Friday, May 08, 2009

A Bear Market Rally on 'Roids? This Week in Commodities

How Bout a Little Shot of Inflation With Your Bear Market Rally?

Well we've finally got the bear market rally many of us have been waiting for, kicking into high gear.  I know I don't have to remind you, dear reader, that most of the largest stock market rallies in history occurred during nasty bear markets.  

To illustrate this point, check out this graph of the stock market crash during the Great Depression - and if you've been drinking Bernanke's "green shoots" Kool Aid, you may want to even print it out and tape this to your desk to help detox your system.  No market ever goes straight up or straight down, so this rally was to be expected, perhaps even overdue.

So where are we at now?  Since a low of 666 on the S&P earlier this year, we closed Friday's trading at 929 - a gain of 40% in roughly two months!

Here's the interesting thing - market indicators are now screaming "overbought" - and have been for the past couple of weeks - yet the market's ascent continues, without a pullback...at least yet.  My favorite short-term trader, Jeff Clark, was at least a little early on his call for a market downturn.  So what gives?

One theory I've been noodling on for the past couple of weeks is that inflation may be starting to creep into the system already.  And the first place that will be reflected will be in asset prices - particularly in commodity prices.  Which we're starting to see already.  

On Friday I spoke with our friends at Stansberry Research, and they seem to share similar sentiments.  So the next few weeks will be very interesting to say the least.  

How should you play this?  Yesterday I sold about half of my stocks - I had held them throughout the entire crash, and decided not to look at the portfolio until we got a bear market rally - which we have now.  You may want to do the same.  Don't be too greedy - if you were offered these prices two months ago, would you have hit the "sell" button?

I'm trying to focus all of my investments around a few key themes, such as agricultural commodities, that I can monitor.  I've realized that it only takes 1 good idea to make money investing - so why have a portfolio of 30-40+ different investments that you need to keep track of?  


Big Picture Scenarios

So if we take a step back and look at the big picture - I think we're seeing these two theories as the dominant ones:
  1. Green shoots - Things are getting less bad.  We'll have a long, slow recovery.  In the end, things will be OK.  Good time to buy stocks, they are still undervalued.  This seems to be the theory supported by the mainstream financial press and Bernanke.  So that's enough for us to throw it out.

  2. Inflation soon - Governments are printing money at an alarming rate.  This will eventually result inflation once the money works its way into the system.  Most of the smart investment minds I track seem to believe this.
My only problem with #2 is that it's too obvious.  It is the universal contrarian viewpoint, and almost seems to be too widely shared.  Just like how the dollar should have gone down last year, and interest rates should have risen...and what happened in reality?  The exact opposite.

So if we try to "expect the unexpected" - what could happen now that few people are expecting?
  1. Outright deflation that can't be stopped - a la Robert Prechter.  He believes the DOW will eventually reach it's low below 1000 - now THAT'S a contrarian viewpoint!  

  2. Inflation right now - the horse is out of the barn, interest rates have bottomed and are on their way to the moon, commodity prices are already starting to move, and we're going to reach the "uh oh" inflation phase much sooner than expected.
Regular readers know that I'm starting to warm up to the possibility of #2, and will trade accordingly as long as the commodity charts continue to agree.  I'm keeping an open mind to all of these scenarios, and will do my best to let the markets guide my actions, rather than being wed to and stubbornly trading on a preferred theory, which is usually a quick way to financial ruin!



You Can't Kiss All the Girls...Other Notable Potential Trades and Performances

Positions Update - Feels Like Old Times!

What a week!  And the recent weekly winning streak rolls on...in a big way...

Now that I've got my confidence back a little bit, I'm probably quite dangerous to myself at the moment!

It must have been something in the air, or the tequila, on Cinco de Mayo, as I decided to grow some onions and do a little pyramid action.  Sugar continued to look strong, and I figured if it's heading higher, I'd rather have two contracts than one.

The big trade came later that night - after much deliberation and a couple of beers, I decided that I owed it to myself to buy the breakout in the Australian dollar.  I have to admit, I didn't sleep well that night after making the trade - I was concerned that we'd see a pullback in the Aussie driven by a pullback in the equity markets.  And being fairly overleveraged at this point, a loss on this trade was not really something I could handle.

By the way - I don't condone this use of leverage.  If I had practiced proper risk management, maybe I wouldn't have pissed my account down from it's heights last spring.  Do as I say, not as I do.  Of course you're reading this blog for entertainment purposes only...and these trades are all hypothetical...so I'm glad we have a mutual understanding.

Anyway back to the story - the Aussie did drop about half a cent, then rallied STRONG to end the week!  So it's a happy ending for now.

What could possibly go wrong from here?  For what it's worth, sugar was down on Friday, with most of the markets up.  Hopefully just a technical correction.  The real risk to each position below is a correction downward in the equity markets.  This is certainly overdue...so we'll watch and see.  It's also possible, as discussed, that we're getting a little swig of inflation right now, and this "bear market rally" could have more legs than many have anticipated.

Open positions

DatePositionQtyMonth/YrContractStrikeCall/PutEntryLastProfit/LossMkt
 05/05/09  Long  1  JUN 09  Australian Dlr      0.7385  0.7666  $2,810.00    
 04/08/09  Long  1  JUL 09  Orange Juice      81.95  90.70  $1,312.50    
 04/20/09  Long  1  JUL 09  Sugar #11      13.38  15.30  $2,150.40    
 05/05/09  Long  1  JUL 09  Sugar #11      15.16  15.30  $156.80    
Net Profit/Loss On Open Positions$6,429.70

Current Account Value: $31,135.73

Cashed out: $20,000.00
Total value: $51,135.73
Weekly return: 15.7% (!)
2009 YTD return: -38.7% (Don't call it a comeback!?)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

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