100 but it is now much smaller and I have quite a small Short on the S&P500. It strikes me Markets are massively pumped up and I will get plenty of opportunities to Close these Shorts on a Sell-off I am sure and they are now of a size that is easy enough to manage. It is unclear why Markets are doing so well and my only sensible judgement is that Interest Rate Cuts and lots of clever Monetary Measures like more Quantitative Easing (QE) and even talk of ‘Helicopter Money’ is pumping up Markets by pushing Investors into Stocks because they are the best yielding Assets in town but the problem is that this all seems very fragile and after the longest Bull Market in history it is obvious that Mean Reversion could kick in hard at any time. My Strategy will be to add to these Shorts if I see the need but any new Shorts will have Stoplosses and they will be obeyed !!! I am annoyed with myself for having such a lack of discipline and not obeying my carefully planned Stoplosses and this sad episode has taught me the importance of obeying Stops. For all my irritation I am taking an extremely important positive from this in that I know that my Approach to Hedging as long as it is executed with full discipline of my Stops, will mean that I have a Strategy that can endure and will work when needed and it means I am well placed whether the Markets rise or if they fall. I suspect this puts me at a big advantage to most other Private Investors who will have put very little if any thought into Downside Protection and although it has been an expensive lesson, I am confident it will help me a lot in the future. I am pretty sure there is a lot of complacency about. Last Week My Portfolio was down 0.5% last week which is disappointing because I think the Markets were generally up but I have no doubt much of this was down to the drag from my Short Positions but of course going forwards this effect will be hugely reduced. My Strategy has not changed – I am being extremely cautious and I think the potential for Markets to take fright from Brexit screw-ups is immense. Add to that all the concerns around Economic Growth (although there were some signs that things might not be as bad as they have perhaps appeared a few weeks ago) and the fact we are in the historically difficult Autumn period, and the need for caution is obvious. I have a fair bit of Cash and I am in no rush to buy anything although I might pick up a bit more LVCG at some point soon. It is unclear when things will be much better. I can see a situation where the turmoil around Brexit goes on well into 2020 and a General Election cannot be far off and this brings in scary risks like a Corbyn government. Another Referendum would cause a Civil War re-run with Boris in his Oliver Cromwell armour against the massed forces of the Establishment in all its forms, and on top of this we have the German Economy looking very shaky. What a mess. Blog Slate A few days ago I put out an ‘Educational’ Blog on WD1 which was an explanation of how my Websites are structured and a breakdown of what is on each page on the Sites. I also put some thoughts around some minor changes that I would like to make but when these will happen I cannot be sure of !! I also put a Link to this Blog at the top of the Homepages on both WD1 and WD2 so that Readers can click this and use the Blog as a quick reference guide. I have loads of Draft Blogs in the pipeline and this Week I intend to either put one out which looks at how Portfolio Managers make very poor Selling decisions or I will stick that one which is the Buy Checklist for ‘Blue Sky AIM Stocks’ out. It will probably be the Selling decisions one because that seems quite relevant to me at the moment although I know many Readers will be eager to see the other one. A Couple of reasons why I should have learnt my Lessons earlier These Blogs are related to what I wrote about at the start of this Blog and one is quite a recent effort and the other is now quite old. Both could be worth reading again though. This first one has Links at the bottom to the earlier parts: http://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-6-of-6 http://wheeliedealer.weebly.com/educational-blogs/topiary-time-aka-all-you-ever-wanted-to-know-about-hedging-but-were-afraid-to-ask Better look at some Charts then. DAX As per usual, all my Charts are taken from the exquisite SharePad Software I subscribe to and if you click on them they should grow bigger so you can see more detail. I am quite intrigued by the German DAX because it has been looking quite fragile to me with a string of small Doji Candlesticks which I will show in a minute and because the bounce off the recent Low has been extremely steep and this tends to be unsustainable. The DAX is a choppy and unusual Index because it only has 30 huge Companies although it does tend to move in line with all other Major Indexes. On my Chart below, please look at the Red Line which is pointed at with my Red Arrow and this could be Resistance that kicks in now – if the DAX can get over this Line then that is Bullish.
On my next Chart I have zoomed in on the previous Chart but what I am pointing you at is the string of Candles where my 2 Black Arrows are and this is what I mean by a “Steep” Rally since the recent Lows. As I mentioned on the previous Chart, we are up near the Red Resistance Line now and also there is Horizontal Resistance from back in July. Note also how these Candles are often quite small and are in essence categorised as ‘Dojis’ – this suggests a lack of commitment by either Bulls or Bears.
Now onto the Weekly Candles for the DAX – my Ellipse here is capturing 3 big White Up Candles and this could be a ‘3 White Soldiers’ pattern which would be Bullish.
In the bottom window on my ScreenShot below we have the Relative Strength Index (RSI) for the DAX Daily. On a Reading of RSI 65 where my Arrow is this is quite high although it could go a little bit higher before becoming quite Over-bought.
Next up we have the Daily Candles on the DAX with the Pink Zone marking the Upper and Lower Bollinger Bands. My Arrow is pointing to how the DAX is currently up near its top Band which could lead to a Pullback or a Sideways move but note how before the latest Candlesticks, the Price was ‘hugging’ the Band higher although that in itself points to what I said earlier about this being a very ‘Steep’ rally.
S&P500
First off the Weekly Candles. My Blue Arrow is pointing to an Up Candle from last week and despite it recovering off Lows and doing a Reversal, this looks Bullish to me and is not something I would see as a Reversal Candle which would suggest a Drop ahead. Note how this is up near the All Time High (ATH) at 3028 where my Black Arrow is and it seems very possible this could break-out to a New All Time High very soon. That would be Bullish behaviour which is quite remarkable this time of year and with all the Economic worries that abound.
On the next Chart we are into the Daily Candles with the Pink Zone being the Bollinger Bands. This is very interesting and shows how Weekly Charts and Daily ones can show different things with the shorter Period Chart obviously picking up on a change earlier. My Black Arrow below is pointing to a Doji Candle from Friday and note how this follows a Shooting Star sort of Doji Candle from Thursday. This Shooting Star is a Bearish Reversal Candle and we might see a drop early in the coming Week. This would be no huge shock because we are up near the ATH afterall and even if the S&P500 does Break-out and go higher, it might need a few attempts.
Next we have the Daily Candles for the S&P500 with the Black Wavy Line being the 13 Day EMA and the Red Wiggly Line being the 21 Day EMA. Where my Red Arrow is, note there was a ‘Bull Cross’ and currently this is in force on the S&P500 and until we get a ‘Bear Cross’, we should expect more upside in the main (obviously we can get Pullbacks for a few days without upsetting the overall Bull Signal given by the 13/21 Day EMA Crosses).
In the bottom window on the Screen below we have the RSI for the S&P500 Daily. Where my Black Arrow is we are on a Reading of RSI 61 and this has a fair bit of room to go higher.
FTSE100
First up the Bull Cross on the 13 and 21 Day EMAs which was the main driver for me Closing most of my Shorts on the FTSE100 and if you look closely you should be able to see this where my Red Arrow is. As you can see from previous Bull Crosses and Bear Crosses that are marked on my Chart, these tend to be quite predictive.
Next up the Weekly Candles for the FTSE100. My Ellipse is capturing 3 White Up Candles and this could be a Bullish ‘3 White Soldiers’ pattern which obviously hints at more gains ahead.
Next up the Daily Candles with the Bollinger Bands. My Blue Arrow is pointing to a small Up Candle from Friday which looks bullish. Note it is at the Top Bollinger Band which might be a place where it hesitates.
My Ellipse is capturing a Zone of Resistance up above from about 7450 up to around 7750 – this could be a difficult area for the FTSE100 to get through.
In the bottom window below we have the RSI for the FTSE100 Daily. On a Reading of RSI 55 this is only just over the Neutral 50 level and suggests lots of room to rise if it fancies doing so.
Telecom Plus TEP
I hold TEP in my Income Portfolio because of the sizeable Dividend Yield (expected 4.7% next year) and it has been falling back for about 3 months and is starting to look overdone. My Red Line marks a Downtrend Resistance Line and the Price needs to break-out of this Line in order to keep recovering. Note a lovely example of a Bullish Hammer Candle where my Blue Arrow is and how this predicted the gains of recent Days.
In the bottom window on my Screen below, where my Arrow is note the extremely low RSI reading which corresponded with the Hammer Candle I just showed – and if you look to the left you can see this was a very Over-Sold RSI level.
OK, that’s it for this Blog – good luck for the coming battles with the Markets, Cheers, WD.
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