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TheInflationist : Trading Summary

1 Comment August 14, 2009 – 6:21 pm |   | Permalink |  Print This Post |

Our weekend summaries have been on hold whilst we were away on holidays. During this 3 week period, markets have rallied about 10%, with the ASX up from 4000 to 4510. We opened another short at 4480 today $10/point. Our portfolio net value have decreased to 82706, up 106% since inception on 1.1.09. Our untimely shorts of ASX at 4000 (which were meant to be short term) were (fortunately) taken out at our stop loss at 4060. Our holdings in Gas ETFs have also taken a big hit. Our NIFTY vs Hang Seng trade is going along nicely, whilst our other arbitrage trades are still in the red. Patience is required for the tides to turn. Sentiment is currently very bullish with the dumb money on an extreme using Guy Lerner’s indicators, whilst most technical traders have turned bullish.

Referring to our chart below, the pink line is the Inflationist Indicator, whilst the blue tracks the indices. Looking at 2000 crash, our indicator seem to track markets closely, its peaks and troughs correlating well with the index. Whilst the index have fallen significantly, our indicator is still relatively close to the peak. Using the Inflationist Indicator (shown in pink below), it is falling nicely in a channel of lower peaks and troughs. The market index is shown in blue. Looking at this chart, there is a significant divergence between our indicator and the index when compared to previous bear markets. Our indicator is close to all time high, whilst markets have fallen significantly. Comparing this to the 2000-2001 dot com crash, the index was still close to the peak when our indicator was at current levels. And when the index was at current levels, our indicator was at levels far lower than the current. Our interpretation of this is as follows:

• Scenario 1 (preferred): When our indicator starts to drop, the index will fall hard and break March lows. The mismatch between our indicator and the index will narrow. So far, even with markets making higher highs, the downtrend of our indicator remains perfectly intact - forming a nice steady series of lower lows. As long as our indicator does not break out of this channel, we believe a cataclysmic crash is ahead!
• Scenario 2: A new bull market is upon us - hence to correct for the divergence between our indicator (pink) and the index (blue) (refer to chart below), markets need to rally hard to catch up with our indicator. We find this scenario less likely given the ridiculous levels of unemployment. The fundamentals simply do not support a bull market.

www.theinflationist.com

www.theinflationist.com

Our focus:

• We will short the Dax, NIFTY and (more short term) the ASX.
• Short JBH (if markets were to fall below March lows, we expect electronic retailers to take a hit). Although it is a well run company with a good track record, a short term play shorting JB at its all time high in the midst of one of the worst recessions should be safe. Be prepared to take profits!
• Shorting the Euro dollar and USD.
• Long Commodities (Natural gas for now, and hopefully crude oil at close to previous lows ~40 USD per barrel)

Our portfolio summary (updated August 2009)

www.theinflationist.com

www.theinflationist.com