Taking the Downside

After switching out of equities in my 401K a couple of weeks back and closing my hedges, my thoughts were that I should expect a bounce as the market was way oversold. Still, I did not wait to time the bounce to exit my equity positions. I operate my 401K on a 1/month analysis basis and when it told me to move into cash, Fidelity Government Income fund and PIMCO Global Bond fund, I did it right away. But the thought was that when the market bounced I would take on downside positions with put options on the stocks I follow, thereby limiting my exposure.

So how did all this play out last week? SPY went from 118.12 to 112.64 during the week. That is a little less than a 5% drop. Fortunately the downside positions I took during the week gave me a positive week on my portfolio.

I started by looking at SPY using my Cheetah system that gives me major and minor signals. It triggered the expected minor down signal on 8/12/11 and since this system can give me signals a little early, I waited a day or two. I added put position on SPY. Notice the Fibonacci lines on SPY that I drew from the previous high to the low and how SPY went almost exactly to the 38.2% Fib line and turned around. Interesting… I was thinking it had a chance to go to a higher Fib level than it did. My mind tells me that it is a sign of further weakness, which gave me a little more drive to take the down position. My minor down signals occur on weakness and is not trend following. In fact it is trend leading, and sometimes can catch me on the wrong side. Usually I wait for the primary and the minor signals to be in the same direction before I take the position as I did this time.

Next I saw a down signal pop up on CAT on 8/15. Again I took the down position on that. Added a few more down positions on some other stocks I track that had similar down signals pop up. Still, I felt the possibility of the market climbing to the higher Fib level and I did not want to be caught jumping in early with a strong down position. That was of course what cost me opportunity loss as I would have made a heftier profit last week if I had gone in down full throttle.

Where will it go next? I did not see a capitulation Friday. There is more downward action likely. There is the possibility that we could see a nice double bottom and the market rips to the upside. Now that would be a little tough on all my downside positions, so I have to be willing to jump ship on the down positions any day next week. In my mind I suspect that will happen towards the later part of the week if it does. But if I rack up a decent gain in the first part of the week, I will take a profit and bank it.

I am about flat for the year, which is not too bad considering the market is down over 5%. Moreover the recent 15% drop in the last few weeks has been quite harmless to our portfolio mainly because of the hedges I had following my technicals.