Autumn's Contrarian Ideas: Mid-Term Report

Idea No. 5: Short Financials

This position was closed previously. A new position in Ultrashort Financials ProShares (SKF) will be opened on Monday, Nov. 2. A 10% trailing stop-loss order will be placed as soon as purchased. The following chart shows the marked three-month divergence between price trend and MACD. Currently there is support at the 50-day moving average (25.50) and the just exceeded resistance line at 26.30. Resistance is shown at the three recent peaks.

SKF (ProShares UltraShort Financials)

Source: Stockcharts.com

Idea No. 6: Sell Municipals

This position short iShares S&P National Municipal Bond (MUB) continues to behave well, with a 2.3% gain since Sept. 25.

Idea No. 7: Sell the S&P 500

This position was closed previously.

Idea No. 8: Sell Oil

This idea has contributed well over half of the gains thus far. The original position in Ultrashort Oil & Gas ProShares (DUG) was stopped out on Oct. 6, with a 4.4% loss. The reversal into UltraLong Oil & Gas ProShares (DIG) produced a gain of 10% until stopped out on Oct. 26. The four days since have seen the reversal back to DUG produce a gain of 13.3%. We will continue to follow the strategy of buying the reversal position whenever stopped out.

In the following price chart, we see there were four gaps in the price rise in oil (decline in DUG) in October. Two of those have been filled to date. The current trailing stop is well below the support level defined by the highest gap filled.

DUG (ProShares UltraShort Oil & Gas)

Source: Stockcharts.com

Summary

The trading in FCG, ERF, DIG and DUG has far more than offset the loss in UNG. The reason for the near-zero return on the portfolio is primarily the timing of the short stock positions (SKF and UltraShort S&P500 ProShares (SDS)).

The correction anticipated at the end of September did not occur and we were stopped out as the market rise continued. There appears to be some sort of correction under way now. We will re-enter one of these positions (SKF) on Nov. 2. If the market correction continues, we expect that financials will lead the market down. The status of the portfolio is summarized on the following table.

Status of the 2009 Autumn Contrarian Portfolio

The next update will published on Nov. 16.

-- Written by John Lounsbury in Clayton, N.C.

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