I have no idea what caused the collapse intra-day today, whether it was a bad trade or the withdrawal of liquidity by the machines or what. What I do know is that it was amazing to watch. At one point, the Dow was down nearly 1,000 points. I have never seen anything like it.
I got lucky. On Monday near the close, I hedged out all my equities positions to net flat. I had also been buying gold calls the past week and have been long the dollar since the beginning of April. So my book since Monday's close has been long gold, long the dollar.
I closed out most of my dollar long position and have kept only a small position. That does not mean the euro is going to rise. In fact, it will probably keep melting down. Remember, it was 85 cents several years ago. And on a purchasing power parity basis, it is worth $1.15-$1.20, so it is still expensive.
I am a long-term bull in gold but have traded in and out of the yellow metal over the past eight years. I started buying a week ago when the price action was acting very well. I expect that we will go back and re-test the $1225 highs, back off a bit, then blast through it. I expect to add to positions on a break to new highs or on a light pullback.
My equities book right now looks primarily like this - long small banks, long semiconductors, short the S&P 500 and Russell 2000.
Over the past year, I have been buying banks, primarily very small banks. My criteria for banks has been to buy stocks trading below tangible book value that made money through the crisis and are forecasted to make money this and next year. I own 14 banks, most that trade by appointment. I hope to add to my bank position during this sell-off.
My semiconductors position is now a residual of a basket that I began building in 2008, and continued to buy through the end of the year and into the Spring of 2009. At one point, I owned 18 different chip companies. I have sold most of my basket and now own six names. I will sell into strength.
The hedges I own are the Direxion Russell 2000 3X Bear ETF, ticker TZA. I own the double inverse Horizons S&P 500 Bear Plus ETF in my Canadian RRSP account, ticker HSD.TO. I also hold the double inverse Horizons S&P/TSX 60 Bear Plus Fund, ticker HXD.TO for other accounts I manage in Canada.
My intention in buying the leveraged inverse ETFs was not to short the market but to eliminate equity beta. Since Monday afternoon, my net position became net short, so I peeled a small part of my hedge. Interestingly, during the 600 point 20-minute plunge this afternoon, I tried to sell some TZA, which is normally pretty liquid. However, it did not get filled, even though I kept it open for 20 minutes. I pulled the order as the market bounced.
I have been expecting a 5%-10% correction for some time now. Today, we got it, with the S&P 500 down 13% intra-day from the highs of a few weeks ago. I had thought it would merely be a correction in the midst of a cyclical bull market. I'm not so sure now. This may be a correction within a cyclical bear market but I must respect the action, and the market action today was just horrible, no matter what the reason for the sell-off.
Sovereign debt crises are very serious, and must be respected. I expect more downside pressure in the near-term.