Volume 15 Moving our Portfolio from Cash to Shorts Market Recap Page 1 Tightening Monetary Conditions Hurt Stocks Page 1-2 The S&P 500 Breaks a Ten Year Old Trend Page 2 Shorting the Major Indices Page 3 December 23, 2018 The Technical Portfolio Moving our Portfolio from Cash to Shorts The stock market has had a rough going these last few months. The S&P 500 closed below 2,500, and if you have been following our Twitter/Instagram, you would know this is a very important level to us. On Thursday (12/20/18), the S&P 500 fell below its long-term trend line, which began in 2009. After the 2% drop on Friday, the index has essentially confirmed the bull market over. There are still bullish investors out there that believe the stock market is acting irrationally. They focus on next year's economic projections, and point out that the fundamentals of the economy are still expected grow in 2019. To them, this means stocks should continue to grow with earnings, and not drop like a recession is coming soon. However, the stock market is not behaving irrationally in my eyes. The stock market is forward looking, and it takes in all information available to it. It is the best leading indicator of the economy, so if stocks are dropping like this, then there is a good reason for it. The reason I believe, is the Federal Reserve. Tightening Monetary Conditions Hurt Stocks Since our first issue, I have been warning that a tightening Federal Reserve is one of the biggest risks to the stock market. This is why our positions always had tight stops. Tightening financial conditions are bad for stocks. When a person is allocating their paycheck, they first look at expenses and then savings. If there is any left over after that, they put it in their brokerage account. The stock market receives whatever is left over. When conditions tighten, and there is less money in the system, then there is less money to be put into the market. In addition, when monetary policy gets tight enough, stocks become a way to raise capital.
Position Returns VXX +67.83% +$1,143.64 GLD +2.59% +$415.38 SBUX -5.16% -$327.32 When interest rates are low, people tap into credit when they need to raise cash. This allows investors to keep their cash in the stock market, where the opportunity to grow the principle outweighs the cost of borrowing money. In fact, some investors borrow money to put in the stock market, with the idea of growing the money faster than the cost of interest. This dynamic changes when the cost of borrowing grows. Investors eventually look to sell stocks to raise capital, rather than borrow. We are entering a period where there is less demand for stocks, and I don't think it will comeback until we reach the bottom of a recession. The S&P 500 Breaks its 10-year Trend The most troubling sign for stocks was when the S&P 500 broke 2,500 without much of a fight. The other major indices still have their 10-year trend lines to act as a support, but since the S&P 500 already broke its trend, the other indices are likely to follow. Watch List PSQ Proshares TR/Short QQQ Target Entry Price: $36.75 DOG Proshares Short Dow30 Target Entry Price: $64.00 RWM +9.15% +$1,150.80 SH +4.14% +$520.00 Total Portfolio Gain/Loss +5.9% +$2,902.50 The market outlook is now in a long-term bear. Sellers have broken past a 10 year old support line that has seen a few crises of its own, including the European scare in 2011, and the "earnings recession" of 2015. The only stocks supporting stocks right now are defensive sectors, as investors are rotating out of cyclical names and into defensive ones. Shorting the Major Indices Right now, we are looking for opportunities to short the market. Rather than shorting individual stocks, I believe the best way we can do this is through the use of inverse ETFs. I want to short indices rather than individual stocks because they are less volatile. The indices are already volatile enough in this environment, so individual stocks are even more
volatile. Plus, I do not want to build a portfolio of short stocks. I want to keep at least 50% cash available to minimize volatility in portfolio returns. By exposing our portfolios with inverse index ETFs, we are shorting the broader market, with less capital. We currently own RWM, an inverse Russell 2000 ETF, and SH, an inverse S&P 500 ETF. These were purchased after both indices fell below their October lows. These points were clear supports that had been broken. In addition, the S&P 500 broke below the key level of 2,500. This means we could eventually see the index fall to 2,200-2,000. If the economy goes into a recession, we will likely hit these levels, if not further. From here, we are looking to short the Nasdaq-100, the Dow Jones Industrial Average. We may also short individual sectors, if the tinning is right. For example, the financial sector is a perfect candidate to short right now, however, we missed an ideal entry. If a dead cat bounce occurs, where stocks move up for a short period in the context of a greater downtrend, we may buy the inverse ETF if XLF returns to, but fails to clear the previous support. To most, Friday was the last real trading day of the year, as many people go on vacation between Christmas and New Year's day. With this in mind, it is hard to make any sound technical trades during this time because there is a lack of volume, and any significant price moves should be taken with a grain of salt. In February I said the S&P 500 had likely seen its highs, but we will retest them before we drop into a bear market. So far, that has been true. My rationale was that their wasn t much demand left for stocks. 2017 was a phenomenal year, and if you did not come off the sidelines then, then you weren t going to. In addition, the Federal Reserve was raising interest rates, rolling off the balance sheet, and tightening monetary conditions. The stock market has grown this much over the last 10 years because of extremely easy monetary conditions. Now that the Fed is taking away the punch bowl, stocks are going to suffer. Investors should never fight the Fed. From here, its hard to make bullish case for stocks or the economy. There is no real catalyst in sight. There may be some positive bumps, like a trade concessions, but unless there is active stimulus put into the U.S. economy, stocks, like the economy, are going to struggle going forward. Portfolio Performance Our portfolios have performed great over the last month mainly due to the defensive posture we have taken. Prior to adding our short positions, we were holding about 70% of our portfolio in cash. We went to cash quickly because the risks were pointing further downwards. This high cash position has helped our portfolios miss the rapid decline in stock prices over the last few months. Our VXX position, which tracks the VIX, is up 67.8%. Initially, we opened a small position because volatility protection was so cheap, and it was a good tool to limit volatility in our portfolio as the market steadily climbed upwards. Now this position has paid off, and provided us with a good return. Recently, we opened up two short positions: RWM and SH. These inverse ETFs allow us to short the broader indices. So far, these positions have done well with the inverse Russell 2000 ETF returning 9.15%, and the inverse S&P 500 ETF returning 4.14%. We are still long SBUX, and we just recently sold our position in DIS. Both of these stocks broke out of a base that was built over multiple years. It is a significant event when something like this occurs, so we tried to take advantage of them, even though market conditions are very unfavorable. So far SBUX has held up from a technical standpoint, although our return is -5.16%. Overall, our portfolio performance compared to the major indices has been great. We will continue to keep a high amount of cash, and look for shorting opportunities as we traverse through this rough market climate.
Thanks for reading, and happy trading! Written by Brandon Ross, CMT for BRTechnicals.com December 23, 2018. Disclaimer: 1. Various BR Technicals newsletters (collectively, Newsletters ), are published by BR Technicals, and offered for sale to the general public. 2. The Newsletters are impersonal and do not provide individualized advice or recommendations for any specific subscriber or portfolio. 3. Investing involves substantial risk. Neither the Author, the publisher, nor any of their respective affiliates make any guarantee or other promise as to any results that may be obtained from using the Newsletters. While past performance may be analyzed in the Newsletters, past performance should not be considered indicative of future performance. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing the prospectus and other public filings of the issuer. To the maximum extent permitted by law, the Author, the publisher and their respective affiliates disclaim any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Newsletters prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. 4. The Newsletters commentary, analysis, opinions, advice and recommendations represent the personal and subjective views of the Author, and are subject to change at any time without notice. 5. The information provided in the Newsletters is obtained from sources which the Author believes to be reliable. However, the Author has not independently verified or otherwise investigated all such information. Neither the Author, the publisher, nor any of their respective affiliates guarantee the accuracy or completeness of any such information. 6. The Author is not a solicitation or offer to buy or sell any securities. 7. Neither the Author, the publisher, nor any of their respective affiliates is responsible for any errors or omissions in any Newsletter.
Portfolio Comparison Aggressive Portfolio SYMBOL DESCRIPTION QTY PURCHASE PRICE CURREN T PRICE TOTAL VALUE TOTAL GAIN/ LOSS Stop Risk VXX IPATH S&P 500 VIX SHORT-TERM FUTURES ETN CLASS A 61 $28.10 $47.16 $2,876.76 $1,162.70(67.8 3 GLD SPDR GOLD TRUST 138 $116.24 $119.24 $16,455.12 $414.00(2.58 $109.45 $1,351.02 SBUX STARBUCKS CORPORATION 98 $64.73 $61.39 $6,016.22 - $327.32(-5.16 $59.10 $224.42 RWM RUSSELL2000 280 $44.90 $49.01 $13,722.80 $1,150.80(9.15 $43.00 $1,682.80 SH S&P500 400 $31.42 $32.72 $13,088.00 $520.00(4.14 $30.32 $960.00 Portfolio Cash Total $52,158.90 Total Risk $4,218.24 $57,960.51 $110,119.41 Regular Portfolio SYMBOL DESCRIPTION QTY PURCHASE PRICE CURREN T PRICE TOTAL VALUE TOTAL GAIN/ LOSS Stop Risk VXX IPATH S&P 500 VIX SHORT-TERM FUTURES ETN CLASS A 60 $28.10 $47.16 $2,829.60 $1,143.64(67.8 3 RWM RUSSELL2000 280 $44.90 $49.01 $13,722.80 $1,150.80(9.15 $43.00 $1,682.80 SH S&P500 400 $31.42 $32.72 $13,088.00 $520.00(4.14 $30.32 $960.00 GLD SPDR GOLD TRUST 138 $116.23 $119.24 $16,455.12 $415.38(2.59 $109.45 $1,351.02 SBUX STARBUCKS CORPORATION 98 $64.73 $61.39 $6,016.22 - $327.32(-5.16 $59.10 $224.42 Portfolio Cash Total $52,111.74 Total Risk $4,218.24 $56,702.48 $108,814.22
Regular Aggressive S&P 500 Date Change Change Change 9/22/2017 $100,000.00 $100,000.00 2502.22 10/27/2017 $101,998.19 2.00% $102,127.69 2.13% $2,581.07 3.15% 11/24/2017 $101,899.79-0.10% $102,336.45 0.20% $2,602.42 0.83% 12/29/2017 $104,833.02 2.88% $105,887.26 3.47% $2,673.61 2.74% 2017 Returns 4.83% 5.89% 6.85% 2018 $104,833.02 $105,887.26 $2,673.61 1/26/2018 $111,339.54 6.21% $113,275.76 6.98% $2,872.87 7.45% 2/23/2018 $105,971.24-4.82% $106,740.86-5.77% $2,747.30-4.37% 3/30/2018 $103,876.28-1.98% $104,007.94-2.56% $2,640.87-3.87% 4/27/2018 $105,432.92 1.50% $105,733.30 1.66% $2,669.91 1.10% 5/25/2018 $107,883.66 2.32% $108,217.73 2.35% $2,721.33 1.93% 6/22/2018 $109,663.19 1.65% $109,915.44 1.57% $2,754.88 1.23% 7/20/2018 $110,843.40 1.08% $111,694.64 1.62% $2,801.83 1.70% 8/17/2018 $111,426.28 0.53% $112,635.93 0.84% $2,850.13 1.72% 9/21/2018 $116,352.88 4.42% $117,792.26 4.58% $2,929.67 2.79% 10/19/2018 $109,086.10-6.25% $110,509.07-6.18% $2,767.78-5.53% 11/16/2018 $107,881.56-1.10% $109,174.76-1.21% $2,736.27-1.14% 12/21/2018 $108,814.22 0.86% $110,119.41 0.87% $2,416.58-11.68% YTD 3.80% 4.00% -9.61% 12-Month Return 3.80% 4.00% -9.61% Total Return 8.81% 10.12% -3.42%