Author: Michael Arold
Covestor model: Technical Swing
The Technical Swing Model portfolio had a challenging month in June: the portfolio lost 3.8% while the S&P 500 gained 3.9%. The underperformance is not concerning since the model is seeking uncorrelated returns and the magnitude of decline is within historical drawdowns.
Some trades did not turn out as expected and dragged down performance: the long position in Gold Miner Yamana Gold (AUY) lost 5.5%, other significant losers were the long trades in Chipotle (CMG) and Skyworks Solutions (SWKS).
Winners couldn’t compensate for the losers, but Disney (DIS), Whole Foods (WFM) and the Inverse Small Cap Index trade (TZA) helped on the positive side. Trading is a statistical process, where a high number of events (trades) need to result in an overall positive outcome. So far, the Technical Swing Model is on track to deliver absolute returns.
From a technical perspective, US stock market indices have been trending up in June, forming a series of higher highs and higher lows. The Dow Jones Industrial Average (DJIA) closed the month at 12,880, which is just 3% below its 2012 high.
So without looking at a chart, it seems that things can’t be that bad. Although I’m skeptical in the light of the upcoming Q2 earnings season, I have to acknowledge market strength and trade accordingly.
My favorite sector remains US housing. Lennar (LEN) is one of my long positions going into July. The sector has demonstrated superior relative strength and companies surprised to the upside in recent earnings reports. Wells Fargo (WFC) is another long position: the bank is also an indirect play on the US housing recovery. A recent headline on Bloomberg was titled:”Wells Fargo Dominates Home Lending as BofA Retreats.”
I’m looking for more housing related trades and would use pullbacks to enter new positions.
I’m still short two consumer related companies: Chipotle (CMG) and Lululemon (LULU). These stocks have shown significant relative weakness as well as heavy institutional selling on various rumors and concerns of slowing growth. Both stocks have very high PE ratios attached (CMG: 52, LULU: 43, according to Finviz.com) and are heavily shorted.
Usually, I would not short these stocks, but when momentum names start to fall out of favor, they can decline rapidly and the fact that more than one of these names is acting weak, makes me think that a larger underlying force is at play. Another company in that category is VF Corp. (VFC). The stock is in a very difficult technical position and acted weak despite various analyst upgrades in June. Note that I do noT hold a position as of June 29.
Short-term, however, markets could continue to rally as a result from macro news out of Europe. As in the last months, the Euro will determine the direction of US stocks. Should traders decide to unwind their massive short positions in the currency, American stocks would benefit.
