Diary of a Financier

I added risk today

In Trading Desk on Tue 26 Mar 2013 at 22:40

I added some risk to the portfolio today by swapping our SPY position for a 4% stake in the Russell 2000 Small Cap ETF (IWM). (I’d take the IWM position as high as 7% if I get an opportunity to average down.) After the market opened ~50bps higher this morning, which was largely retraced, then subsequently bested before the close, I had all the confirmation I needed that the intermediate term risk-on switch has been flicked again.

These last two weeks, I shuffled the deck a bit, just waiting for a pullback to present a buying opportunity:

“Expectation from here is still for [yet another] 3% pullback over a little more than 3 weeks, before a 5-6% rally takes us into the summer.”

Peak-to-trough, we just got [yet another] 2%+ pullback. That’s enough for me, given the sustained priceaction today and the bull reversal of daily technical indicators.

According to the 2006 analogue that’s governed the entire broad market so far this year, a lower-low still awaits SPY–the turn down should occur next week the bottom the week thereafter. But, IWM’s near term low is in (2/25 @ $89), and Small Caps will rocket higher, outperforming for next quarter (14 weeks):

IWM v SPY 2006 (daily)

IWM v SPY 2006 (daily)

Ironically, later this afternoon, Goldman Sachs published a research note that expressed the same notion:

1:27 PM Goldman Sachs (GS): Small-cap stocks are set to outperform, research shows that IWM outperforms the SPY by an annualized 8.1% in quarters following a steep drop in the VIX. The “acute” decline in the VIX YTD “provides a tailwind to small-cap performance in 2Q13.”

When the small cap outperformance ends around the beginning of July, it marks the top for IWM/SPY ratio, then the midsummer correction begins before exuberance sends the market to a blowoff top:

IWM v SPY 2006 (weekly)

IWM v SPY 2006 (weekly)- the last cyclical bull’s parabolic rally, from thrill to euphoria, actually occurred with large caps outperforming small caps


This comes on the heels of using our cash to buy a 2% position in the S&P 500 Dividend Aristocrats ETF (SDY) and Merck (MRK) on 3/21. The portfolio is back up to overweight, with a 0.79 beta (vs. 0.76 benchmark), although our allocation is still light with a 53/38 stocks/bonds mix (9% cash). Like I said last week, I’m still saving cash to buy a dip, while our high beta won’t let us miss any upside.

As SPX chugs higher this week, I plan on selling some remaining singlenames (like CSTR & CSX) to raise cash a bit higher and tactically derisk my correlated holdings. The envisioned dip in SPY will hopefully give me a chance to add index exposure and double down on the singlenames I bought at the beginning of March.


  1. […] the latter as the rubber stamp on this cyclical bull market once SPX hits all time highs [proximately]. The follow though–transcendence from Excitement to Thrill–should occur this year too, […]

  2. […] Caps (IWM) are getting particularly hit hard, -1.5% so far today.  Regardless, as I said last week, RUT’s stochastic has receded further away from overbought conditions, and the […]

  3. […] also asserts that we’ll lift from a V-shaped bottom and rally into the summer months with risk-assets leading the […]

  4. […] rally in IWM (vs. +3.6% for SPY) over the next 11 weeks, which is significant outperformance. As I observed three weeks […]

  5. […] vein, I’m staying the course with my Russell 2000 Small Cap (IWM) position, for which the thesis hasn’t been disproved, although IWM’s underperformed SPY so far. I was able to average […]

  6. […] vein, I’m staying the course with my Russell 2000 Small Cap (IWM) position, for which the thesis hasn’t been disproved, although IWM’s underperformed SPY so far. I was able to average […]


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