June 27, 2016

Reducing my Net-Short positions

We're already witnessing the vulnerability and volatility of worldwide markets. I believe that Wall Street had too much complacency and too many stocks arguably priced to perfection ahead of the Brexit vote. Many institutional portfolios are poorly positioned, long on financial assets and have massive derivatives and other leveraged positions.

Given the disproportionate role of the quants' volatility-trending and risk-parity strategies and the likely frequency of margin calls, almost anything could happen Friday and over the next few days and weeks. As I've continually suggested, higher-than-normal cash positions make a lot of sense, although you should base such a positioning on your time-frame and risk profile.

Most players don't short, but should nonetheless make it their highest priority worry about a return of capital rather than a return on capital. 

My Game Plan
Let me lay out my near- and intermediate-term investing and trading plans for you:

First, I realize that the Brexit decision will promote a lot of volatility -- which creates opportunity, but also unpredictability. As such, I believe smart players should rope in their portfolios' "value at risk" (or "VAR").

Given my own risk profile in managing money, I plan to opportunistically move from my previous net-short position back to market-neutral.

Even though an overshoot to the downside is a distinct possibility, I'll be taking off all of my recent index shorts for nice gains. These include shorts of:
-   The SPDR S&P 500 ETF (SPY) -- our Trade of the Week -- which we shorted at $209+ a share.
-   The PowerShares QQQ ETF (QQQ) .
-   The iShares Russell 2000 ETF (IWM) .

My other plans:

-    I'll be covering my short of the iShares MSCI United Kingdom ETF (EWU) .
-    I might also take off my small short of the Financial Select Sector SPDR ETF (XLF) , even though "lower-for-longer" interest rates could doom bank-industry earnings. That said, my XLF moves will depend on how much the financials drop.
-    I'm also taking SPY, QQQ, IWM and EWU off of my "Best Short Ideas" list, due to changes in those ETFs' risk-vs.-reward quotient.

Given the likely rise in volatility (not to mention the possible market chaos that we might see), I plan to use an opportunistic trading strategy. I'll place both my long and short investments on the back burner and won't increase my long-term commitments.

Instead, I plan to opportunistically trade on the long side (an area where I'm not currently well represented), but will be so only on a short-term trading basis for now. That said, it's conceivable that good longer-term long opportunities will arise over the next few weeks or so.

The Bottom Line

Uncertainty, risks and rewards will all, but I want to err on the side of conservatism. I'll harvest some of my short gains, then approach the market in an opportunistic manner on both the long and short sides. But over the next six months or so, I expect stocks to reset lower.

In fact, I'm sticking with my prediction that the S&P 500 will see a high-single-digit or low-double-digit percentage drop for 2016 as a whole.




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