Tightening the Reins
Happy New Year! I hope you’ve enjoyed the holiday season and are looking forward to a fun and profitable 2015. I know I am!
Not surprisingly, volume was light on this first day of trading in the new year, as many extended the holidays one more day. We’ll get back to the regular routine next week, and in today’s first update of 2015, I want to talk briefly about what we’ll watch here in January to build on our strong second half of 2014.
The last few days of the quarter and year can be a little on the wild side, but the run-up to New Year’s felt a little looser than usual. Traders seemed content to push prices back and forth around the market or let their algorithmic programs do the work for them. We did see some year-end profit-taking to close out 2014, but there didn’t appear to be a whole lot of conviction or a whole lot of skin in the game.
Our stocks swung fairly widely while in the aggregate remaining fairly close to the broad market benchmarks in terms of day-to-day performance. Overall, our stocks were exactly flat this week, including our UVXY hedge. Taking out the hedge, our long positions fell an average of 1.1%. That is ahead of the S&P 500’s loss of 1.5%. (More on UVXY in a moment.)
The overall effect was that a little money seemed to be rotating out of our strongest performers and into the stocks that haven’t done as well in the last few weeks. That’s a great situation to be in. If this continues into the new year, we could see the Absolute Capital Return universe firing on all cylinders at once – something like mid-October, when we had to double up on our exits to lock in mature trades as fast as possible. The earliest candidates are Semtech (SMTC) and ChannelAdvisor (ECOM), which are now up about 13% each.
In a few weeks, I suspect our leaderboard will look very different. As we start 2015, I’ll be tightening the reins a little bit. Stocks will have less time to prove themselves after we buy them. If we don’t see strength relatively soon after buying them, we’ll rotate into better opportunities. We have way too many good opportunities out there to sit around in trades that require patience, much less tender loving care.
Looking back at the last quarter, we closed 17 positions for average gains of 9.48% per trade. That’s exactly where we want to be. Considering that we usually only have about that many positions on our Buy List, we are essentially turning our capital on a quarterly basis. That’s also about where I want us to be in terms of trade flow and the opportunities available in the current environment.
And if the last few months were typical, we can capture most of the upside the broad market can generate in a year in a much shorter cycle. On that basis, I am looking forward to hitting the ground running next week, so keep an eye on your email and be ready for the Trade Alerts when they come!
Here Comes the Hedge: UVXY
We had a relatively calm stretch through the holidays, as expected, but after Wednesday’s slide, volatility is on the rise again. The S&P 500 Volatility Index (VIX) jumped about 23% this week, from 14.50 last Friday to today’s close of 17.88, and it popped over 20 earlier today. Our hedge is designed to increase with volatility, and ProShares Ultra VIX Short-Term Futures (UVXY) gained 16.6% for the week.
The fact that UVXY jumped in the last two trading days should be troubling news for traders who were hoping to drift through another easy season like what we saw this summer – volatility is already 35% above the levels of September that now seem so complacent in their calm.
But a little volatility is healthy because it reflects an environment where stock prices are moving. We like stock prices in motion because it gives us more opportunities to trade. The only real thing to fear is those price swings turning against us.
Either way, the hedge is there to cushion the downside while we wait for each swing to go our way. Remember, over the long term the VIX has tended to revert to levels around 19, which is where we were earlier today and a full 20% above where it opened this week. According to some measures, “normal” over the last quarter century may be a lot higher than that.
Our UVXY position is designed to move at twice the speed of underlying volatility, so as the market nudges back onto its historical rollercoaster track, we are already seeing that position revive fairly quickly. However, the point I would really like to emphasize as we go into the new year is that a generation of traders grew up in a world where everyday volatility was quite a bit higher than what we have enjoyed in the last few years.
They survived and the market thrived. As long as we can accurately gauge the “new normal” of risk and time our trades accordingly, I see no reason to suspect that we won’t do likewise in 2015 and beyond.
SC Moving Near our Sell Price
As I mentioned a couple of weeks ago, I continue to follow Santander Consumer USA (SC), and if you missed your chance to sell amid the buyout rumors a few weeks back, the stock is now back in position for you to try again soon.
I recommend you go ahead and set a limit order to sell SC at $20.35 or higher, and then wait for the price action to activate the order for you. That’s right where we sold before, and at the rate it has been moving (hitting $20.21 today), it may hit soon.
Looking Ahead to 2015
Enjoy your weekend, and then as I said, we’ll be ready to hit the ground running next week. 2015 is shaping up as an interesting year for a lot of reasons, and we’ll be talking a lot more about that in the coming weeks. Next Friday, we’ll have the full Monthly Issue, and we’ll take some time then to survey the trading landscape as well as go through all of our current positions one by one.
And then, your feedback was so positive from the last couple of live online chats we’ve held that I want us to have another “family meeting” to kick off 2015. I’ll be in touch with more details, but you put it on your calendar now for Tuesday, January 13. I want to give you as much of a heads up as possible in the hopes that you’ll be able to carve out some time that afternoon to attend.
Once again, I wish you and yours a healthy, happy and profitable 2015! I look forward to what we’ll accomplish together.
Sincerely,
Hilary Kramer
Editor, Absolute Capital Return Portfolio