Strategy Update: Activate Risk Management (PREMIUM-UNLOCKED)

*The following Premium Post was issued to TLS members midday on February 26, 2021.*

As expected, stocks have entered more of a 2-way market — here’s how we have been managing risk.

The 2-way market continues today with a (predictable) fade off of opening strength. Our strategy in the environment, as we have been saying, is to more actively manage risk — both ways. We are not looking for a major stock market top or correction, but a choppier market with swings up and down. So that means taking profits more aggressively into resistance while being a little more patient than we had been since the election in buying the dip — at least hold off on aggressive dip-buying until lower, more significant support levels are tested. It also means adding hedges from time to time, particularly since we still like our long positions as they are still constructively positioned in our fund selection model as well as on the charts. So what are we doing today?

  • As you know, we put on a hedge (short) in the Russell 2000 into a bounce before the close yesterday. Specifically, we bought the inverse fund, TWM. With the Russell 2000 below the ~2220 level, there is immediate risk to ~2110. This morning’s positive open provided another opportunity to hedge — as is the current mid-morning bounce underway.
  • We were also looking to add a hedge in the Nasdaq 100 as the tech space may be particularly vulnerable to near-term risk. It is still set up well for future gains, but its extended status leaves it among the riskier areas, near-term. Specifically, the QQQ’s have potential downside to below 300 from the current ~315 level. We have not shorted the NDX yet as our portfolio is low on cash. Therefore, into the strong opening today, we raised a little more cash by selling some small exposure in our tech-related holdings, e.g., FDN, IGV, SMH, XSD. We also sold the rest of our small QQQ position as we are looking to hedge there. Tech stocks are bouncing back here mid-morning, allowing for good profit-taking spots again.
  • Besides technology, the other area of perhaps our largest allocation is the commodity-related space, in particular the metals and miners. And while we also like the space in the longer-term once this consolidation is finished, there were some important breaches of support in gold and gold miners, as we mentioned in today’s DSS. Thus, unless it is a false breakdown and recovered immediately, it does open further downside, particularly in the miners (below 165 in GLD opens downside to ~158; below 47 in GDXJ opens downside to ~42, and perhaps the mid-30’s). For that reason, we added a hedge in the junior gold miners via the inverse fund, JDST, near the ~12 level. Gold miners are bouncing back a little here mid-morning to allow for the adoption of the hedge.
  • On the long side, we are stalking an entry point near ~92 in the Chinese Technology fund, CQQQ, that is finally selling off after its huge run this past year.

That’s about it for now. We are simply actively managing risk in this near-term consolidation. Our positions are largely the same. We are mostly adding some hedges to protect profits while the market chops around.

As always, stay tuned to our DSS posts for further developments — they provide the most current updates to our investment portfolio and outlook. We touched on many of these potential moves in today’s DSS.


Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.