Author: Andrew Laubie
Covestor model: Russell 2000 Long-Short
Disclosure: Long TWM, SRTY
The Russell 2000 Long-Short model has suffered through the market rally since November 2010, but we opened the month of March with strong performance on March 1 thanks to the leveraged short ETFs (TWM) (SRTY) in the portfolio. The market’s uptrend since November 2010 has been broken. Though fundamentally the latest economic data point to an improving economy, I believe that the equities market has already discounted it in the rally of the past six months, with special credit to Ben Bernanke and the second round of Quantitative Easing. The road ahead, however, is likely to be bumpier. Inflation seen in commodities pricing poses a serious threat to that recovery, and technical indicators have peaked. While there is the possibility of further upside, a pullback in the coming weeks to the October/November levels in the major stock indices appears likely to happen.
On the longer run, Bill Gross of PIMCO points in his latest newsletter to the uncertainties following the end of QE2 this coming June. If the Federal Reserve decides not to enter into another round of Quantitative Easing (QE3), we are likely to see a spike in US Treasuries as the U.S. dollar weakens and central banks in Europe look into rate hikes. Given the precarious situation of a global economy that recently extracted itself out of an economic crisis caused by debt by issuing more debt, who knows what really awaits. One thing is certain: markets do not like uncertainty. And this could lead to more downside in equities.
Volatility historically translates into a market moving in sharp uptrends and downtrends, where good technical analysis prevails over good fundamental analysis. With a solid technical methodology, this is a market I am looking forward to trade in the Russell 2000 Long-Short model.
Sources:
“Two Bits, Four Bits, Six Bits, a Dollar” William Gross. PIMCO, 3/11. http://www.pimco.com/Pages/Two-Bits-Four-Bits-Six-Bits-a-Dollar.aspx
