In many ways it makes no sense whatsoever (more on that in a bit) but last week the S&P500 and other major US Indexes made New All Time Highs (ATH) and that can only really be seen as Bullish. I will show the S&P500 Chart later in this blog.
This gives me a problem. All year I have been running a Short Position on the S&P500 in order to Hedge against trouble that I expected to hit Markets, but rather surprisingly the Markets have been pretty strong for all of 2019 so far and I have had few opportunities to unwind my Shorts in a way that minimises the damage. My current thinking is that very soon I will close my S&P500 Short and take the hit but I will keep the Shorts I have running on the FTSE100 as the potential turmoil from the General Election and its outcome is significant.
When it comes to Hedging there are really 2 different types with regards to how I now think about it – Dumb and Smart.
‘Dumb’ Hedging is pretty much what I have been doing all year (although of course my initial intention was to be ‘Smart’ but I slipped into the usual traps that a lack of discipline are destined to throw our way if we take a chance with how things will play out) and this is really where the Shorts stay in place over a period of time and offset any gains on the Long Portfolio of Stocks - but if the Shorts and Longs are ‘in balance’ then you end up with not much loss but equally not much gain.
This sort of Dumb Hedging is perfectly fine if you are working in an Accounts/Treasury department of a Company and you wish to Hedge currency movements to ensure that a fluctuation in Exchange Rates does not impact on an expected return as a result of executing a Contract for Services and/or Products. In such case the Profits (or Losses !!!) will be made on the provision of what the Company does operationally and it is not intended (or wise !!) to become a Currency Trader and try to win or lose that way. In fact, in most companies any risky Hedging of Currency can get you into a lot of trouble with the Guvnors.
However, when it comes to being an Investor, such ‘Dumb’ Hedging is really not a good idea and as I have found from bitter experience it can be financially painful but perhaps much more importantly, it can be very frustrating and cause a lot of mental angst. Investors certainly don’t want this agony as it can lead to further bad decisions and lack of discipline when a calm head and rational decision making are vital for success in our chosen field of endeavour.
‘Smart’ Hedging is where we need to be so that a significant part of the Decision about whether or not to be Hedged against Market movements is taken out of our hands and is largely ‘automatic’. It really should not be all that hard but of course when it comes down to ‘The Real World’ of Investing things are not always as straightforward as the theory suggests.
With such Smart Hedging, when I feel concerned about Markets and the Charts give me technical signals to support that view, then I should whack on a Short Position and if it goes my way that is good because it will offset Losses on my Shares. But if things play out differently and the Markets keep going up, then the Stoploss kicks in and I take a small hit but then I am exposed to the gains.
Of course looking back now it is easy for me to see where I screwed up and the simple Rules to fix it are obvious. The catch is that it is always like that and the key thing is to set Rules and to follow them whatever happens – even when it seems like that is entirely the wrong thing to be doing (which was pretty much the situation I was in early in 2019 when my Stoploss Rules were telling me to Close my Shorts but my silly Caveman Brain was telling me to keep the trades running because of fears over Brexit at the end of March).
Anyway, ‘we are where we are’ and all that and I am very much leaning towards Closing my S&P500 Short and just marking it up as painful experience. With US Markets so strong it is likely to be very painful continuing to fight them and the simple reality is that if I see clear signals that it is time to go Short again then it is almost a ‘flick of a switch’ to do so and I just need to make sure the discipline of the Stoploss is there – as I have already managed on some recent Trades which actually went very well because I closed them well before my Stop was hit and the damage was very limited. The price of insurance.
Closing the Short will be irritating because it will crystallise a Loss to my Portfolio equivalent to about 3% or so and you can probably add on another 2% perhaps to cover Finance and Dividend Costs – yes, that stings a bit. On the bright side, this is very much ‘Dumb’ Hedging because I am merely foregoing gains I could have had rather than actually losing Money overall – in fact, the way things are going, it looks like my Portfolio will be around breakeven for 2019 as a whole which doesn’t upset me too much as it was always going to be a strange one. The annoyance of course is that if the Shorts had automatically closed themselves (in practice I would have had to manually close the Shorts), then my Portfolio might be up around 10% on year end. That would not have been a bad result considering I will have done very little actual trading this year.
Hindsight and Outcome Bias are powerful things……..
Oh, while I think of it there is something really important to add. I am sure Readers must think I am nuts to persist with my Hedging attempts but there might be some method hidden in my insanity. After 10 years of a Bull Market (officially the longest in history I believe) and with Stocks relentlessly climbing skywards, and with not much sign of a Slowdown or Recession since the Credit Scrunch in 2009, time is definitely against us and at some point soon, perhaps in 2 or 3 years ish, a big Slowdown is coming I suspect. And when I say “big”, there is a danger that I mean “absolutely f****ng massive” (please excuse my esperanto) and the ability to Hedge could prove extremely helpful.
With the way that Financial Markets and Currencies etc. have been manipulated by what I suspect are highly dubious Monetary Policies, it strikes me we could easily suffer a hit that is similar or worse than the spanking we took in 2009. With all the financial jiggery pokery and experimental wheezes being performed by the Powers that Be, it would not surprise me if no Assets are safe and stuff like Gold could easily suffer with everything else – the only escape could be an ability to Hedge.
Stocks and Interest Rates
I was reading the always superb ‘Investors Chronicle’ today (dated 1st November 2019 with ‘Seven Deadly Signs’ on the front cover) and an article by Chris Dillow on page 16 entitled ‘No comfort from falling rates’ impressed me a lot and ties in with what I have just been saying about future trouble on the horizon.
As ever with the stuff Chris writes it is quite deep and you certainly need a reasonable understanding of Economics and Markets to really get to grips with it, but if you have a copy then it is worth reading. As the title suggests, the essence is that the conventional view that Interest Rate cuts are good for Stocks is perhaps not actually true. It might be in the short term but the actual Correlation between the FTSE All Share Index and the US Fed Funds Rate has been 0.57 since 1996 – this means that falls in the US Interest Rate are highly likely to go along with falls in the FTSE All Share.
I better just quickly give more explanation about how Correlation numbers work. For falls in Interest Rates to result in rises in Share Prices, you would require an ‘Inverse Correlation’ which means that the Correlation number must be negative (0.57 is clearly positive !!) and a perfect Correlation is where 2 things move exactly in-step with each other and the Correlation number is then 1.0. A Correlation number of 0 means that they do not move together in any way and a negative number means they move inversely – as one goes up, the other goes down and vice versa.
Here are some quotes from the article:
“One obvious reason for this is that rates fall when the US economy is doing badly. And this is bad for equities not just because it cuts corporate earnings, but also because it reduces investors’ appetite for risk.”
“Even if we control for changes in US output, however, it is still the case that cuts in US interest rates (and falls in bond yields too) are associated with falls in UK equities. This is because rate cuts send a signal – that prospects for the US (and hence global) economy are poor. And these are circumstances in which shares do badly.”
“The idea that loose monetary policy can support share prices is, therefore, refuted by recent history. Any equity rally caused by rate cuts is likely to be weak and short-lived. It is not interest rate cuts that would lift equities, but something else - any signs that the US will avoid a recession.”
“This means that any pick up in growth would be a good thing. If we get it, investors won’t think – as they did in the 1970s and 1980s – that there’s a threat of inflation. They’ll just be relieved that we’re escaping recession.”
So this very much lines up with what I have been saying for ages – if we get a Global Recession (or even perhaps a Slowdown), then we can expect Stocks to fall.
Big THANKS to Chris Dillow for his continually excellent writing.
New TPI Podcast
Part 2 of the Podcasts we recorded about a week ago has just gone live. You can find it at the link below if you want to hear it on Soundcloud and if you use the Apple and/or Audioboom platforms then go to the ‘Conkers Corner’ Channel and you should be able to find it there. This one is just under an hour long and we cover utterly loads of Stocks on it:
Another irritating week where my Portfolio was down 0.9% - mostly due to strength in the Indexes hurting me on the Shorts and a Profit Warning from Empresaria EMR did some damage although it is not a big position so the hit from that was not all that big in terms of the Portfolio. If I do actually close the S&P500 Short it will be interesting to see how that affects my Portfolio in coming weeks – as always this will appear via Tweet and with an Entry on my ‘Trades’ page.
Needless to say, but I will say it anyway, my Strategy now is pretty much to do not a lot and apart from a possible tweak to my Hedging I doubt I will do any Trades until we have the General Election out of the way. November and December tend to be very good months (December is the best month usually) and being more ‘Long’ over this period is probably the best approach. I do quite fancy GTLY though.
Mello Chiswick – November 12/13
The next Mello Event is due to take place on Tuesday 12th November and Wednesday the 13th in Chiswick – not much longer than a week away !! I intend to be there on the Tuesday afternoon and into the evening and there is a Discount Code going around where you can get Tickets for half price if you are quick – the Code is SC50 and you can book at the link below. If you find the Code doesn’t work, then email me on firstname.lastname@example.org or Tweet me or something and I will see if I can get a Code for you:
These are without doubt the best Investor Events around and well worth attending. There are usually loads of decent Companies with stands and presenting and it is a superb opportunity to meet up with other Private Investors who are serious about Stocks.
I even see that expected female attendance is better than last year.
Despite many distractions and having not much time to work on blogs, I appear to have actually been quite productive. Part 2 of the Gately GTLY blogs is in a pretty decent state and I think if I can crack on with it in the next few days then I can issue it this coming Thursday or Friday.
Last week I published a blog that had already appeared on Michael Taylor’s ‘Shifting Shares’ website and I suspect many WD Readers had not actually noticed it – so I wanted to get it in the Blog Archive here. Anyway, it is very good (I am being interviewed by Michael so there might be some bias in that statement !!) and well worth reading – especially for the comments around the Dotcom Bubble and the 2009 Crisis which newer Readers will particularly ‘enjoy’ I suspect.
A few weeks ago I read an excellent article in Investors Chronicle about how the new IFRS16 Lease Accounting Rules work and I figured that I could make a simple blog to explain this nicely by picking out some key bits from that article etc. I made really good progress on such a blog last night and hopefully that will get published in a few weeks.
Unbelievably another month has quickly slipped past and I need to update the ‘Weekly Performance’ page for October but I probably won’t get a chance this coming week – we shall see.
From the Catacombs
With all this talk about Hedging, I must chuck this one in from the ‘old days’:
Blimey, I really have been waffling big time tonight. Time for some pictures !!
As ever the Charts I show are taken from SharePad using the ‘Print Screen’ button on my laptop and if you click on the images then they should get larger so you have half a chance of being able to see something.
In keeping with ‘Best Practice’ I am starting with the Monthly Candlesticks first because we now have October out of the way and on the Chart below, please ignore the tiny Candle that is captured in my small Black Ellipse as that is for November and not properly valid until we have a complete month. Obviously the Candle before the one in the Ellipse is for October and this is not a Reversal Candle of any sort and more of a ‘Bullish Continuation’. As we will see in a bit, the S&P500 has just made a New ATH so this is a Bullish Index.
It was a good job I mentioned the ‘Print Screen’ button because for an unbeknown reason it encouraged me to look on the separate Keyboard I use (the one on the laptop is a bit small for my attempts to touch type) and I actually found one. Because I will no longer have to reach over to my laptop, that will save many hundredths of seconds of my increasingly valuable time remaining on planet earth !!
The next Chart has the Weekly Candles and my Blue Arrow is pointing to a sweet Up Candle for last week and clearly that is Bullish and it is a new ATH.
In the bottom window on the Screen below we have the RSI for the Daily S&P500 (Relative Strength Index). Where my Black Arrow is we are on a Reading of RSI 65 which is quite high but not really extreme and there is room to go higher in the short term if the Market so wishes.
In last week’s blog I showed a possible Bearish RSI Divergence with the Price Line in the Window above (this is marked by the Blue Line with Blue Arrow sloping upwards whilst the Red Line with the Red Arrow in the lower window is sloping downwards), but as things have played out, that Red Line was broken last week so this is Bullish.
On the Screen below I am interested in the Black Line which is the 13 Day Exponential Moving Average Line and the Red Line which is the 21 Day EMA. Where my Blue Arrow is we have a Bull Cross and this implies more upside.
It should also be easily able to see the White Up Candle from Friday which was when the S&P500 made the new ATH.
The next chart is interesting because it is the only one so far with a hint of something not quite so Bullish – but it would only be a short-term thing most likely and this Index is overall very Bullish.
This Screen has the Daily Candles for the S&P500 and the Pink Zone marks the Upper and Lower Bollinger Bands. Where my Black Arrow is I am pointing to the White Up Candle from Friday and note this is right up at the Top Bollinger Band. This suggests it might ease back short term or perhaps go sideways. It could keep rising, but this is the least likely scenario.
From these Charts it should be obvious why I am seriously tempted to Close my S&P500 Short position !!
Dow Jones Industrials Index
I just looked at the Nasdaq Composite and it made a New ATH like the S&P500 but I noticed that the DOW is lagging a tiny bit behind – although it is likely it will soon join the club. My Chart below shows the Daily Candles for the DOW with the 13 and 21 Day EMA Lines but look at my Huge Blue Arrow which is pointing to where the All Time High occurred which is a shade off 27400. If you look at the Candle from Friday, we did not quite take that one out.
First up the Monthly Candles. Again we need to ignore the tiny Candle in my Black Ellipse and the Candle for October is a small Black Down one with a bit of a long Tail down to just above 7000. It strikes me the FTSE100 is in a bit of a Range between 7000 at the bottom and about 7450 at the top.
Next the Weekly Candles for the FTSE100. The jerky Red Line with the Red Arrow is from a few Weeks back and is my attempt at highlighting a possible Bearish ‘Rounding Top’ pattern.
My Black Arrow is pointing to a Small Black Down Candle from last week and note it had a bit of a Tail and it looks to me like the FTSE100 was unable to build on the nice White Up Candle from the week before. Overall it just seems to lack direction but I guess that is no shock with the Brexit nonsense and the General Election just getting into its stride.
Next the 13 and 21 Day EMA Lines. Where my Green Arrow is these did a ‘Bull Cross’ but note how the lines are moving closer together now – it lines up with this sense of sideways drift at the moment.
Finally we have the Daily Candles for the FTSE100 with the Pink Zone marking the Upper and Lower Bollinger Bands. My Blue Arrow is pointing at the tasty White Up Candle from Friday and this suggests some Support around 7250. On the flipside there seems to be Resistance at just under 7350. In the slightly bigger picture, my Green Line with the Green Arrow is trying to show the Top of a possible Range up near 7450 and my Black Line with the Black Arrow is showing Support down near 7000.
OK, that’s it for this weekend – make sure you listen to the Podcast and good luck for the coming week !!
Stocks & Markets WheelieBlogs
These tend to be more Markets and Stocks related and timely - the Blog Page on the Main WheelieDealer Website has the 'Educational' stuff (well that's the theory anyway !!).