OK, I get weekly updates on this particular strategy.  If you're not familiar with the idea, the dogs are the "worst" stocks within the Dow Jones Industrial average on any given year.  I postulated that the reason why the dogs "outperform" is because you're simply taking on more risk in the way of volatility. The idea here is that the DoD outperform the greater DJIA each year, but I assert that this is because the components selected are highly volatile. I proved it on several occasions within the last year when the market was tanking. I further asserted that the dogs would significantly OUTPERFORM when the market recovered and subsequently rallied up. Well, I wasn't entirely right this year. The larger DJIA is up 18.4% as of this writing. The dogs are up 10.9%.

So what does this mean? Well, my lesson learned here is that outperformance is interesting when put in the context of timeframe. I know our dogs haven't outperformed for the year, but I bet they've been up significantly during the upward swing. And as things have recovered, the dogs have probably outpaced the market as a whole, but this doesn't make up for how much they've fallen over the bad times. So when we take the dogs timeframe over the "bad" times and the "good" times we see that they're still lagging overall.

So what does this mean? To me, it means that limiting volatility is just as important as limiting losses. Each bear has a lesson to teach.

So we bring in supposed "experts".  People who trade the markets every day, Nobel Laureates, economics professors, billionaires and more. These people come on the air as if what they say is any more or less valid than what you say or think with regard to the future. I'm not sure why these segments continue to air or the articles continue to be written. This is noise and nothing else. No one knows the next tick let alone what's going to happen next week, month, year. I've griped of it before and I'll probably bitch and complain about it again, this is nonsense and should be ignored. Reputable (if there is such a thing) outlets are the means of distribution. Your CNBC, Bloomberg, and Marketwatch blow this crap out as if it adds value. If you ever base any buy/sell decision on this, you're a fool. No exceptions.

OK, there, now I've taken my medication and will get back to my nightly reading and research.

A regional idea.  Georgia was under a "severe" drought over the last 2 or 3 years.  Yes, I put the severe in quotes because I wasn't a believer, but that's another debate for another day.  What was serious is that a mini-war amongst states began.  Alabama and Florida started bitching and complaining about Georgia not letting enough water down the Chattahoochee River which is their fresh water source.  This went to court and became front page news for many months until the ruling came down against Georgia.  We could not withhold water from the downstream states.

Fast forward to the last few months where we've seen floods and we're close to setting an all time rainfall record for the month of October.  Now we're talking "negotiations" and other civil means for dealing with neighboring states and water.  This was less than civil just a few months ago.

Rainfall averages are just that, averages.  Like the market, from time to time, they will deviate, sometimes wildly, but eventually the snapback will happen.  When the news here was that Atlanta could possibly be a desert, I wanted to be long rain.  If that were possible, I would be talking of my windfall at this point.

However, what if the trend changed permanently.  What if fresh water or water supplies were severely crippled or cut off in a region.  How could/would that be remedied? What sort of companies could provide relief in a serious situation? I know the water angle isn't new, but the water angle in the US is.  This has my eye on Claymore's CGW ETF.  Unfortunately, this is "global" in nature, but I suspect that a US water ETF is an idea for the future.  The next time there is a regional water crisis and the discussion turns to ghost towns in a major region of the United States, a good speculative play might be water.  High risk / high reward, for sure.

So we're back to arguing politics in the Atlanta area, not whether or not we're going to have to abandon our homes in search of H2O.  Forecast in Atlanta, rain showers, maybe some thunder, just in time for the weekend.

I have a trading system that I retired right about the time the downturn started.  It was in the final phases of live testing, but I decided that I didn't like the actual results enough to continue committing capital. It also had a lot to do with the fact that another trading system I was testing was showing better results. It operated against individual Dow components, so before too long, I found myself holding 1/3 of the Dow.  Then whoosh, the bottom fell out.  The trading plan didn't have a stop loss, only a bar time out.  So I decided to "outsmart" the trading system and hold on to these guys because I was certain the market would bounce back.  Well, it has bounced back (although I didn't expect to be sitting on these positions for over a year).  Like most, I'm a little nervous about being excessively overweight in equities, so this has provided me with a great opportunity to unload some of these speculative equity positions from market cycles past.

So two things are accomplished here, one, I get to fix mistakes from the past and second, I get to lower my equity exposure.  Another win/win.

Now that I've had a few minutes to digest a bit more about last week's trading sessions, I've made what I think are some interesting observations.  First, the VIX had a hell of a down week (probably releasing some earnings anxiety) and second, long term treasuries were socked pretty hard on Thursday and Friday to end the week down over 3%.  Meanwhile, the overall market continued its steady climb upwards with the S&P 500 up over 4%.

Why this struck me is because it looks "normal".  The market is up, the VIX is down and bonds are down.  Gold went in various directions (mostly up because of the worldwide speculation of de-dollaring) but seemingly uncorrelated to both stocks or bonds.  This is a pretty normal market 1 year after everyone in every asset class lost their minds.

I've had the feeling that all asset classes that I hold were short term overvalued.  I felt the inverse one year ago and I bought with reckless abandon.  I've been holding cash on the sidelines waiting for something to crack and the first thing was bonds.  I snapped up some TLT this week and I have my eye on some TIPs probably when they crack below $101.00 and some more at $100 and so on.  If the inverse movements between bonds and equities continue, I may even sell some stock and beef up on bonds.  This will hopefully hedge against the snap back that may or may not occur.

The market is feeling a little "text book", which has me nervous.  [grin]

Seems that the theme of financial news right now is the 1 year reflection on the financial 'crisis'.  I thought it would be interesting to look at the TED spread between now and then.

My chart of the day, if you will.

There seems to be a direct correlation in the minds of the masses between the economy, the price of the broad based indexes and the jobs numbers.  True, all are related in some sort of way, but all do not move in lockstep.  In fact, the market is considered a 'leading' indicator, jobs, a lagging indicator and the economic numbers themselves somewhere in the middle. Whether or not this is all a self fulfilling prophecy is a topic for another entry. I bring this up because the masses are confused again (read, marketwatch comments, morning radio, friends, etc) and I don't know how else to communicate this fact. It happened in the last bull/bear cycle and it will happen again in the next. The market will likely fall, people will wonder why because everything is 'rosy', then the economy and jobs follow.  The order is maintained when the cycle goes the other way.

So being a 'bear' because the jobs numbers are bad, is a recipe for missing out on the incredible run up that usually happens when the cycle swings up. With the S&P 500 up 50% off the lows, it's probable that the people watching the jobs numbers as their clue or cue to get back in the market have now introduced risk into their holdings.

A great headline this afternoon pushes one of my points through succinctly.

Exactly!  Now what, or more importantly, who cares?  This doesn't change a thing and has no meaning whatsoever.  Why is it a headline? I suppose they have to write about something. Imagine you're on a road trip, the road trip takes 500 miles. You just hit the 100 mile mark, what does that change about the trip? It's still a 500 mile total trip, you've likely planned an arrival and departure time, those haven't changed. Getting out of the car and dancing around at the 100 mile mark could get a lot of funny looks, but doesn't change the details of the journey. Is mile 100 somehow more significant than mile 99 or 101? I understand milestones and goals, but it shouldn't be based on a random value of an index.

I suppose it's a way to quantify gains and losses and a point in time for people to reflect. Where were you when the Dow hit 10,000 (the first time, second time, and hopefully third time)?

So to answer 'now what', nothing.  End of article. This is why I'm not on TV, I've nothing interesting to say, couple that with a face for radio ... a fatal combination.

So the headline today is that the Dow is having its best month in 20 years. It sounds like a statistical outlier, some extremely rare event ... something you shouldn't weigh too heavily in your speculative analysis. Hopefully you're detecting my sarcasm. You can look at it a different way, I started testing my new system this month and wouldn't you know it, we have some statistical improbability on the very first month! If you're a trading system developer, surely you feel that the moment your new system goes live that the market is out to prove that your system doesn't work any more. heh.

Good thing I decided to cap my risk with a bear call spread. It's tempting to go with naked options to keep more premium, but if the indexes have thier "best month in 20 years" you're screwed. With the spreads, my risk is always 100% defined. I also opened way out of the money, so while the indexes have run straight up, my 56/57 spread is still out of the money (although not by much). The only time I ever consider running naked (sorry for the bad visual) is when I don't mind the pure directional bet that assignment might put me in. In the case of IWM, I put on a put credit spread to the downside because I didn't want to own more IWM. The bear call spread to upside is because I don't want to be short IWM. If either of those statements were inverse, I would consider going naked.

So the plan at this point is to wait. August is typically a slow month thanks to summer vacations. I expect a bit of mean reversion. It's a weird feeling when you don't really care which way the market heads. My only real care is if the market heads down sharply. But then again, if that happens, I buy more long term holdings. I think a wise man once said, trade what's there, not what you think is there. So I stress, once again, to have a plan for all cases.

The last 12 months have been particularly brutal for investors. The very fundamentals of the markets and investing were challenged. Asset allocation was declared dead, talks of shotgun shells and gold being the new world currency, calls for S&P to go to 350 and all other sorts of mayhem. People were scared, they sold indisciminately and without a plan. It was the topic of many discussions with friends and family when normally the topics were kept to things much lighter such as sports or the newest restaurant around town. Everything was different this time, the banks were going to collapse, real estate and home prices permanently changed, expected returns from the markets forever altered.

Deja vu all over again. Today, the Dow is flirting with 10,000, the S&P 1,000. This isn't back to the good ol' days by any stretch, but its hardly collapse. The question I asked over and over again to the sellers is 'when do you get back in?'.  No one ever really had an answer to that question. It was all about running for your life.

I write this to hopefully have something to draw back on when the next "this time it's different" bear market rolls around. I'm not signaling an all clear, but we're substantially off of our lows, numbers are stabilizing and the VIX is at 25. The world to this point did not quit spinning. There's still a lot of recovering to do, but my long term portfolio is in the black (speculative is not) and I suspect a lot of other people are starting to feel relief instead of fear. In fact, I heard one of the morning radio jockeys tell people that it was now OK to open their 401K statement. Talk about random.

The conventional wisdom is that closed ended funds, or CEFs provide a bit more volatile ride than open ended funds.  This is usually because they can trade significantly higher or lower than the net asset value.  The premium/discount of the CEF represents the value that it is above or below the net asset value or NAV. Typically, during bull markets, CEFs tend to run at a premium to NAV, during bears, a discount.  At the end of last year, CEF discounts were significant across the board.  I don't like to speculate on whether a discount represents value, which is one of the reasons why I don't do too much with CEFs.  However, the broad based discount was too much to ignore for a 'buy low' kinda guy like me.  In fact, I picked up some BEP in November and Decemeber when I felt asset prices were very depressed and add to that a decent discount to NAV on BEP which doesn't happen very often.

At the risk of monkeying around too much with long term holdings, my BEP holding has caught my eye for the same two reasons why I purchased it to begin with. Except for now I feel that equity prices are a bit rich short term and that BEP is at a high premium to NAV.

Things are very interesting for my bearish position.  As I mentioned, my new profit target is around 875 for the SPX, which seems like light years away.  After the employment numbers and the futures way up on the news, I was ready to close my bearish calendar at a loss, but before I could do so, the market ran right back down to breakeven on the day.  This feels very weak to me because on 'surprisingly' good numbers, the market could not muster a big rally day.  This feels weak on the short term and made me keep my position opened.  At this point, it is still open but the time is fading.  There is two weeks until expiration and I'm about 65 points away from my profit target.  I'll be looking for an exit in the next couple of weeks, naturally, but I'm highly skeptical that my profit target will be met.

This is one of the drawbacks of a calendar spread.  Sure, you get a low barrier to entry, but in exchange for that, timing is of the essence.  You get to sweat around expiration and what's more, your short option could be assigned.

My point here is to let anyone who is trading short term to understand the psychology.  It's easy to look at a chart or a position after the fact and justify the response, but if you're a bearish / overbought person, what do you do now?  It's not easy on the bull or bear side.  Hopefully I'll alleviate some the pain by telling you that I'm both long and short.  At least this helps me cope with a strange market.  The bearish position was put in place to hedge some of the gains I received on the long side. I'm happy to see the market move up, but not as sad as most to see the market move down.  This is probably the psychology that should be when in a bull situation with a small bearish hedge. 

Today's blast up is nearly uniform.  This was after the first down week in over a month.  As I like to speculate, small caps lead big ones into the next up cycle.  So I've been paying special attention to IWM.  IWM was one of my last purchases on the way down because the smaller guys usually crash further and longer than the defensive names.  But what goes down, must come up.  Everything played out according to plan with the exception of the last downturn.  I expected that with the mid term trend being up and the short term trend (i.e. last week) being down, that the IWM may outperform (lose less) than the bigger boys.  Not so.

Here's the perf of IWM vs. SPY month to date.

I'm reading a recent article on marketwatch.com questioning the stocks as a good investment.  It's true, the last decade has introduced something that we haven't seen recently, down 50% twice in a decade.  Meanwhile, during the last 50% down run, government bonds are up 20%.  The author is right, but what if you're an investor looking at entire the market today.  Over the very long term, stocks have outpaced bonds by a wide margin.  Does it mean that this trend will continue 5 years, 10 years, or 20 years into the future?  Who knows.  Based on historical information beyond this last crazy decade, it would seem that stocks have suffered an unusual setback and for 'buy low, sell high' folks, this might be a good time to get in low.

I'm not advocating any particular strategy (there I go, out on a limb again), but this may be a good time to be overweight stocks.  I say overweight because being in government bonds is never a bad thing, a balanced portfolio should have both.   This is where asset allocation might be a cue.  If you have a balanced portfoilio, your bonds are relatively high, your stocks are relatively low.  In this case, you should be putting more into stocks and less or nothing into bonds to get your predefined allocation back to your 'ideal' allocations.  With an allocation defined in advance, you can probably safely ignore what the front page news is and invest mechanically.  This is what I like about asset allocation.  You don't have to think too much about what the market is doing, you just need to continue to follow your plan.  Sometimes stocks are up, sometimes bonds are up.  Think about the late 90's where stocks were to the moon, hopefully your allocation strategy told you to put less into stocks and more into bonds.  It would've seemed counterintuitive at the time when your cab driver was recommending stocks, but you knew better. Not because you're smarter than your cab driver, but because you looked at the math.

What am I doing?  Following my allocation.  My current bond portfolio looks a bit rich.  While personally I'm looking to pay off my house with free cash, if the house were paid for, I'd be putting it into stock.  My allocation over the last few years has looked a bit toppish for both, which is why I took to paying off debt.  However, when stocks got really cheap in late 2008, I went for stocks because my portfolio was very imbalanced.  Then stocks and bonds went south.  Now bonds went north. I've placed a lot of 'pent up cash' into stocks and my asset allocation is looking a little lopsided.  Meanwhile, bonds have gone up, so that's not looking like a great place for the long term either.

The long winded point, as I do so often, is that your situation may vary.  I don't known what your tolerance is and I don't what allows your to sleep well at night, but if you're a risk taker and stock lover, it sure does seem like a great time to be long stock.  So if you're still with me and you want to invest some hard earned money into stocks, where do you go now?  Well, you have many options to consider.  My recommendation is NOT to invest soley in the United States.  Investing in foreign and emerging markets is a worthy consideration.  For emerging markets, I like VWO.  I own it.  Is it cheap now?  I don't know.  Is it cheap relative to the past, absolutely.  Are there other developed markets to consider?  Absolutely!  Latin America and Asia are two places I have my eye on.

So I'm stressing that we're in a fairly unique situation.  What you do in this situation is up to you and it should make sense for your risk tolerance and you're outlook on things bonds, stocks and foreign.  Please, please, please, as always consider risk before return!