Diary of a Financier

Exuberant Action Yesterday

In Capital Markets on Fri 29 Apr 2011 at 08:07
  • Bought RSH at the close.
  • Monitoring POL to buy.
  • As volatility continues to slide, I’m ready to trim VXZ position all the way back once it breaks support.

To start, a quote from my partner yesterday, “Either something’s being priced in this week or this is another bout with exuberance.”  These rallies put a manager in a tough position between chasing momentum and controlling risk.  I’ll keep standing to dance, but I’m being as careful as I can to not bump into anything.

RadioShack (RSH)

I bought RadioShack (RSH) at $16.00 just before the close yesterday.  RSH has been priced in a classic value sweet-spot for a few quarters now, as evident from the valuation:

After waiting patiently, I’ve found a terrific setup into which I can finally buy:

RSH daily extended- Rising out of a downtrend, closed above LT support.

RSH daily- Catapulting out of a bullish Head & Shoulders, resting on neckline with bullish indicators.

RSH monthly- indicators continuing bullish divergence. Despite bearish pricetrend, a bullish Head & Shoulders has rallied up to its neckline.

PolyOne (POL)

Here’s another value stock I’ve been following for a while.  From the Chemical space, PolyOne (POL) is just getting started.  Short-term, it’s ready to bust out of this consolidating pattern:

POL daily- Looks ready to break through bearish trendline and retain its bull trend.

But longer-term weekly & monthly charts are still too bearish for my taste, so I’ll continue to wait patiently:

POL monthly- bullish but overextended.

Weekly:

POL weekly- Bearish with support at 13 and H&S on stochastic.

Volatility Mid-Term (VXZ)

I have my finger on the trigger with this one.  I entered the long vol position with VXZ for two reasons: to hedge a portion of the risk in our 42% long equities, and to buy cheap [mispriced] volatility.  Well, our equities are exploding to the upside due to the exuberance of markets, and vol keeps sliding lower.

VXZ daily extended- Indicators still riding their bullish trendlines for the most part, but the price is resting on support while still stuck in an overwhelming downtrend. Stochastic doesn’t add confidence, nor does MFI ploughing into its trendlines support below 40.

Zooming in a bit tighter on the daily:

VXZ daily- Reiterate the price resting on support, but how far down would it be from here?

The longer-term weekly chart just looks ghastly:

VXZ weekly- Just a bearish chart with no second thoughts of rallying.

My thought is to trim back the position to a fraction of its former self before this weekend, because I don’t want to blow it all out at the lows and I still see vol mispriced in the medium-term as long as support holds.  It’s just a matter of whether contract contango will erode VXZ’s NAV, which is all a matter of how long a reversal takes to gain steam.

–Romeo

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  1. […] be honest too, I had planned to trim-back my long volatility hedge by about 50% in exchange for long-dated Treasuries.  However, […]

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