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TMFHumbleServant (92.89)

I Feel It Is Time For Caution



May 12, 2010 – Comments (6)

I am 85% cash and 15% VXX (boy I wish there were a better vehicle for the VIX as I am not an options guy) right now. For me, there's just too much uncertainty to have this much optimism for stocks in general. As such, I prefer to be cautious with my capital rather than put it at risk. Here are my thoughts why:

1. The stocks I owned previously were close to fairly valued and their risk/reward seemed too skewed against me.

2. I am very worried that the stock market believes the housing market will work just fine as it comes off of life support: tax credit expires, no more RMBS purchases, lots of foreclosure possibilities, and some potential disruption from OptionARM resets. That doesn't seem like the likely outcome, but we'll see what happens.

3. Europe needed a $1 trillion bailout package as a pre-emptive strike against a liquidity crisis. I still can't figure out what this hopes to solve. But hey, who doesn't love cheap money!?

4. It doesn't seem like the right time for consumers to seemingly be releveraging when many of their balance sheets remain in disrepair. Admittedly, I need to get a better handle on this over time.

5. I am having trouble finding many opportunities for my personal capital. However, I have found a few high-quality large caps that seem to be trading at reasonable prices, some high yield stocks, as well as some Ben Graham-type value plays. I will start writing up what I am finding and then tracking them in CAPS as I have with Green Mountain Coffee Roasters, which I just closed as a short.

Maybe I am being overly cautious and am likely to miss some run up. But I prefer to make big purchases when there's more fear in the market than greed, just as I did with Primus Guaranty and recently with VXX on the flip-side when the VIX showed massive complacency.

I plan to do two other things: 1. Look for more stocks to short and 2. trade a little more frequently. This doesn't seem like a "buy and hold" market to me. So I think the other way to capture the benefits of volatility is to buy some dips and sell some rebounds. I am not much of a trader, but we'll see if my fundamental analyses can identify mispricings to take advantage of over the shorter run. I'll be sure to share those ideas, too.

What do you think? Is now the wrong time for caution? Should I remain steadfast to my buy and hold preference? I'd love to hear your thoughts.

Fool on!


6 Comments – Post Your Own

#1) On May 12, 2010 at 12:40 PM, JaysRage (81.93) wrote:

I think your strategy is very prudent, since it mimicks closely where I am positioned and my own reasoning.    In my short-term portfolio, I'm 2/3 cash, as of today.   I closed out another position today with the little burst.    I am looking closely for some nice value plays across a multitude of sectors.   I think there are a few bargains out there, especially in the China sector, but I also think there are some ridiculous over-valuations in a lot of areas too.   I think the market could go either way from here.   I am slightly bearish, and I agree that the huge bargain list is getting smaller.   I'm not bearish enough yet to venture into shorts, but I'm not bullish enough to be all-in on stocks either.  

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#2) On May 12, 2010 at 12:41 PM, Momentum21 (97.85) wrote:

I think you are a week late. 

There is nothing wrong with being cautious but being 15% against volatility seems a little risky. Based on your concerns how about a little SLW or CEF or SIL? Or TIPS?

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#3) On May 12, 2010 at 2:02 PM, TMFAleph1 (91.78) wrote:

Hi David,

Now is absolutely the right time to be cautious.

However, I'd be extremely careful with the VXX position. I wrote an article on April 23 suggesting that the VIX index was significantly underpriced. However, due to the ETN's structure, expressing one's views on the index is extremely tricky via VXX. I would suggest that if you made money on your initial call, you may want to consider taking that position off.


Alex Dumortier

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#4) On May 12, 2010 at 3:03 PM, TMFHumbleServant (92.89) wrote:


I didn't say I started going long volatility today. I made VXX purchases in March and April and have had a nice return since then.

But your point is well taken -- I would not be adding at today's prices.

Thanks for the feedback and Fool on!


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#5) On May 12, 2010 at 3:05 PM, TMFHumbleServant (92.89) wrote:


I have been thinking about selling. It's an event-based trade and an event has happened.

Gotta recheck the Fool's trading rules, too.

Thanks and Fool on!


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#6) On May 16, 2010 at 5:48 PM, eatenbybears (< 20) wrote:

I had a fear of increasing my VXX holdings at this price .... but reality is, VXX is trading at $27.00

 It 52 week high is $87.00

I feel much more  volatile  at this moment than I ever did a year ago ..... So ... could $27 be looked at as a bargain in a few weeks?



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