Editor’s note: As of 9/7/11, James Peera no longer manages a Covestor model
Author: James Peera
Model: Total Alpha
Disclosure: Long C, DTO at time of writing
My current strategy is to look for opportunities during market consolidation and the commodity correction. My key positions at this time are a long in Citigroup (NYSE:C) and short of oil via Powershares DB Crude Oil Double Short ETN (NYSE: DTO)
Fundamentals
The U.S. economy continues to improve, albeit at a very slow pace. The April jobs report confirms job growth is stable but recovering very slowly. This, combined with weakness in housing, means the economy will require further stimulus, most likely via loose monetary policy by the Federal Reserve Bank (though it will unlikely be called QE3). Weak economies in Japan and Europe also require loose monetary policy in each of those regions.
The result has been a surge in precious metals and commodities such as oil, as investors seek alternatives to paper currencies.These long-term trends remain intact, but have and will continue to fluctuate as investors react to gradual changes in monetary policy and economic recovery.
Technicals
The technicals suggest the S&P 500 will stay in a trading range between 1300 and 1400 in the near term, before breaking above 1400. The consolidation is supported by market concern over the end of QE2 which has also resulted in a correction phase for precious metals and commodities.
Portfolio Trades
The portfolio holds significant cash and sold many energy and commodity positions in anticipation of a market correction due the end of QE2. In addition, I shorted oil via DTO, an inverse oil ETF, as fundamentals did not support oil over $100, especially as the Middle East turmoil subsides.
Financials were added to, as they remain undervalued, particularly Citigroup, which could benefit from its reverse stock split drawing institutional investors who were previously deterred by a sub-$5 stock price.
Positions will be added when the market is oversold at approximately 1300 on the S&P 500, and shorted if it’s overbought at approximately 1400 on the S&P 500.
