Portfolio Thoughts

Frankly, Our Man is somewhat surprised by the slide over recent days having expected to hear a number of companies talk about how 2010 (or 2011!) is going to be the best year…ever! However, slide the market has, and thankfully OM’s portfolio has largely managed to resist the urge to join in.

So firstly, it’s important to note, that if the recent weakness is just a head-fake or a buy on the dips opportunity for others, then OM is comfortable with his book.

However, today the market has started to reach the technical levels that Our Man had jotted down as interesting in the…”this might not just be another opportunity for (the ubiquitous) them to buy on the dips” kinda way. While he’s relatively comfortable with the portfolio and not planning on doing anything, yet, Our Man has begun pondering the following:

- L GLD: Is it time to trim the GLD from its oversized position?
The position was oversized as OM felt that as the trade became more popular Gold would break through its March highs (turning the resistance to support) and possibly head up towards $1,200. With Gold now back around the level of those March highs, Our Man is watching carefully to see if they hold. Should gold be unable to hold it, OM will likely reluctantly part with some of his loot.

- L TLT: Is it time to roll some of the TLT position into SPY puts?
Our Man had circled the 1060, 1050 and 1020 levels on the S&P Index as his numbers to watch, after taking it as a positive sign that his simplistic technical analysis and Elliot Wave Theory seemed to settle on similar numbers for the first time. 1060 as a level at which to start pondering, 1050 as one to see whether there were any buyers on these dips and 1020 as a sign that there weren’t enough of those buyers.

Our Man’s view of market structure is pretty simplistic, as there are only 3 investors Momentum guys, Fundamental guys and Others (Who? Well our man looks at them as the wild cards…a mixture of I-need-to-keep-my-job people and retail investors).
- Momentum guys have been buyers on the way up, Fundamental guys have been holders on the way up, and Others have been neutral to net buyers on the way up.
The market has now fallen 5% from peak -- will people call it a dip and still be buyers (like every pullback in this rally)?
Or will the plethora of negative data give a pause as people wait to see what happens (hello, to OM's boss)? If it does give a pause, does that mean Fundamental guys start/continue to bail (they know they're beyond fair value, and were likely running winners) and do Others (especially those that lost a ton last year, made a good chunk this year and can see year-end redemption so close at hand) join them getting out to protect themselves? If so, given retail has shown little interest in playing this rally and there's no natural buyers -- does that cause momentum guys to want to move from L to S? Especially if the move downwards stretches from 5-8% and the peak drifts further into the past?

Thus, if the market eases through 1050, is that the time to find some puts…with the intent of adding more if it ever goes through 1020? Or should he stick with his flight to quality play? Or is there a more creative way to use his mix of TLT, GLD and SPY put assets to profit from a falling market?