We decided on the last rally in April/May that before the "next" correction (which did not take too long to surface) we were going to adopt a bit more of a barbell approach. That meant buying at least a few of the sectors we don't like, for times just like this - when financials, homebuilders, and retail is jumping. This way we have something working at all times. Frankly on a day like yesterday, if we had the type of positioning we had in January and March (full fledged "global growth" stories while remaining hedged against financials and real estate) we'd of shown one of those days as we had in Jan/Mar where the market was up 2.5% and we were down 2%. But with this adjustment we actually outperformed the market yesterday even when almost half our positions were red to flattish. It helps when Ultra Financial (UYG) goes up 23% in 1 day.
Now with that said, this last correction was quite relentless and unlike the previous versions where the Kool Aid was "a recovery is not too far off" in both financials and housing, I believe the psychology of acceptance finally hit people that there won't be any rebound coming "any day now". So these stocks sold off even worse than they did in previous corrections. So we were definitely "early" (i.e. wrong) in building up the positions - timing is everything. That said, we are seeing some serious bounces in the past session and this morning, so I am going to sell off a portion (to raise cash) of the 2 housing stocks we own in our barbell strategy. Not a huge sell off because these "early cycle" moves (i.e. stocks that recover at the beginning of an economic recovery) generally last anywhere from 5-10 days. But with cash low and a good profit in the last batch of DR Horton (DHI) and a small profit in the last batch of Lennar (LEN) I'd like to liquidate some here and start raising some cash.
Again, these are not sectors or positions I "believe in"; they are effectively hedges - I believe housing and financials have years of struggle ahead. But nothing straight down - or up. If we continue to rally for about a week from here, and these groups "lead", I'll probably liquidate these down to near nil, and then we'll repeat the process later in the year and try to time it a bit better.
- Sold 500 of 2600 shares of DR Horton (DHI) - this last batch was bought at $10.65 a week ago Tuesday, and we're letting this go around $11.60. Takes our stake down from 2.4% to 2.0%
- Sold 500 of 2250 shares in Lennar (LEN) - this last batch was bought in mid $12.20s and sold today in mid $12.50s. I did not keep buying this on the way down simply since we were out of cash and were buying other opportunities. This takes our stake down from 2.2% to 1.8%.
I also took out some of our Ultra Financial (UYG) which was up 23% yesterday and another 17% this AM. Yes that sounds appealing but if you do not time this sort of instrument correctly you get squashed. We bought this with half way good timing actually [Jul 1: Starting Ultra Financial], missing the first 80% of it's carnage but it still fell from $20 to $15 during the last 20% of it's gutting, and only now has rebounded back above $20. I'll still hold the rest to see if we can build on this rally but 40%+ in 2 days is not something I am going to just sit on, even if it just helps us get back to break even or a bit over. We took UYG down to a 1.6% stake.
I will still be doubting this rally until/unless we break over S&P 1275. So with low cash we want to build some up. So we will.
Long all names mentioned in fund; just sold DR Horton and Lennar
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