TIB: Today I Bought (and Sold) - An Investors Journal #233 - Brazil, Covered Calls, Australia

Political messages are fraying market nerves. I take the exits in Brazil - late it seems. I re-enter Australia. I will find out if that is late. More covered calls written mostly on US Banks. This is a way to take the exits. It is time to review and explore exit strategy more fully

Portfolio News

Market Nerves My portfolios had a schizophrenic feel about them this morning. European side of the portfolios were up. The Europe interest rates side was down. The US markets side was down with a few exceptions like oil. US Dollar side and US interest rates side was down. It is all down to nerves - 3 snippets tell the story and no more words are needed.

Markets will come back to the data in due course and maybe the broken leg will be fully healed.

In this phase, it is important not to overreact to every market move higher and lower, and it is more valuable to confirm that buyers continue to engage at important support levels

Sameer Samana - Wells Fargo Global Equity Strategist

https://www.marketwatch.com/story/the-stock-markets-broken-leg-is-nearly-healed-analyst-says-2018-05-21

The article has a link to another article about a "hidden strength" indicator. It seems that everybody has cottoned on to the Advance Decline Line divergence I wrote about yesterday (see TIB232).

https://www.marketwatch.com/story/an-indicator-thats-90-accurate-suggests-hidden-strength-in-the-stock-market-2018-05-11

Now there is one area of portfolio impact that is important. Airlines and Shipping companies are vulnerable to higher oil prices if they have not hedged their oil exposure. I am invested in Delta Airlines (DAL) via an in-the-money bull call spread and also in a number of shipping stocks. Time for a review.

Bought

Investsmart Australian Equity Income Fund (INIF.AX): Australian Equity. I am not a great fan of managed funds principally because management costs are high especially compared with ETF's and entry and exit is at the behest of the fund manager. I have been looking for ways to broaden my exposure to the Australian Market to start driving some dividend yield but I have concerns about building exposure to the Australian banks. The introductory line in an email caught my eye

As the Royal Commission intensifies and tougher lending conditions come into play, this will likely increase the risks to the banking sector's profitability. Our recommendation has always been that investors should hold no more than 20% in the banking sector, or 10% for more conservative investors, and we are following our own advice

James Carlisle, Portfolio Manager of the InvestSMART Australian Equity Income Fund (Managed Fund).

I sent in the application forms to open up a position in the fund. The management expense ratio at 0.82% is higher than I like to pay but it is less than 1 or 1.5% commonly seen. The fund will be listed as a Listed Investment Fund, so entry and exit is driven by market prices and market timing. Market timing for investing in Australia is behind the market but this is a long term play.

https://www.investsmart.com.au/

Sold

VanEck Vectors Brazil Small-Cap ETF (BRF): Brazil Small Caps Index. One of the Real Vision short ideas I read over the weekend was to go short Brazil on the back of the political uncertainty ahead of the October elections for which there are currently 19 candidates. More compelling was the discussion about the weakness of the Brazilian currency. Step 1 for going short is to reassess the long positions one is holding. I am invested in Brazil through this small caps ETF and through Petrobras, the oil producer.

I sold this holding for 26% profit since November 2016. I had written covered calls in March for an additional 1.22%. I knew then that I was comfortable exiting the stock. A 26% profit is a good result for taking the chance that Brazil would recover from recession and small business would lead the recovery.

It is a good time to talk about when to exit a profitable stock investment. I did a video some time back about using MACD (a momentum indicator) and Bollinger Bands (a dispersion moving average tool) to exit trades. I reviewed that this morning after exiting the trade. There are two places that the strategy in that trade would have exited. They arise when price drops into the lower half of the Bollinger Bands and the MACD indicator is no longer bullish and/or is showing divergence. Let's look at a chart.

The Bollinger Bands are the green bands either side of the price bars in the top window. The momentum indicator (MACD) is in the lower window. It has two lines - the signal line (blue) and the slow line (orange). I have marked possible exit points as ellipses on the top chart

There are two occasions when there was divergence (marked with the blue arrows). [Means: Bearish Divergence is when price makes higher (or level) highs and MACD makes lower highs]. Both exits would have been profitable and the 2nd one would have been higher than the exit I made.

It is easy to use hindsight to say the 2nd exit would have been better than the 1st. What I can see is there was a signal to re-enter the trade after the 1st exit. Price touched the lower Bollinger Band twice and the signal line (blue line) crossed above the MACD slow line (orange line) in the lower window. The 2nd exit is more categoric as the signal line is dropping hard and crossed over the zero line.

Do fundamentals help in these cases? There are two main flows of fundamentals running through this investment.

1. What is going on in Brazil: Economy has been improving. Oil prices have been rising and Petrobras is an important contributor to the economy. President Lula was found guilty of corruption in April which introduced the political uncertainty and the need for elections
2. What is happening in the world: US Dollar began to strengthen which put massive pressure on Emerging Markets currencies and on Emerging Markets stock values.

President goes to jail -signal 1 or was it? Note the date - April 5

https://www.telegraph.co.uk/news/2018/04/05/brazils-former-president-lula-facing-arrest-ahead-elections/

I have combined those factors into the chart by adding in iShares Emerging Markets ETF (orange line).

The Emerging Markets line was rising when the first signal came to exit Brazil. I did not look at the BRF chart then but I was comfortable at the time with Emerging Markets, including Brazil. The beginning of the emerging market rout coincides with the decline in Brazil - it is about emerging markets essentially. (draw a line through the head of the arrow that spans the BRF price chart and the Emerging Markets line). The political situation just accelerated the decline.

The summary for me as an investor is I missed the technical signals and I missed the fundamental signals which cost me 8 to 10% points of profit. But I did make a 26% profit.

You will find the video I revisited here. Content is still valid though there are lots of ums in it.

Income Trades

Wrote covered calls generating around $500 of income overnight. I am comfortable with exiting these stocks if price passes the sold strike in 4 weeks time. The table summarises the results of calls written so far. I have highlighted the key columns which are the % income to strike and the % price move from close. I like to receive about a 0.5% income and leave myself 5% to go to the sold strike. This is not always possible

ArcelorMittal (MT.AS): European Steel. New trade

American International Group (AIG): US Insurance

Bank of America Corporation (BAC): US Bank

SPDR S&P Bank ETF (KBE): US Banks. New trade

Wells Fargo & Company (WFC): US Banks

I do have some bids outstanding.

Cryptocurency

Bitcoin (BTCUSD): Price range for the day was $466 (5.5% of the high). Price is clearly uncomfortable in "no mans land" and wants to test the bottom again. Price has already made a lower low today.

CryptoBots

Outsourced Bot One closed trade on this account on STRAT (2.68% - 2 days) which was replaced with a trade on XLM (205 closed trades). Problem children was added to with BTS joining (>10% down) - (15 coins) - ETH, ZEC, DASH (-41%), BTS, ICX, ADA, PPT, DGD, GAS (-47%), STRAT, NEO (-47%), ETC (-43%), QTUM, BTG (-45%), XMR.

NEO remains the worst and is joined on -47% by GAS. There are clearly problems in the NEO/GAS world. DASH also joined the -40% club (5 coins).

Profit Trailer Bot No closed trades. Dollar Cost Average (DCA) list was unchanged at 12 coins with 5 coins improving, 3 coins trading flat and 4 worse. 2 coins are now worse than 40% down (KNC and AION).

The chart for the day is for NULS which rose 11%. The daily chart shows price now recovering from the pump and dump of two weeks ago.

New Trading Bot Positions dropped another 4 points to -35.1% (was -31.1%).

This was driven by drops in all coins with ETH the worst for the day.

Currency Trades

Forex Robot did not close any trades and is trading at a negative equity level of 14.6% (lower than prior day's 15.9%) for another better day.

Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas

Images: I own the rights to use and edit the Buy Sell image. News headlines come from Google Search and Telegraph.co.uk. All other images are created using my various trading and charting platforms. They are all my own work

Tickers: I monitor my portfolios using Yahoo Finance. The ticker symbols used are Yahoo Finance tickers

Charts: http://mymark.mx/TradingView - this is a free charting package. I have a Pro subscription to get access to real time forex prices

May 22, 2018