Could Black Gold be the Black Swan ?

December 11, 2014

Not being part of the soon to be 3 year old  VTI trade, I maneuver in the market  using VTI and / or  SPY strictly as a  buy / sell signal.

For instance, I  had  written ( sold )  twenty plus  SPY 195 December puts which I closed out for pennies on the dollar this past Monday. That was my exposure to SPY.  My actions were saying I would rather own SPY at $195  than at $208, especially because I was being paid a premium to take the lesser risk of accepting delivery of  SPY  at a price  6% less than its 52 week high.

There are two ways I can approach SPY.

#1  Consider available macro data such as the falling price of oil in terms of what it means for SPY and act on my conclusions, or

#2 Wait until December 31 to see whether the month end price of VTI or SPY triggers a signal to sell  my entire ETF and equities portfolios.

If I had a day job, I’d probably follow path #2 relying on back tested history relating to SPY’s month end performance.  But, I’ve been retired since December 31 2006 so I am more of an activist when I believe what I see on the road ahead.  If I can make a case to myself for early action, I’ll lighten up a bit.  I don’t like sitting with accumulating losses.

In my last post I proclaimed that I had no fear of a Black Swan ( outlier ) disrupting the market because I have the Fed on my side with low interest rates almost forcing investors to consider equities.

I still feel the same way, except that it has been pointed out to me that the price of oil and the price of SPY have a history of travelling in the same  direction.  But, the market has been making new highs almost daily for all the reasons I enumerated in previous blogs despite the precipitous drop in the price of oil.  But does that mean  the directional divergence will continue ? !

I do know  that oil represents 8.2% of  SPY’s   value.  So, at some point,  the falling  price of oil must,  at the very  least, represent a head wind for SPY.

And, while lower oil prices are adding money to the USA  consumers purse it is also having a negative  impact on economies less able to withstand the oil price drop ( including Russia which is Europe’s largest trading partner ).  So, what happens to Europe’s ability to purchase from the USA if  it ‘s exports to Russia wither ? And, how does that impact 2015 profits of USA / SPY companies exporting to Europe…especially with the added  barrier of  paying for  imports from the USA with a weaker Euro.

At some point the world’s problems become ours as we shoot for higher highs.  So this has the potential to become more than a head wind.

In terms of my actions in the market, I have almost no  SPY exposure because of the Puts I retired.

Overall.  I am now  a little over 50% invested in the market  and geared to buy and hold or liquidate on December 31.  I like the quality of what I am holding, but, again, I don’t like the feeling of being submerged if I think the dunking could be more than a temporary phenomena !

I am holding   Sector ETFs  and some individual stocks which conform to ” smart ” criteria and depend on USA business rather than exports etc..

The Sector ETFs I’m holding are XLV ( health care ) FBT ( biotech ) IYT ( transportation ) and XLU.  The equities I am holding are TWX, BX, UNH, CVS, DIS,  DFS, RTN, LUV, C, and NOC.

What I am learning is to never say never about owning equities.  My equities have outperformed SPY since November 1.and  I am gaining confidence about how to reduce the specific risk of equities.  But,  SPY should always be a significant piece of my portfolio

 

Richard Maurice Gore

Leave a Reply