TGIF – Bringing This Weak Week to a Close

It's been this kind of week: 

The hits just keep on coming as bad news is suddenly bad news for the markets and even the promise of Draghi waving his money wand next week isn't enough to keep investors in equities.  $4.1Bn flowed out of US-based stock funds according to Lipper while $4.3Bn went into bond funds – driving TLT all the way to $135, where we decided to initiate a short position in our Short-Term Portfolio.   

Our STP finished the day yesterday up 92.5% and we're still very much on the bear side, up 16.6% for the week ($16,600) while the S&P fell 3.3% – AND THAT IS HOW YOU HEDGE!  Yes, our bigger and bullish Long-Term Portfolio lost 1.8%, but that was "only" $8,600 so our net for the week is up $8,000 as our BE THE HOUSE – Not the Gambler strategy continues to pay off for the first two weeks of 2015.

Of course $8,000 a week is $400,000 a year (+66% to our $600K start), so it's not likely that we will be as much on the right side of trades all year as we were this week, but it's a fantastic example of how well our balanced portfolio approach works under extreme market conditions.  We made only a couple of minor adjustments (like adding the TLT shorts) but, for the most part – we don't have to do anything to get that performance when we call the direction right.

Monday is a holiday in the US, so we're certainly not inclined to flip bullish today – or even neutral, for that matter.  All of our weak bounce lines were broken, which is what we feared would happen on Tuesday, when we set them.  Fortunately, our 5% Rule™ prevented us from capitulating during the run-up last week and now we are reaping the rewards on the way down!  

Last Friday, for example, we mentioned that our Members had added $13,000 of TZA longs to our Short-Term Portfolio and TZA has rocketed up from $12.33 (a trade idea we published for free for the cheapskate readers) to $13.48 as of yesterday's close – up 9.3% (+$1,209) for the week to cover that 3.3% drop in the indexes.  

Of course the spread we discussed pays 130% (+$16,900) if the Russell is below our 1,170 target and, as of yesterday, it closed at 1,155 – so we're well on our way to making 14x with the TZA options strategies we teach our Members.  Not only is hedging fun and profitable – but it saves you a tremendous amount of stress at times when the market does have these little sell-offs.  

Make no mistake, we are still very long on the market.  Our Long-Term Portfolio is $500,000, vs $100,000 in the Short-Term Portfolio and the LTP is 100% bullish (though mainly in cash as we're not too confident so far this year).  The STP acts as the rudder by which we steer the LTP around the rocks as the market dips and bounces along the way to our expected long-term gains.  By having both portfolios, we are able to avoid panicking in and out of long-term positions, which keeps our eventual gains the long-term capital type!   Come tax season, you begin to see the wisdom of that strategy, right? 

As noted on the Big Chart, we are drifting between the 10% line on the S&P (2,035) and our 5% line at 1,942.50, which is another 2.5% down from where we finished yesterday.  It's very likely we will get a follow-through to that mark next week, maybe a bottoming move on Tuesday and then we all catch Draghi fever into Thursday's ECB Policy Decision.  

Meanwhile, let's continue to be careful out there – earnings have been less than thrilling so far and we get a lot more reports next week along with lots of housing data, which has very much been called into question by the Home Builders' Reports we've seen so far.  

Have a great weekend, 

- Phil

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