Author: Michael Arold
Covestor model: Technical Swing
If you like roller coaster rides, you would probably have enjoyed the November action in stocks. The month was very challenging and it would have been easy to get caught on the wrong side of the market. Even though I started the month with a bullish bias, the Covestor Model Portfolio lost only 0.13 percent, slightly better than the S&P 500 for the month.
As I pointed out in my last month‘s report, I expected higher prices because of a strong earnings season, potentially some year-end window dressing and better than expected US economic data. The European situation, however, caused tremendous volatility and while stocks declined by over seven percent at one point, they managed to recover most of their losses in just a couple of days at the end of the month.
During the first two weeks of November, it seemed like equities could manage to decouple from developments in the European currency; while the Euro was losing ground, US stocks kept trading sideways. During that period, I kept trading the markets from the long side. At the same time, I was hedging with a short position on the Euro (EUO). On November 17 it was becoming clear that the Euro-equity correlation was still strong, so I closed the longs, most of them with a small loss.
The Financial sector traded weak throughout the month, so I kept focusing on short positions in the major banks like Citigroup (C), Deutsche Bank (DB) and Goldman Sachs (GS). These trades turned out to be profitable. On the other side, I kept cash levels high because of elevated market volatility and the potential for a violent short-covering rally, which actually took place during the final trading days. Managing risk is extremely important in the current environment.
I am not sure what to expect for December, but the dominating themes might change. If the market starts to focus on potential strength of the US economy while negative news from Europe stays muted, equities could move higher. The market will stay very news-driven, which is why I will have to take profits quickly when stocks reach price targets.
