Author: Michael Arold
Covestor model: Technical Swing
A quick update on what happened to my Covestor portfolio after a brutal week for global equities. As I mentioned in my last monthly Covestor update, it was “time to focus on mean reversion trades” as the S&P 500 has largely been in a trading range between 1100 and 1230 since the beginning of August. (Google Finance: http://bit.ly/pQ24eF)
I have been trading the range with a bearish bias: going short at the top of the range, closing shorts and going modestly long at the lower levels. The strategy has worked out so far, as the model portfolio is up over 8% for the month of September, as of end of day 9/23. (Covestor calculations)
It’s a very short term oriented strategy, and the trades barely lasted longer than three or four days. For example, I took various short positions on Tuesday 9/20 (IWM, REMX, KOL, GS, VSI) and closed the trades fully (IWM, VSI) or partially yesterday (Thursday 9/22). The S&P closed at the lower end of the range last week. Does that mean it is time to go long again? I don’t think so. However, adding to the shorts isn’t a high probability trade either. Given the recent downside momentum, there is decent chance that stocks will build another leg down. In a highly volatile, news-driven environment like this, nasty short covering rallies can occur any time and it is mandatory to manage risk. I will keep raising cash if major indices continue to record new lows.
My favorite scenario is a panic sell-off, because a reaction trade on the long side would offers what I consider a compelling risk-reward situation. Unfortunately, various sentiment indicators I’m following indicate that fear is not at extreme levels yet, so keep your seat belts fastened.
