In my previous post, I was quite proud of the performance of my holdings in an asian equities fund in GBP (+8-10% for the year). But on June 29th in the morning, just a few hours before the big slump in the stock markets as there were concerns about the Chinese growth, I asked the asset manager to get me out as these profits vanished to something close to 5-6%, -3 to 5% in a couple of days, it's going fast (and I've not checked yet where the order has been executed, probably a couple of percent south)... On that bucket, the managed equity funds one, I'm now 100% on UK Gilts, let's say that the default risk of the UK remains acceptable... for now ;) The same day, I initiated a short position on the DJ Eurostoxx 50 (SX5E) at around 2570, the first of several if things keep on going badly. As one can see, one clear advantage of minimum diversification is flexibility : in a couple of hours, a fax and a few clicks and I'm able to switch from long to short my whole position.
Back to the last summer, the main argument for me being bullish was the way the Sheriffs, governments and central banks, were coordinated to fight the crisis with a set of stimuli, measures and the will to put whatever it takes to recover. To me, the name of the game used to be "Don't short the Sheriffs", but is it still the case? The reason why I stepped from bull to bear is not only because in the debate between "austerity" and growth as I discussed in my previous post, I think Germany is wrong, but mainly because of the de-synchronisation of opinion and action among the Sheriffs, particularly after the last G-20 meeting that I found accomodating for both parties and ruled nothing out. That's enough for me to stay on the sidelines with my managed funds and start testing the market with a short position on a stock index.
Actually to be frank, instead of shorting a stock index, I considered in order to reflect my bearish view to short the EURUSD as Germany's tightening could harm ultimately the Euro (that's the recent Soros' point). TLofT forbids. Fortunately for me (as the EURUSD jumped from 1.22 to 1.26 as I write in a couple of days), I estimated that as the European started tightening while the US kept on easing, the pair was fundamentally due to rally : EUR to strengthen, the USD to weaken. On this, I was probably right for the wrong reasons, it looks like the USD weakness came after the bad figures from the ISM on July 1st, highlighting a weak growth in the US. It seems the correlation we've had between the stock markets and the EURUSD broke : the EURUSD jumped while the SPX slumped. I could have been killed on this one.
Another trade that could have crucified me is on Gold as I considered to add more on my long position. The rationale was that in the case the market drop significantly, my bet was the safe haven role of the gold would prevail and whatever the direction of the EURUSD, the "short USD" role (as a commodity) or alternatively the "short EUR" role (as an alternative currency to EUR) of the precious metal would help its rise. I was dead wrong on this, it looks like only the hedge to EUR role accounted and Gold lost almost $50 (!!!) on July 1st as the EURUSD jumped.
That's two big bullets I dodged in a few days and so far my choice of shorting a stock index to reflect my view seems not too bad but it shows how the Bear path is slippery.The real danger with a short position is to be shot by a Sheriff so if you have to join the Bear side, move step by step.
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FYI As this post is published: SPX 1021 // SX5E 2522 // NKY 9203 // DAX : 5834 // EURUSD 1.2550 // USDJPY 87.73 // XAUUSD : 1209
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