Risk, Reward And Being Very Long

Is the market setting itself up for another substantial tumble? Quite possibly. But I’ve been busy going long on equities.

That might seem strange given I’m bearish about the prospects for the next 6 months - however I’ve been doing pretty well with my long equity positions. The question is, when to get out of these trades. And of course I don’t know the answer, although I’m gambling on a successful stimulus vote giving equities a slightly bigger boost. We are getting close to critical resistance points around 4300 - 4400 on the FTSE (^FTSE), and in the 870 - 900 range on the S&P 500 (^GSPC). So I can see an argument for taking some profits and reinstate short positions on the indices soon. However I’ve already cut back my short in gold and reduced the size of my currency positions in anticipation of another bout of volatility. But I’m not cutting any more - yet. Read on for my reasoning

Equities - Searching Out A Decent Risk/Reward Ratio
One of the things we’re all keen on is finding trades with risk/reward ratios which don’t keep us awake at night. A great example on my book recently was buying RBS (RBS) at 12p. I was more than happy to risk £30 of my capital at £5 a point because I felt the odds were overwhelmingly in my favour that the stock was bottoming out. It was highly unlikely, in my view, to halve yet again so the trade had very low risk and high reward. Trades like these are my holy grail of spreadbetting … and they’re hard to find.

Now if I’d been a properly ballsy (or rich) trader I might have have opened at £50 a point instead of £5. However I prefer to build up my position when I see that the market is moving in my favour, so in my small way I’m now net £15/pt long of RBS. One thing I’m trying to do is to buy (or sell) into strength if I can see that the market is consolidating into a trend. So if RBS gets above 30p a point I’ll buy some more.

How Am I Trading?
I’m aiming for a series of simple equity positions which don’t require me to babysit the screen. And over the last couple of weeks I’ve been adding to these and building up decent three figure profits for quite a few of them. As regular readers may realise, I like to dabble in small amounts in a number of different markets at once - a ‘micro hedge fund’. But this is not recommended for everyone - it’s a hobby not a living!

Banks
I won’t bore you with a complete rundown but - on the financial front I currently have long positions in RBS (from the 12 - 15p area) Barclays (from 50p and 70p and 95p - see previous blog), Bank of America (BAC) (from 480) and Bank of New York Mellon (BK) (from 2600). They were oversold and they will be prime bailout/stimulus beneficiaries. I’m hoping to keep these going but have set a series of stop losses around 10 % away from where the current price to protect a chunk of profit.

Buying The Oversold
I’ve been up to my usual trick of buying into stocks that look unloved and oversold. The biggest and perhaps most surprising success has been a long position in online estate agency portal Rightmove which has added around 33% over the last week; I bought it at 150 and it’s now trading at around 200p. This is probably more due to hedgies closing out their shorts, than a serious shift in sentiment towards the UK housing market. But there have been a few signals of stabilisation in property (including a surprise increase in house prices, according to Halifax) and this has produced a tradable bounce. I also bought British Airways (BA) at 115p and 118p - that’s 20% up from where I went in on speculation about their merger with Iberia going through. If they don’t break through 140 in the next few days I’ll take profits on half the position.

I’m also substantially long of car dealer Pendragon (PDG.L) (which has nearly doubled from a princely 1.9p to over 3p - but at £30 a point that’s OK; and I’m back into battered housebuilder Taylor Wimpey (TW.L) (with US interests, so stands to be something of a stimulus beneficiary). And I’m long of Ukraine-based iron ore miner Ferrexpo (FXPO.L) , who have taken a total hammering and are now bouncing back on slightly better than expected results and some evidence of recovery in Chinese demand for steel. However as a hedgie mate said - “it’s a high beta bet on a recovery in the global market” so I may well take some profit soon.

Higher Level View
So, all pretty contrarian, long plays. A ’sensible’ trader, wanting to protect profits, might get out of them soon, but I can’t quite bring myself to. The risk/reward ratio to the upside looks too tempting - if I can hold on to even half of these long postions over a longer timeframe I could be looking at much, much bigger profits.

My biggest concern is that my book is pretty well all in one direction, and fighting against the gloomy consensus at that. Up until last Friday I was had shorts on the S&P, Land Securities, British Land and Tesco, but they’ve rallied along with the broader market so they’ve gone now. I am trying to build a list of equities to short. However until then, my one consolation is that most of these positions are protected with stops above their entry points so if it all goes wrong there’s a reasonable chance I’ll escape with my trading capital intact.

Right, that’s my current state regarding equities. I’ll try to jot some more on currencies and gold soon.

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