Bildar's  Instablog

This past week, I again noted Hal's take on things in real-time on stocktalks, so I'll spare you a wholly boring replay like I posted last week. Just check out recent stocktalks if you are interested.

There have been no significant changes in positions, and overall weightings are only slightly changed since last week: 59% equities, 20% municipal bonds (this includes ETF's and individual bonds), 6% miscellaneous bonds (mostly JMT, FAX and NBB, no treasuries), and 15% cash. The 10 biggest positions are also the same. In order of size, they are: BMY, XOM, PFI, VOD, INTC, ABT, T, COP, NUV, and EIX.

Hal sees some potential for es-mini futures to work their way a little higher this coming week, though the market may need to retrace a bit (short-term) to get a running start in an effort the get there. Those potential upside targets that may become "high probability minimums" are currently around ESU12 1352, which translates to SPX 1358.50.

In the final minutes of trading on Friday, the market hit a cluster of intermediate term high probability upside targets. This defines the point above which Hal has eyes wide open for indications of a potential short or intermediate term reversal. But at Friday's close, Hal decided to maintain the existing positioning.

Hal doesn't react to news, interpretations of news, or anticipated news. He is again blissfully unaware of this weekend's events in Greece. He does, however, know what EURUSD and European markets are doing. As you can infer from postings on stocktalks, he assesses things minute by minute, day by day. He will be up all night monitoring the es-mini overnight session, and if given the opportunity, he'll interrupt my sleep.

Cheers!

This is a continuation of my first Instablog. It's best to read it, as well as my associated comments before continuing.

Today we can see that Hal's prediction of a bottom forming somewhere between 7.5% and 8.5% off the highs DIDN'T HAPPEN, as the market ultimately dropped about 10%. But there is a pleasant upside: Hal doesn't make excuses, or try to use verbal gymnastics to try to fudge a perception of him being "right"! HAL WAS WRONG, pure and simple!

So what is Hal "thinking" now? Regarding the immediate future, Hal is expecting the market to hit the intermediate term "very high probability" minimum target, first mentioned in a Stocktalk on Thursday.

More precisely defined by Hal, the target (as of last Thursday and also today) is at es-mini (ESM12) 1333.25. There is also a target somewhat higher, at 1337.25, which is a "high probability" expectation (very nearly as high as the minimum number).

After reaching target levels, Hal reassesses things, and may compute a new higher target, or not. So for now he's just waiting to see if these expectations are fulfilled.

Longer term, Hal is still expecting some backing and filling before a sustained move up to the vicinity of the highs can be maintained. So he is happy with the present positioning of the portfolio. This is discussed below, along with some review of the past week.

I posted some real-time follow up commentary on Stocktalks starting on Sunday, June 4, while looking for a floor on es-mini futures. Hal anticipated a short term floor when I posted: Futures are down, -5.25, 'should' find a floor here, for awhile.

There was a small bounce, and then the market drifted a bit lower, where Hal found a stronger, longer lasting floor (based on a reliable intermediate term "buy" algo), where I posted: Nuther floor here, es mini 1264, stronger wood.

I use this algo to close any es-mini short hedges that may remain open. It also compels me to look extra hard for good individual stock entries (which I do with Hal's help). This time I had no open es-mini hedges, as all were closed earlier (at a much less optimum point and noted in my comments in my last Instablog). This floor was the bottom of the sell-off for es-mini futures.

The next day, Monday, June 5, Hal calculated a solid "floor" target below the market, which had bounced higher, at SPY 127.40, where good buying opportunities in some stocks were likely to unfold, which was noted in Stocktalks: Busy market gremlins are trying to build a floor below current price, down around SPY 127.40.

The market drifted lower and hit the floor, and I posted: We are at the SPY 127.40 'gremlin floor'.

(Note: While some of these triggered signals were fairly precise, they are not always so, and this has been and will continue to be revealed in the future. Please be aware that even good systematic strategies do what they do quite imperfectly. You will see the good, the bad, and the ugly in the real time posts).

I did some buying around that time, and as is typical around bottoms anticipated by Hal, I bought a small basket of stocks. As this is done one stock at a time, it entails a lot of time and attention monitoring stock prices and Hal's algos, which makes it difficult and distracting to report in real time, so I won't offer details.

Since the removal of hedges put the portfolio as close to "risk-on" as conditions warrant, the new positions were small and the overall percentage increase in the overall portfolio equity weighting was not substantial. All of these were intended to be buy/writes, with the calls not being written immediately, but at the first opportunity presented by some upward movement in prices. This occurred over the next few days, and at the present time, all are now (most likely prematurely) hedged.

The largest positions in the portfolio haven't changed much since the last time that I reported them in a Stocktalk on 7/18/11: Largest stock positions in hedged portfolio: COP, XOM, AEP, ABT, INTC, PG, BMY, PFI, T, VOD. 32% cash, 8% muni bonds. 70% short SPY hedge.

Since that time I sold AEP and PG, which caused then held positions 11th and 12th largest, NUV and EIX, which I still hold, to move up in the queue.

The current 10 biggest positions, in order of size, are: BMY, XOM, PFI, VOD, INTC, ABT, T, COP, NUV, EIX.

The current allocation is 58% equities, 21% municipal bonds (this includes ETF's and individual bonds), 6% miscellaneous bonds (mostly JMT, FAX and NBB, no treasuries), and 15% cash.

The very reliable anticipated "Big Momma" buy signal never triggered. The re-triggering of the necessary precondition that was expected on Friday, June 1 or Monday, June 4 didn't even happen. However, this doesn't mean that the market didn't find an intermediate or even longer term floor last Monday. The "buy" algos that did trigger are quite reliable, but less so, and also other expectations garnered from Hal's algos these past two weeks resulted in only removing the "put" side of option collar hedges and the short es-mini hedge (noted in the previous Instablog and associated comments), plus minimal new long stock positions which now are hedged with covered calls.

Right now near term potential future changes in the portfolio include a reduction in the NUV position, and additional long stock positions if opportunities present themselves. This will require another round of lower prices, but not necessarily below the existing June 4 low.

Stocks currently on Hal's "buy watch" are NUE, TOT, AT, AA, SCHW, NYB, AT, DE, GAS, ISIL, JNJ, CCL and also dumpster stocks WAG and HPQ. Hal's full list has about 80 stocks on it.

I'll update from time to time in Stocktalks as we go along from here. Hopefully this might provide some insight about using a systematic approach to investing that doesn't incorporate news or interpretations of macro events.

There has been recent news from Europe about Spain that is likely to affect the markets on Monday. It appears that most observers are predicting a huge move up. Hal is blissfully unaware, and likes it that way! He'll take each day one at a time.

Cheers!

(Note: I just noticed that es-mini futures just blew by Hal's upside targets. It will be interesting to see what follows).

Before I get into what he "thinks" today, let's first take a look at a bit of recent history:

I posted a stocktalk regarding Hal's "thoughts" about a probable S&P 500 downside target and bottom formation on May 15. Hal's high probability targets are extremely reliable, and serve to keep me positioned properly in a trend until a reversal signal is in place. When the target is hit, Hal's algos compute another target, or, if a probable reversal signal is deemed imminent, signals this probability and offers "advice" as to appropriate actions. On May 17 the market hit the target, and I posted another stocktalk. Here are links to the posts:

http://seekingalpha.com/user/662110/stocktalk/7298311

http://seekingalpha.com/user/662110/stocktalk/7412461

The market hit Hal's minimum target (7.5% off the high) on 5/17/12. As the precondition had not yet triggered, and because of other indications as well, I reported in a stocktalk that day that Hal was expecting more downside. The new target was the lower end of the anticipated target range, which was about 1% lower. The market hit the that target (about 8.5% off the high) Friday afternoon, closing a bit below. The precondition signal also triggered at that time.

So what are Hal's "thoughts" now?

He 'says' that the bottom, if it occurs near these levels, will very likely be "complex" (like a double bottom, etc.). He advised against closing any hedging positions at this time beyond selectively closing the put side of option collars on some individual stocks (done on Friday). Most of the time, a small percentage of the short hedge, like 10% to 20%, is closed on precondition day. This happened the last time the precondition triggered (reported that day, 8/8/11, on stocktalks), but this time Hal is content to just lower stops on short hedges to the equivalent of 1324 on the S&P index.

Since Hal uses a trend following type of algorithm to get in most of the short hedges (short es-mini futures and broad market etf's), they are most often initiated a bit late if looked at from a get-in-optimally, countertrend point of view (the kind of entry that I think SA readers like to see). Though not what I would call tight, the 1324 stop level, if hit, will still lock in profit. Short hedges can always be put back on if necessary. Hal likes risk control on the risk control. The options hedges on individual stocks are initiated using a countertrend algo, and are selectively done, usually at different times, and not on every stock.

Back on 8/8/11, Hal was considerably more bullish on precondition day, though he did say the bottom would likely be complex. I posted specific examples in stocktalks of historical bottoms that resembled what he was anticipating. The buy signal triggered the next day, and he advocated closing more shorts and adding some longs (also detailed in stocktalks on that day). This time around, he's 'seeing' more risk.

So, going into the week just a little less hedged, I'm waiting for a potential buy signal and Hal's next pronouncement.

Note: My posts are not intended to provide specific investment advice. How one invests is very much dependent on individual needs, risk tolerance, and other factors. These posts are merely snapshots of the methods that I use, and hopefully, may provide some food for thought regarding systematic, quantitative strategies.

A bit more about Hal: He become personified in 1988, when he started to "talk", originally in a different application, using a Texas Instruments text to speech board that sounded like Stephen Hawking. Back then, he was known as "Sven" because he had a very slight Swedish accent. I turned his voice off years ago. At times it was rather comical and entertaining, but it ultimately became annoying.

Cheers!