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Year 2, Week 22 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.
Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.
To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.
Cash (2 positions [SHV/BIL] + cash): 66.0% (vs 55.0% last week)
26 long bias: 28.9% (vs 35.0% last week)
7 short bias: 5.1% (vs 10.0% last week)
35 positions (vs 39 last week)
Additions: N/A

Removals: ReneSola (SOL), Life Sciences Research (LSR), ICON (ICLR)

Top 10 positions = 20.3% of fund (vs 20.9% last week)
15 of the 35 positions are at least 1% of the fund's overall holdings (43%)
Weekly thoughts
The markets had a stellar week, rising 6% - as with every week the market is on fire we definitely lag due to a hedged strategy. Volume was thin as it was a holiday week so it is hard to really trust this move, but we've been saying a long base was forming and it was important for the market to get over its longer term resistance areas "soon" or the conclusion to this long base (sideways action) would be down. So for bulls, at least on a technical basis, there is some hope as the 50 day exponential moving average (just under S&P 920) was finally cleared on Friday - ironically this was exactly the same high that the market has been fighting with through December - stalling at 920 constantly through the month. Can you trust it? Considering most of the big boys were at home, it is hard to at this point. But I want to allow for both sides of the equation and "performance anxiety" (watching the indexes take off without you) could hit the professionals next week.
As we move forward we have a lot of resistance ahead - basically every 50 points on the S&P I see some resistance: 950 (mid Nov), 1000 (early Nov), 1050 (mid Oct).

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So if this move continues - we have to fight all these levels off and break through them. Certainly with Obamamania in the air anything is possible - because all bad news is being summarily dismissed and we're trading on (wait for it)... hope. As the market kept ramping this week we kept letting go more and more of our long exposure and moved further into cash. We cut our short exposure Monday by half but not due to any "foresight" on my end - I wrote the past few weeks about the evil that are ProShares Ultrashorts [Dec 28: More ProShares Ultrashorts Tomfoolery] So as I noted in that piece, the only way to really use these are on periods of strong moves down where they can make a lot of money in a little amount of time; but as a long term hedge they have proven to be useless. In a real fund atmosphere I'd be shorting individual equities or indexes, rather than using these instruments. For example, iSharesIYR) or any number of individual REITs which have rebounded tremendously offer a more "sleep at night" way to short. Despite all the "rallying" going on last week, IYR (commercial real estate) has stalled.

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So you have a very easy low risk short on IYR (resistence is at $38 - the 50 day moving average) and the stock has fallen back on every test of the 50 day. If for whatever reason the ETF breaches this you can be stopped out at $38.50 and head back to the sidelines. You can find similar setups on individual REITs.
Anyhow, many of our top names have rallied very strongly but have begun to stall the last 1-3 sessions, as people move into more speculative names that have been beaten down the worst. When that starts happening I begin to get more cautious... in a bull market, this type of rotation is healthy - people will rotate from sector to sector. In a bear market, this type of rotation to the "worst of breed" usually portends people have run up the good merchandise as far as it can go, and to get some return they are going to go to the junk. For example let's throw out one name - our friend Las Vegas Sands (LVS) - surely Americans (based on Obama, 4.5% mortgage rates, and 3M new jobs created "soon") will be flocking to Las Vegas... time to run up casinos! 20% on Friday alone.

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I mentioned on Friday that 2-3 more days of action like this and a whole bevy of individual shorts in the "worst of" names shall appear - LVS has gone from $5s to $7s overnight; if it can get to $9s and hit that resistance area - a beautiful short opportunity. This is just one representative name of many that are "setting up" nicely. Many others are setting up the same in retail, financial and the like. I continue to point to almost anything consumer discretionary as an excellent short - the bulls will have you believe the "2nd half recovery" is coming and hence you must buy these awful groups ahead of the turn. I will tell you an increasing unemployment rate, the coming bankruptcies (retail and personal), states going broke, and many other dislocations won't point easily to a recovery. But for now, it's thesis time - and the thesis is President Elect Midas along with Uncle Ben shall save us - again. As I've been writing the past month or so, 2009 will be a year of ping pong in sentiment - the same people saying today "it's all priced in" at some point in the next 2-8 weeks will say "well maybe it's not all priced in". Count on it. Seeing the "junk stocks" run makes me believe we are somewhere in the range of 2/3rds to 3/4ths of the way through this move...
Here are some things that still look shady to me

1. As I wrote a few weeks ago, we have a bipolar outcome facing America during this grand Federal Reserve financial experiment - deflation on the one side, and inflation on the other. Late this week people were running up commodities on the "re-inflation" trade. Yet the other part of that trade would be gold rising and/or the dollar falling. Neither of which really happened last week - gold was stable and the dollar rose. If deflation is our path, the dollar shall continue to rise as dollars are destructed, hence each remaining dollar shall have more value. Uncle Ben is trying to create more dollars to offset the ones being destroyed - and if/when he is successful the dollar should fall (and gold rise). So I don't buy the "reflation trade" outside of anything than a hedge fund thesis at this time. Further these are "late cycle" stocks - unless Obama/Bernanke can reverse the business cycle - early cycle stocks need to lead the market for now for this to be "real". Late cycle stocks later.... I'll keep repeating this during each HAL9000 induced rally in the coming 6 months.
2. To that point, bank stocks and retail stocks (and even much of the housing complex) lagged the general market this past week. They were relatively limp in an otherwise strong tape and many are lower than they were early in December, despite the market being higher. Again, I will ask how we can jump ahead to the "late cycle" stocks without having the economic recovery stocks rally first.
   
3. Oil is up 23% in a week. Oil is down 30% in a week. What nonsense. Another market completely bastardized by speculation. Yes yes, Israel attacked Gaza and thus oil is right to go up by one quarter in value in 5 days. Sure. Why not? I was surprised oil fell through $40 because usually long term moves, when they correct, fall back to the beginning of the base - which was $40. Basically so many hedge funds speculating in commodities were thrashed or headed to cash that oil was in free fall in the last quarter of 2008. Now a new year is here so we have a new slate to speculate .... I mean, the supply demand dynamic changed 23% this week. USO which is the proxy I use for oil has now rallied back to its 20 day moving average (on huge volume the past 2 days) So we're in the $35s and a rally to $44 could happen I suppose but oil is simply too hard for me here; there are no earnings reports - there are no business metrics. It is all sentiment and speculators.
   
4. Valuations. While I've been hiding out in certain stocks with the most secure revenue streams in 2009, I've been ignoring valuations much of the past 4 months and sticking to charts. But when I take a peek, after this rally, a lot of stuff is starting to get expensive. But let's pull that back and talk about the market as a whole. When we last looked at S&P 500 earnings [Nov 19: S&P 500 Earnings Estimates All Over the Map] the top down analysis for 2009 was $63. I don't see anything in the past 6 weeks that should be adding to this number and in fact the economy has worsened since. I am guessing best case (if everything falls in line perfectly) the S&P might do $60 in 2009 but my more likely scenarios are something in the $45-$55 range. And I lean to the low end of this... Merrill Lynch has now dropped their estimate to $50, and Goldman Sachs to $53. So I'm not out of line here. Which is another reason why, despite the hope that Jan 20th shall set forth on America, we have to live in reality. 2009 earnings have a few problems - banks are going to be impaired most of the year, just as in 2008 and for all those cheering low oil prices as a "rebate for Americans" - well the flip side is energy company earnings will be impaired for much of 2009. So in return for said "rebate for Americans" - the energy companies in the S&P will have much lower earnings. Not to mention the general economy as a whole hurting domestic company earnings and the stronger dollar hurting multinational earnings. But nevermind that - Obama himself is worth $10 of S&P 500 earnings. So let's say we find pots of gold, unicorns, and butterflies ahead and the S&P can pull off a $60 EPS for 2009. Throw a 15 multiple (quite average) and you are talking S&P 950... at the end of 2009. We're already at 930. If you think $50 is more likely, throw a 15 multiple and you are at S&P 750. But that's fact, and we're all on the SAME train we were on a year ago at this time - the ever elusive "2nd half recovery" - just change the year from 2008 to 2009, and recycle same Kool Aid. One year you will "nail it"

• The ailing U.S. steel industry is pressing President-elect Barack Obama for a public works plan that could be worth $1 trillion over two years to boost flagging demand for U.S.-made steel, the New York Times reported in Friday's editions.
• Nicastro and fellow legislators want the papers to survive, and petitioned the state government to do something about it. "The media is a vitally important part of America," he said, particularly local papers that cover news ignored by big papers and television and radio stations.