Following another extremely low volume positive week, the Big Wave Trading Portfolio remains under a mixed bag of signals. The NYSE, DJIA, SP-500, and Nasdaq 100 are all under BUY signals, the Nasdaq is under a NEUTRAL signal, and the Russell 2000 is still under a SELL signal. While the price action overall is very solid, the volume still leaves much to the imagination. That being said, it is not volume that produces the capital gains it is the price. Obviously, then, we will focus on the price and not volume.
With the NYSE indexes hitting new highs, it should not be a surprise that we are basically fully invested at Big Wave Trading with the portfolio weighted 85-90% long, 10% short, and 0-5% cash. Our long positions are coming from basically four sectors: Consumer Products, Utilities, REITs, and Oil&Gas related names. We obviously have long positions outside of these sectors but the heaviest weight on the long side resides in these sectors.
We have taken off our hedges in most index related instruments for now. However, we still have small hedges in the Russell 2000 and the KBW Bank Index. Price is our master. Even though we are highly likely closer to a top than a level where significant gains can be acquired, we must follow price and price is giving us every indication it wants to continue moving higher. When that proverbial top comes, we will hit the market hard with shorts. For now, this isn’t the case.
In fact, since we did not get the crash we were setup to produce, it would not surprise me at all if we just continue drifting higher for the rest of the summer. If that happens, this does set us up for the possibility of a fall sell off. Especially if we do not get any volume on a continued rally. We seriously need volume or else we open ourselves up to the possibility of a harsh reversal. With the market so complacent it wouldn’t be surprising.
The truth is that while the market is expensive on many valuation levels it is still not horrible. On top of that, the VIX while extremely low at the 11 levels is nowhere near the lows it hit in 2006 when it tried to touch 8. So there is room for further complacency. Who knows. Maybe the Investors Intelligence survey will at some point be 70% bullish and 10% bearish. Maybe that will be the new extreme. Oh so many what ifs. So little time!
In reality, this tape will probably not end its slow uptrend until the Fed is forced to take action on the short-term end of the yield curve by hiking rates. If either the long end comes down or the short end comes up or they both move, then we can get a little more nervous. But until I see that yield curve inverted or flat, I am simply going to be looking for quick scary pullbacks that might lead to a flash-crash.
If I see an inverted yield curve, an expensive stock market, a low VIX, complacent sentiment surveys, and then see the market breakdown, then it will be time to load up on Puts. Until that happens, it will just be hedges against the long positions that continue to move higher.
Have an amazing Sunday and I wish you all the best on the upcoming week. Thank you and aloha from Maui.
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – DATE OF SIGNAL
VIPS long – 354% – 7/17/13
HEES long – 188% – 9/4/12
AER long – 172% – 6/27/13
WDC long – 100% – 1/9/13
TPL long – 90% – 10/22/13
USCR long – 74% – 4/12/13
