I'm not claiming to be the first person to think of this, but during my morning reading today I had what I think is a pretty good ETF idea.  An ETF that buys stocks with the highest short interest as percentage of float.  This is another "conventional wisdom" type thing that I'd like to see challenged.  The theory states that stocks with high short interest are bound to outperform because they really have a large set of known buyers waiting in the wings (the short coverers).  I haven't seen any statistical proof that this idea actually works.  I'm sure someone can fool us with a backtest.  Ultimately, I'd like to see how it plays out in the real market.

I'm not paritcularly thrilled with my options (no pun intended).  C is too close to $20 for me to like the $20 strike and the premium on the $22.50 (SEP) is a nickel.  With commissions, that stinks.  So I decided to do something a little different, I went out a month and sold the $22.50 strike (OCT) for a 0.25.  Not exactly the 1% per month I was hoping for, but it's about the best I can do at this time.  Time is ticking away and volatility is high, but it's all back and forth and all over itself.

And coincidentally enough, I'm looking to sell some $18 (SEP) puts on the XLF.  I have a long term holding that's not doing too hot.  I would like to apply a band-aid to the stab in the chest at least and if it goes much lower than $18, it looks like a good DCA strategy for my long term holdings.

The market commentary has been light because it's just a lot of repitition and not much interesting at the moment.  Things are calmly violent.

So I'm using a "proprietary" model of sorts to help me with the momentum fund that I've been playing around with.  I haven't had a lot of luck with momentum stocks in the past.  I think the volatility is too much for me most times.  But I keep getting back on that horse.  My current foray isn't doing super hot at the moment, but it's probably doing a bit better than my previous attempts.  One of the hardest things to do is follow the model when you don't feel confident.  Right now, the picks are all commodities based.  I think at best the commodities market is in for some real volatility and probably not a lot of forward motion.  At worst, it will begin a clearly defined downtrend.  I figured if I started this pseudo fund at the end of the commodity bull run, that's just simply bad luck.  It may also be a testament to how well this fund can be.

So with all of that being said, the model says to buy CLF tomorrow.  Please remember that this proof of concept is all on paper and that you should never follow my advice or picks.  This is strictly for discussion and hopefully provides a learning experience for all.

Two things I've blogged about on a regular basis are options trading and new ETFs coming to market.  Given my (even more) hectic schedule lately, my research time and as a result my number of trades has suffered.  Maybe that's good in this market, who knows.  The second item is ETFs.  I subscribe to a number of ETF feeds to keep my finger on the pulse of this emerging product line.  Many speculated during 2007 that the number of new ETFs coming to market was getting ridiculous and the focus of them was getting too specialized.  It got to the point of why bother picking up the ETF, may as well just buy the "best" stocks they hold in the sector and go from there.  I've been looking for numbers to see how many ETFs were opened vs. closed this year and haven't found a definitive list, but I will say that the introduction is slowing and I'm getting a lot more "headlines" that read like this:

• XShares To Close 15 HealthShares ETFs
• Beware of ETFs Closing
• Claymore ‘Acts Responsibly’ and Closes 11 ETFs

Pay attention to the inflows or outflows and understand the risks of entering a new ETF.  So what happens when your ETF is closed?  Well, nothing too serious because the shares are liquidated and you get your money back.  OK, I get my money back, what's the problem?  Well, it may become a taxable event and one of the main advantages of owning ETFs is tax efficiency.  Also, having your shares dumped may become a problem because you might have a hard time getting back in for one.  And you're on the hook for more commissions should you decide to get back or try and reconstruct the ETF holdings yourself.  It could turn out to be a costly event in the unfortunate event.

Even with my hectic schedule, there hasn't really been an ETF introduced in recent weeks that has caught my attention.  There seems to be a lot of consolidated type ETFs where they're holding many different asset classes and performing the rebalancing for you.  I also expected that the actively managed ETFs may bring on a flood of new and interesting products, but not a whole ton.

Has the creation of new ETF products peaked?

It feels like I'm reading the headlines backwards.  Dollar up, market up, oil down, gold down, commodities taking a hit.  This is not standard fare over the last couple of years.  Even the prudent European economy who has a steadily growing economy and a properly appreciating currency has taken a blow recently.  There is a chink in their armor.  So what's going to happen next?  Who knows, my crystal ball is broken, but the velocity of the current moves will have to abate at some point I should think.  If not, oil goes to $0 and how will Barack gives us our just $1,000 "rebate" from the "greedy" oil companies if that happens?  OK, all kidding aside, my take on this is that the trend is changing.  As trends go, this won't happen overnight, so it's probably about time that things take a breather.  I think over the next month or so, oil and other commodities may tick a bit higher or be relatively flat.  Don't get me wrong, I'm not running to go long oil futures, but I have think after the substantial move to the downside that things will slow a bit.  There may even be some periods where oil spikes a bit on a weekly basis.  If you're a reader of the Bloomberg news sites, you may have come across the charts.  If not, here's a look below:

 

This appears to be a trend change.  Again, I don't hold the real crystal ball, but I'm starting to believe that the commodity bull run may be coming to a close ... at least for the short term.  As of recent, this seems to be a boon for equities.  I'm still holding steady with my diverisification across many different asset classes.  I have not sold any of my DBC holding (admittedly, it's quite tempting).  Just simply color me as an emerging believer that the trend in commodities may be changing.

An observation that I thought I'd share.

I've been known to put things in the book too early, but I think it's safe to say that my C calls are going to expire tomorrow.  So now the total premium collected so far is $90 per call.  The $20 strike was probably a little too close based on volatility, but I squeezed out with a profit.  For a quick recap, I sold the $22.50's for $40 and was assigned as C continued to plunge.  I sold the August $20 for .50.  I've got my eye on the $22.50's for September.  I would like the juicy premium for the $20's, but overall that would lock in a loss if assigned.  The $22.50's are selling for ~.20.  That would give me a 1% return for the month.  Not bad, but not super hot either.  My other alternative is to wait and hope that C rebounds a bit more and either the $25's look good or the 22.50's beef up so that the monthly return looks a bit more attractive.  I haven't made up my mind yet and there's still another full day of trading tomorrow to see where things end up.

There's some speculation that the jobless claims number is acceptable since the number of claims fell this week by 10,000.  I'm here to say it's not good.  Anything over 400,000 is bad, it's particularly bad when the moving average is well over 400K.  The standard moving average to smooth out the jobs number is 4 weeks.  Apparently this is a volatile number, but I don't think it's that bad.  This feels like a repeat of 2001-2002 and the numbers are much the same.  The only thing different are the players.  The 01-02 jobless claims hit the tech sector the worst.  I am in the tech sector and I can tell you that everyone that I knew from friends to ex-coworkers were on the chopping block.  So everyone lost their jobs, but the good news is, every one pretty much stayed employed throughout.  They either took pay cuts or had to accept short term contracts to make ends meet.  I didn't actually lose my job at the time, but my employer quit paying me.   So I had to move along.  The employer eventually made good, but he was in an expansion phase and the capital he supposedly secured to do it with dried up on him.

So fast forward to today where we have a repeat in the trend and about the same numbers.  The situation is not good, only this time it's not good for the financial, homebuilders and construction businesses.  Everyone I know (which isn't a lot) associated with these sectors has had a job change, pay or work reduction or at the minimum some tense times.  The good news for them is that I'm breaking out my crystal ball and I can see that people will need money and homes in the future.  These sectors will make a fashionable come back, I'm sure of it.

If you're currently employed in the hardest hit sectors and have lost or are in fear of losing your job, I'm telling you to hang in there.  It'll work itself out and just about everyone I knew in the tech sector who lost their jobs is actually better off today than they were ... some very substantially.

I've been bestowed the honor of putting together and executing someone's asset allocation plan.  I'm not a professional advisor, but this was a family member so I guess I don't have to be.  Anyway, it was pretty fun.  I got to explain some of the in's and out's of asset allocation and also got to hear about their objectives and goals.  I think we all have a little speculative blood in us because this person was convinced that clean and green along with pharma was going to bring outsized returns over the next 5 to 10 years.  I'm not sure I agree, but it wasn't really my place to argue.  The only thing I could do was keep the speculative piece of the portfolio to a size that was not going to harm the longer term objectives.  So anyway, here's what we sat down and came up with.

Symbol	Description	Asset Class	Allocation %
SPY	Large Cap U.S. Blend	Stocks	12.50%
IWM	Small Cap U.S. Equities	Stocks	12.50%
VTV	Large Cap U.S. Value	Stocks	12.50%
VBR	Small Cap U.S. Value	Stocks	12.50%
VNQ	U.S. Real Estate	Real Estate	2.50%
WPS	International Real Estate	Real Estate	2.50%
TIP	Treasury Inflationary Protection	Bonds	10.00%
BND	Total Bond Market	Bonds	10.00%
VWO	Emerging Markets	Stocks	10.00%
DLS	Small Cap International	Stocks	10.00%
PZD	Clean Energy	Speculative	2.50%
PJP	Pharmaceuticals	Speculative	2.50%
			100.00%

The real goal here was to be about 70% stocks, 20% bonds, 5% real estate, 5% speculative.  Within the stock portfolio, we wanted some international and small cap exposure.  I don't know enough about bonds to tweak the maturities, so I went with the total bond market fund mixed with some TIPs.  I'm also trying to keep the transaction costs down, so spreading across maturities didn't seem like a good use of commissions.  That could be my bond ignorance talking though.  And finally, I tried to keep the percentages of allocation simple.  I'm sure we could tweak the international and small cap a bit higher and achieve better returns over time, but I like keeping it fixed at nice round numbers so that it's easy to digest.  I'll let the family member tell me if they want to get heavier into assets that they can see are clearly outperforming.

CF and HP both took massive hits yesterday on the "mo" portfolio.  While both of these are indeed good companies, they're both tied to the commodities market in some shape or form.  Much to the world's delight, the commodities, particularly oil have been taking a beating over the last couple of weeks.  As goes oil, so goes the rest of the commodities it appears.  My DBC holding peeked at $45.95 on July 14th.  It has gone nearly straight down since then to close yesterday at 38.68.

A decline of 16%.  This is a somewhat broad based commodities holding.  If the stock market were to decline 16% in two weeks, there would be a little panic, I would think.  But anyway, I suspect a rotation out of commodities, but even with my suspicion, I rolled with what my models told me.  It's not a timing model, so I anticipate that there will be some drawdown during rotations as sector go out of favor.  It's important to see how badly this impacts performance.  In other news, an interesting article about active ETF performance now that they're 3 months old. They've been overweight in tech and energy and underweight financials and surprise, they've lost less than the broad based indices. Not a shocker. I suspect that the actively managed funds will suffer from the same underperformance during sector favor change. I hope they can survive it as well. You can read the full article here.

My IBD this weekend tells me we're now in a confirmed rally.  I was questioning that just as recent as last weekend.  Apparently Tuesday was the follow through day they've been waiting for.

In the meantime, the non-complaint momentum fund I set up outperformed this week (up 1%).  <laugh!>.  With only three stocks in the fund, I'd say that was pure luck.  To recap, I'm currently holding ICLR, HP and HIL.  I have a new member to add to the mix on Monday, CF.  The stock has been on a tear over the last 12 months, nearly tripling in price.  I'm looking to catch the next leg up.  It closed at 162.54 on Friday.  Assuming I get about the same entry on Monday, I hope to ride it to somewhere around 187-188 or lose it somewhere around 145.

It's the dog days of summer.  This isn't a bad time to have a look at the performance of the famous Dogs of the Dow strategy.   If you're not familiar it goes like this. The strategy is that blue chip companies do not alter their dividend to reflect trading conditions and, therefore, the dividend is a measure of the average worth of the company; the stock price, in contrast, fluctuates through the business cycle.  This should mean that companies with a high yield, with high dividend relative to price, are near the bottom of their business cycle and are likely to see their stock price increase faster than low yield companies. Under this model, an investor annually reinvesting in high-yield companies should out-perform the overall market. Source - wikipedia

There are a number of slight variations on this theme, but the spirit and intent is maintained for the most part.  Last year an ETN was released to mimic the DoD strategy.  I wrote about it here.  The ETN ticker symbol is DOD, aptly enough.  It performs the rebalancing each year for you. At this point, I've put together a chart that compares the difference between the DOD ETN and the Dow Jones Industrial Average.  Both are down pretty good this year, but did the DoD strategy outperform?   (click to enlarge) At this point in the year, the dogs are indeed dogs.  I think GM has hurt the dogs immensely this year.  It is down nearly 60%.  Other notable pains in the sides of the strategy is C, down 36% year to date. The DoD was doing fine up until last year.  When the market fell apart, the Dogs of the Dow fell apart even more.  Some are saying that the dogs of the dow are dead, but I think this is temporary.  In fact, I'd so far as to say that the strategy just doesn't hold up in a down market.  If the market is up, it makes sense that value is going to outrun most of the major averages.  So it's really no surprise that this behavior is occurring in nature. It's still an interesting strategy to watch.  Mostly because it has a track record and it's very simple.