Author: Michael Arold
Covestor model: Technical Swing
Stocks surged last month and the S&P 500 had one of its best Octobers in its history with a gain of over 10 percent.
My Covestor Model Portfolio trailed major stock indices and was slightly down in the first month of the final quarter of 2011. I am not at all concerned about the return since I followed my trading plan. However, there could have been reasons to trade more aggressively on the long side.
In my last month's outlook, I indicated that I didn't expect a strong rally due to fundamental factors, which is why I was careful with my positions. Within a couple of days, the market shot up to the top of its trading range, making it difficult to enter positions at that point. In hindsight, I could have emphasized the latest market characteristics instead of trying to predict price action from anticipated fundamentals.
On June 29, I blogged about the "hit and run market environment." I observed that the markets had turned extremely volatile and discussed their tendency to make strong multi-day moves after changing direction. This characteristic hadn't changed in October, so there could have been a case for going long. Markets’ ability to discount news long before newspapers can catch up on the headlines is one of the most amazing phenomena to me. One has to be careful to not listen too much to what is written from journalists. It seems like the European debt solution (time will tell if it really was a solution) was foreseen by the markets.
So while I was careful in October, I took on trades on both sides - long and short. My best trade was probably the short of Green Mountain Coffee before the stock started to sell off. Even though GMCR was a very successful trade (I closed the position on October 26), the overall portfolio gain for the month was small because that trade offset a couple of losses in other positions, including a Skyworks (SWKS) trade that moved against me.
For the full year through end of October, the model has dramatically outperformed my benchmark, the S&P 500, by 16.5%. My strategy aims to maintain this relative performance, which implies a focus on long trades for the next two months.
Going forward, I'm slightly bullish since earnings season has started quite strong and the recent developments in Europe should keep bears in check. It is the end of the year, so money managers might try to play catch up and push the markets higher.