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TheInflationist Weekend Summary 30.01.2010

Post a Comment January 30, 2010 – 1:07 am |   | Permalink |  Print This Post |

This week has been fantastic for bears. We posted our 1937 vs 2007 comparison a week ago - and included a road map (in yellow, 2nd chart below). We even stuck our necks out to say we are going to hold our shorts to sub 10k - and then leave the rest of the icing for the next trader. It took only one week of decline to make our account look ALOT better. Beware though, next week could bring us back to where we were (or worse!).

Starting Portfolio Value, 4 January 2009: $ 40,000

Starting Portfolio Value, 4 January 2010: $ 92,748

TheInflationist Weekend Summary: 29.01.2010

We started 2010 with $92748. Since 4 Jan 2010, we have recorded a 29.24% return, our account standing at $119,863. For new readers, we started LIVE trading on TheInflationist Challenge on 4 January 2009 with $40,000. That’s a return of 199.65% in 13 months! Sorry, we got a bit overexcited there. We are. However, from experience, market volatility can wipe this outperformance out pretty quickly. That’s why our rule is to be more weary when you are ahead - do not be greedy, and stick with the same winning strategy. We are happier though, to have made our profits through steady small profits (from many trades) rather than making huge profits from few trades. The former suggests that we have a statistically significant profitable strategy, whilst traders who make ALOT over a short period of time with few trades is more likely to have been lucky. “No of trades taken and making a profit” can be likened to “no of times a dice is rolled and calling it right”. Winning on a streak of 1000000 rolls is more significant than winning on 10 rolls. OK, enough rambling. Back to our analysis. (For new readers, more details on TheInflationist Challenge Year End Summary and TheInflationist Challenge )

We plan to close our naked shorts this coming week, at DJIA sub 10k would be nice. My trading partner rang me this morning to say the “Dow Has Crashed! - should we take profits??” (he has been doing the same since the Dow was 10250, but each time we talked it through, and have decided to stay the course). I said hold our shorts! Nicknamed “BOS” for having “Balls of Steel”, I have decided to stay with my 10000 target. Markets love round numbers, and 10000 is a nice round number that will rattle the nerves of the Bulls. Once that is breached and when a % of bulls have given up and turned short, the markets will head up again - this time to test the resolve of bears. We will deleverage this week. I guess 10064 and 9960 (our first exit point) is only about 100 points - to hold could be a lesson of “Don’t be greedy”. We will apply our sliding scale strategy, closing our shorts over a 200 point range probably starting at 10000. We have at least $20/point DJIA short equivalents, so our strategy will be something like this:

• $5/pt at 10020
• $5/pt at 9950
• $5/pt at 9900
• $5/pt at 9880

We will have stops set for all naked DJIA shorts at 10200.

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Chart 1: 29 January 2010 Update: 1937 vs 2007 Bear Market Rally

1937 vs 2007 Crash update

Chart 2: Road Map (Posted A Week Ago, 23 January 2010)

1937vs2007comparison

Our rationale:

We dissected the decline from the peak in 1937 (peak at B) into 3 phases: 1. sharp fall 2. sideways/slight up 3. another fall. We believe Thursday was phase 3. Monday could see another fall - we have no idea how far, but we think -30% level is very achievable and even conservative (calculated from 2007 rally peak at 14164). This will take the Dow to 9914. So factor in a breach of 9900 round number, 9880 should be our last exit point. Stops should be lowered as markets go lower to lock in profits. Knowing our bad timing, markets may even go much lower, but we will leave that profit to the next trader.

Also, we will NOT be participating in the subsequent rally, ie no naked longs. Trying to catch this falling knife could be a very expensive lesson - and without the conviction of a true bull we will be very uncomfortable holding these positions. Instead, we will wait to re-short higher. We have been going long in a way by buying a few companies listed below:

Australian Agriculture Company (AAC.AX)

Coeur d’Alene Mines (CXC.AX)