SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
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Flight to safety starting
In the last few days, the only “green” on my watchlist of Australian stocks were those of defensive stocks like utilities and consumer staples while the mining and banking stocks tumbled. Telstra, which was so unloved in the past months is finally making a strong comeback. For those public super funds who have to maintain a certain percentage of their portfolio in Australian equities at all times, moving their holdings to defensive stocks would be their only option if they expect the market to go down. Readers of this blog will know that for us who run our own SMSFs, we have other ways to protect ourselves such as using put options to hedge our stock portfolio, or moving to cash. We have put together 3 training videos on “How to Protect Your Portfolio in a Falling Market” which can be found on our Training Videos page on this website. Please check them out if you agree with my analysis in yesterday’s post that the stock rally may be ending soon.
In last year’s flight to safety just before the Lehman Brothers bankrupcy, the US dollar and US treasury bonds rallied while commodities including precious metal like gold and silver crashed along with stocks. If history were to repeat itself, we should know where to put (or not put) our money. I sold our holdings of SLV, an ETF for silver a couple of days ago when it broke some key technical support levels. I was hoping the commodity rally would last a little longer but learned my lesson from last year that when commodities fall, they fall fast so you need to run and not walk to the exits. Silver fell over 50% from $19 to $9 in 3 months in 2008 and I did not wish to go on that ride again and was happy to sell at a small loss and stay in cash. The long term uptrend line for SLV has not been violated, so there may be some further up side. If SLV had options, I may have just bought put options as a hedge but since it does not, I decided to sell my shares.
With regards to the direction of the US dollar, most people are bearish and I am sure you must have read many articles such as this one from the Business Age “Dollar parity on the horizon“. However, if you look at the chart below of UUP, the ETF for the USD against a basket of major currencies, you may see a different picture. The USD is coming into a major area of support. I have also highlighted the volume bar for this week which has exceeded all previous weekly volume bars even though it represents only 3 days of trading volume, as this chart was taken after the close of Wednesday’s trading. I will let you decide for yourself if you think we are headed for parity or back to 65 cents. If you believe the latter, stocks like CSL which derive a large portion of their income in USD may be a good buy as it is now trading at a good price. I sold a CSL $34 put option not too long ago and will be quite happy to own the stock if I get assigned, as CSL is a great company in a recession proof industry.
It will be interesting to see what happens to the market in the next few months. If there is another stock market crash, we should be more prepared for it this time after what we have gone through in 2008. Our SMSF is definitely choosing to stay safe by mainly holding cash, bonds and defensive stocks, with one small punt on the down side. We have one hedged long position in SH, an inverse ETF that tracks the S&P 500 which will profit if the market goes down. If the RBA continues to raise interest rates and inflation stays low, cash is an increasing attractive option.
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[...] by strong volume, there is a higher likelihood that this rally will have further to go. In my Oct 29 post, I drew attention to the price spike in UUP, an ETF that tracks the US dollar, which was [...]