Anyone noticed that the QQQQ is within spitting distance of its 07′ high? This shouldn’t surprise anyone, Apple (AAPL) broke through 300$ with authority this week and it’s 20% of the Nasdaq. As for the SPY, it's still trapped below major resistance where it fell off a cliff back in 08′. Why? Because it includes decent exposure to financials and energy, the two lagging sectors in this market.
The fundamental story here is actually rather simple. Tech companies are finding ways to squeeze every last dollar out of this economy. While there aren’t many sectors of the economy showing real growth, technology is on fire, top and bottom lines are surging. Just take a look at IBM, a company that has its fingers spread across the economy with its service business. IBM is trading at an all time high, yes that’s right, above its tech bubble high. How is it that if IBM is so connected to this domestic economy that it's doing so well? Simple, it gives businesses the tools to be more efficient. And that is the whole story here, everything is about efficiency, it has been for a few years now. This is why we see employment lagging a corporate recovery, why wages are declining, why technology is surging.
Yes, the Fed has all but said they will be embarking on a second round of quantitative easing. Gold is surging as a result and the dollar is getting crushed. The race is once again on for real assets, as it should be. The old saying “don’t fight the Fed” is famous for a reason, because it’s true. I’ve said this time and time again, the economy is not the market, they are two very different things. The market responds to capital flows, it’s plain and simple. Eventually both come into equilibrium, but that can take years. You need to be willing to put aside your personal beliefs regarding what’s right and wrong with our government’s policies, and just trade the tape.
We continue to do just that, stay long into this tech surge. We haven’t been 100% long at any time during this rally, but have outperformed the indices at between 70-80% while managing risk tightly. It’s nice to see some positions in the portfolio heading for holding periods around two months. That is a natural occurrence with my style, the longer the holding periods the healthier the market, it’s not a choice I make, just the result of the tape. The trend is strong and my focus these past few weeks has been to keep my fingers off the keyboard as much as possible. I’m trying hard to block out all the noise and trade what I see. I’ve been paranoid a few times because of the ease of the gains, but each time I take a look at the tape and find no reason to sell wholesale. Positions have been trimmed, others cut for underperformance, but overall a large exposure on the long side has remained.
As the dollar has become extended to the downside and the metals have run quite far, I have pared back my exposure to the miners. I did buy into Molycorp (MCP) this week, a rare earth metals miner. It’s a very speculative position but the rare earth metals story is strong, I’ve been following it for quite some time now and believe it’s no fluke. Search my blog for rare earth metals and you will find many Sunday linkfests with this topic included. The key when playing a story like this is to get involved only when the price action confirms that traders are now focusing on it. That is what we’ve got now, the story is hot, but so is the money flowing in, so if you are going to play through MCP or Rare Element Resources (REE), manage your risk very tightly.
We continue to hold good sized positions in emerging market banks ICICI Bank (IBN) and Grupo Financiero Galicia (GGAL). The long emerging market short domestic financials pairs trade that I have been talking about for months now is working beautifully.
The portfolio is loaded with tech, and there is a trend here that is just developing. The optical space is on fire right now with Finisar (FNSR), Oclaro (OCLR), and our position Oplink Communications (OPLK) surging. They all look set to make huge runs. I’m not completely sure what the real story is here. During the tech bubble a lot of fiber optic cable was laid around the world, too much in fact.
There was an excess of capacity and many of these companies got slaughtered and stayed down for quite some time as demand just withered and died. I’m not a fiber optic specialist, but it seems that we’ve worked off that excess capacity due to the huge amount of video data being shared over the internet. As well, there is a new push to get fiber optic into the last mile of pipe going into every home, enabling the end user to stream all that awesome content. I can personally attest to how awesome Verizon Fios (VZ) is, with those speeds StockTwitsTV would be much harder to produce. The stocks all look great technically, and based on my research OPLK looks the strongest here, although FNSR was the winner last week.
As @The_Real_Fly likes to say, Chinese lotto is making everyone rich these days. I think it’s still a Baidu.com (BIDU) or die market, but I’ve chosen to play this a different way. Chinese travel is on fire, so I’ve taken positions in Ctrip.com (CTRP) and Home Inns & Hotels (HMIN). Travel across the board is on fire for that matter, just take a look at Priceline.com (PCLN), Expedia (EXPE), and Travelzoo (TZOO). Don’t miss this trend.
I still think biotech and high beta healthcare are set to run here. Also, do not forget about the trend taking place in the chemicals industry, my pick is Lubrizol (LZ), but I would love to get into Braskem (BAK).
We put up another 215 basis points of absolute return this week and about 110 basis points of alpha. We’re about 80% long and 8% short, right where I want to be at this point.
Positions sold this week include Oracle (ORCL), Incyte (INCY), and 1/4 of my position in Compania de Minas Buenaventrura (BVN), and a closed short in Polycom (PLCM). Closing Oracle was a mistake, I got bored of waiting for it to really move and rotated into other stuff. When I took the position I told myself that it was going to be a long term holding given the technical setup and my fundamental conviction in the company. As I said, mistake selling it for a tiny gain. INCY just wasn’t acting well towards the end of the week, the trend is a little long in the tooth and although I believe this stock goes much higher, it may need to pull back and regroup here. I will be interested again.
Positions added this week include our optical position in OPLK, Chinese lodging stock HMIN, and the rare earth metals play MCP.
Positions that performed well this week include BVN, CTRP , Amerigroup (AGP), the iShares silver ETF (SLV), and HMIN.
Positions that did not perform well this week include IBN, GGAL, and Perrigo (PRGO).
Another round of earnings is upon us. I don’t subscribe to the idea that you shouldn’t hold positions through earnings. If you have oversized positions going into earnings it is smart to pare them back, but selling out makes no sense in my mind. Earnings are a huge catalyst, and if you have fundamental conviction in your positions, and believe the market is set to move higher, there’s no reason to be cutting a position ahead of earnings. AAPL reports Monday afternoon, it will be a HUGE report. They will blow away the estimates, but as always, the reaction is what matters. The stock is extended short term, but on a longer term perspective still looks cheap compared to how fast they are growing. I can see Apple at 400 quickly. You do the math from there, if Apple is at 400, where do you think the Nasdaq is?
As always you can find the whole Model Portfolio here.
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Disclosure and Disclaimer: Nothing that I say or show on this blog should ever be considered investment advice or a recommendation to buy or sell any security. The performance numbers that I post in the momentum book should never be regarded as representative of any specific client account managed by Surfview Capital, it is there solely for educational purposes and should be treated as such.