Trading Diary: Hedging our portfolios as stock market wavers

McClellan Oscillator attempts to relieve oversold market conditions, but it’s not giving our own positions very much help this week. Then, there’s the Fed.

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A protester greets Fed Chair Janet Yellen between innings at Jackson Hole. 2014. (Screen shot from Bloomberg video)

WASHINGTON, August 22, 2017 – As we noted in our companion column today, stocks attempted a modest comeback Monday and actually succeeded – modestly – due to investors’ attention being diverted elsewhere, namely to the rare, cross-North America/U.S. solar eclipse. That event found many people sneaking out of work (and away from trading desks) to head outside and catch what they could of this spectacular phenomenon.


Read also: Eclipsed Monday, stock market bulls attempt Tuesday rally


Today’s bullish trading is more robust. But this type of action has a long way to go even to reach equilibrium, which, for us, is the zero line on the following chart of the McClellan Oscillator, a chart that’s helped us with trades many times, as it tends to be highly accurate in demonstrating oversold market conditions (which find the chart-line significantly below zero) and overbought conditions (the precise opposite) as well.

McClellan Oscillator, Monday, August 21, 2017. (Via Stockcharts.com)

These signals, in turn, tend to predict at least short-term market reversals, which, in oversold conditions, generally means a sharp rally is in the offing. The length of such rallies, however, is hard to predict. In the generally negative August-September time frame, such rallies can be volatile, exciting – and short-lived.


Add to this any mystery surprise info coming out of the annual Federal Reserve-sponsored economic powwow in Jackson Hole, Wyoming, and anything goes this week.

Trading Diary

We put on a small position in the double-short S&P 500 ETF (SDS) Friday, and it protected our positions until this morning’s rally. We sold half this position this morning for a loss, but no matter. Such positions are only intended as hedges against disaster. If the market had continued to tank, we’d have netted a nifty profit over just a few days. Mr. Market apparently thought otherwise, at least today. That’s the way it goes.

Our two most miserable positions, in baby bond/preferred stock issues associated with Rait Financial (symbol: RAS) and Travel Centers of America (TA) seem to finally be bottoming today, though it may be a long and painful trip back up again.

RAS, in particular, is performing very poorly indeed as it attempts to re-juggle its failed REIT strategy, repositioning themselves for gains in the future. Traders are thus far not impressed, plunging the stock into near-penny stock territory. (It’s currently trading at around $1.03 per share.)

The common stock, however, is not the Rait baby bond that we hold, whose symbol is RFT. But it does affect this issue, which is senior to the common even if the common cuts the common dividend to zero. At par value ($25 per baby bond), RFT yields 7.63 percent. At its current terrible price ($19.03 per baby bond as we write this), it’s yielding nearly 10 percent. Holders are dumping it, however, as they’re nervous about the underlying common shares.

Analysts we read are short-term bearish and long term bullish on the common. If they’re right, we’ll eventually come out OK on this one. If not… well, let’s not think about that one.

On the other hand, even though August has been killing our portfolios in general, we’ve still had some winners, notably a pair of supposedly beleaguered retailers: Dollar Tree (DLTR) and Home Depot (HD). We bought both last month when the Amazon-Sears Kenmore deal hit the tape, viciously kneecapping all retailers, whether they sold large appliances or not. DLTR doesn’t sell them at all. Its shares bounced sharply, at which point we took our profit and ran, given the market’s current volatility.

We actually added to our position in Home Depot, however, during a second dip in price, and may add to it again. We’re up decently in the position currently, but are holding longer term, as we think this Dow stock is an ongoing winner, with DIY home repairs and contractor work continues to rise.

We’re back in tiny gold and silver ETF positions as a defense against headline risk, using our usual ETFs, SGOL for gold and SIVR for silver. Our performance this year in precious metals has been mixed. But the news, at least as it’s being reported daily, means you have to hold some of this stuff just because.

Hopefully, we’ll be back with you tomorrow, assuming we have something interesting to cover. Enjoy the day.

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