Small Ordinaries major bull market, is it time to get a bit defensive? Sales of ELD & NUF.

Let me admit from the start I’ve been quite cautious about overall market levels for over a couple of years at least so it may pay to ignore this post!

Most are probably aware but I wanted to note the performance of the ASX larger stocks versus the smaller sized counterparts.

Hopefully I have this correct on Friday via the snp indices website I compared the last year of the ASX100 total return versus that of the ASX “small ordinaries” ( the next largest 200 companies following the top 100), it showed plus 9.05% for the ASX100, but the small ordinaries showed plus 29.24%! One thing I have stressed though is the major U.S. indices I’ve been more concerned about higher valuations rather than many other markets. So if you are picking stocks amongst the smaller end of the Australian market and possibly shorting U.S. indices for an element of protection you should have still done very well in the last year.

If you have a bit of a bias not to focus as much on the large cap stocks which admittedly I do, you probably will have had a good year this year. Even thought my gold holdings are quite a bit off from the highs, I worked out even if all my trailing stops get hit it will have probably still been quite a good year. When time permits I’ll eventually try to summarise how the stocks I have mentioned here have gone, like I posted once in May.

Another thing that has struck me is how boring it is waking up and seeing what the overnight markets did. Still seems complaceny exists and the ranges are narrow. The VIX albeit off its recent lows I would still describe as very low all things considered. Even the recent payrolls night, often the session of the month that can be most interesting, was a bit of a yawn.

So even though having a defensive mindset has been a waste for me, when I consider that the small cap part of the market is more like a raging bull market I wish to ponder what could go wrong again. So how can I keep dancing while the music is playing, yet keep a close eye on the exit door from the dance floor?

After Brexit I mentioned I was uncomfortable the way stocks, bonds, gold you name it seemed to rally together and I would try and simplify the portfolio a bit. So recently I looked at my holdings including some that were bought earlier in the year when markets were weak, may have been smaller positions, and the trap is to forget about them. I asked myself would I buy them right now and felt the answer was more like not particularly. So I have sold ELD at 3.56 NUF at 8.33. These agriculture plays at the time when bought I thought there was nervousness around and more central bank liquidity might pick up this unloved sector at the time. Things are a bit different now and these could suffer on a general market decline and I probably don’t understand the businesses well enough. CYB I almost sold. I got set only half what I wanted and unfortunately didn’t quite hit my 3.50 level for the next fill. I’ve made good gains (12%) here but don’t find them that compelling to make this a more sizeable position. At the same time been OK with the U.K. data of late so will run a stop on this. I don’t want to only just trumpet the successes on the blog so admit ELD & NUF were not that great picks. ELD my buy level was 4.30 but the performance I note for this blog was from when I first mentioned it above 4.80. So a 27% loss from the blog there. NUF was ok making about 9% but nothing flash in a strong market of late.

That frees up a little cash so how else am I being defensive? Whilst my gold positions may do well in a risk off environment there are no guarantees. I have trailing stops on the gold stocks. If I get hit I might replace this with buying CEF:US again or other gold ETFs. There was a school of thought (well those following Soros and some others) that gold stocks ran a bit ahead of the commodity and such a switch back to the ETF may make sense. There might be a little truth in that. I have actually bought some GOLD ticker on the ASX today ahead of this possibility as I am actually impressed with gold’s resilience to speculation of Fed hikes of late, and also to keep my weight up in assets denominated in USD. Some other trailing stops I will run are on SSM, CYB and YOMA:SP.

Finally I haven’t as of now, but later not ruling out more put options on the S&P 500 if the VIX keeps really low and markets remain elevated. Also if that index breaks below the 200 moving day average I will short sell the indices for a modest part of the portfolio as I believe this method can smooth out volatility of performance without costing a great deal over time.

On recent records all of this will be unnecessary. Yet I would point out that if markets continue up one can still often at least match the gains with some shrewd stock selection outside of the large caps even whilst still holding high cash levels. Geoff Wilson’s funds have demonstrated this over long periods. Hopefully when I summarise some of the blog stock’s performance here later on it should tell a similar story despite myself being surprised at the overall market’s strength this year. Whilst my cash equivalents I would currently put at near my longer average say of 25%, if the markets do decline then some stocks may get stopped out and inflate that to maybe 37%, together with potentially more synthetic protection on the indices. Since I am already marking to market these particular stocks at the stop levels I have already noted that my figures should still come out ok under this scenario.

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