Author: Michael Arold
Covestor model: Technical Swing
Disclosure: Long AXAS, BX, ARMH, CLF, JNPR, SWK, SGI. Short PHM, CHRW, EEV
Summary
February was positive month for the model portfolio. As of the end of day 28th of February, the model outperformed the S&P 500 for the month, according to the Covestor performance summary.
Two factors helped drive returns: during the first half of the month, I traded strong momentum names, such as ARM Holding (ARMH), Netflix (NFLX) or Baidu (BIDU) from the long side. I then turned more defensive in the second half of February by sharply reducing long exposure and even opening selected short positions. Market breadth simply couldn’t keep up with major indices and I concluded that it would be only a question of time when the market would find its way down.
Note that I went into February with a bearish bias and was even short the small cap Russel 2000 index as of January 31. However, I closed the trade very shortly after opening it when I saw that the market behaved much stronger than anticipated.
Market Commentary
The 22nd of February was a key date: stocks finally sold-off on news about the situation in Libya and skyrocketing oil prices. It remains to be seen if the event has triggered a major market correction. I see arguments for both the bullish and bearish view, so I’m keeping a balanced trading portfolio with long and short positions going into March.
One positive for the market is a relatively high level of fear among investors, which can be inferred by recent high put option activity as well as a surprisingly fast decline in bullish investor sentiment, as measured by the AAII sentiment survey. In addition, major US stock market indices still remain in an uptrend, even after the sell-off. The fast recovery from the decline during the last week of February indicates that “dip buyers” are still coming in and continue to push stocks higher.
On the negative side are headline risks with respect to the Middle East and oil prices. Also concerning is the fact that several stocks that have lead the market higher recently began acting weak: companies such as Netflix, SalesForce (CRM) and Chipotle didn’t participate in the recent rebound. Failure of leading stocks to break higher is usually a warning sign, but could also indicate sector rotation.
Position Review
As of February 28, the following positions are in the portfolio. Note that I usually keep stocks for less than a month, so composition can change quite frequently.
Long positions:
Abraxas Petroleum (NASDAQ: AXAS): A small cap stock that stands to benefit from strong energy sector and higher oil prices.
Blackstone (NYSE: BX): Private equity company that stands to benefit from an improving IPO market.
ARM Holdings (NASDAQ: ARMH): A derivative play to Apple – ARM technology powers the iPad.
Cliff Natural Resources (NYSE: CLF): A miner that stands to gain from soaring metal prices. Also a potential take over candidate.
Juniper Networks (NYSE: JNPR): Seems to be taking market share from Cisco in the router business and benefiting from Internet infrastructure boom.
Stanley Black & Decker (NYSE: SWK): Exploiting the home remodeling trend, and benefits from cost savings as a result of the merger with Black & Decker.
Silicon Graphics (NASDAQ: SGI): Computer manufacturer under-followed by analysts. Cloud computing trend is positive for super computer vendors.
Short positions:
Pulte Home (NYSE: PHM): This home builder is still suffering from a weak US housing market.
C.H Robinson (NYSE: CHRW): The logistics company is under margin pressure due to high oil prices.
Emerging Market Inverse ETF (NYSE: EEV) : Higher input costs and inflation are pressuring emerging markets.
