The Big Wave Trading Portfolio switched to a soft SELL signal on Monday 1/27/2014 as the stock market sold off for the third day in a row on very heavy volume with the Russell 2000 breaking down below the 50 day moving average. Normally, this price action alone would never switch our model into a SELL signal in such a strong uptrend. Unfortunately, for the die-hard bulls, the previous very heavy volume churning in the Nasdaq the entire month and the extremely poor individual stock action forced us to take further action than at any other 50 day moving average break during the year 2013.
This being said we are still extremely neutral on the overall market here. We are still 60% long and all of our stocks that we will be currently holding on Monday all still have unrealized capital gains. Until we get confirmation profit taking or sell signals in our current holdings, we will not simply sell stocks to sell stocks out of fear that the market has topped here. We have our trailing 10, 20, 50, and 200 day moving averages and are hard rules. We know how to stay in stocks for the big moves and listen to our moving averages for our sell/profit taking signals. No discretionary guessing is necessary.
With the 60% of our portfolio still in our winning long positions, we have raised significant cash and put on a decent size hedge in an inverse leveraged 3x ETF. We are now holding 20% of our capital in cash and have another 20% in this one hedge. Through backtesting, it is now clear that working with these leveraged ETFs on the short side in dowtrending markets will be much more profitable than taking individual short positions during these downtrending markets. During the downtrends of 2000-2002, 2008, and various periods in 2011 and 2012 while short positions did well they still are not able to provide the returns that I would like to see. This is where the use of leverged ETFs will now help with performance numbers during downtrending markets.
For now, like I said, it is still a guess to which way the market wants to go but we are now better positioned and have been able to have a very tiny drawdown from the recent market highs where we have been fully invested on the long side for months now. Our best attempt at speculating suggest that the price action might remain choppy through earnings but clear up by the time we are through with them. Which direction the market decides to go is still up in the air but we have our winners, have our hedge, and have cash to work with once a real move becomes clear.
Enjoy the Super Bowl everyone. Aloha.
TOP CURRENT HOLDINGS – PERCENT RETURN SINCE SIGNAL DATE – DATE OF SIGNAL
DUE TO THE SUPER BOWL THIS SECTION WILL NOT BE UPDATED THIS WEEKEND. THIS SECTION WILL RETURN NEXT WEEKEND. ALOHA.
