Covestor

During the middle of July, I started to put up a couple of small "pilot trades" in order to take advantage of surprising market strength and good start of the Q2 earnings season. Unfortunately, I was stopped out of these positions during the strong reversal of July 16. In hindsight, the market needed more time to create a solid base. Despite the fact that this move did cost some relative performance, my model portfolio has been able to outperform the market this year.

A new position that created controversial discussions on some Internet message boards was my Short Gold trade. The emotions, which some opinionated investors articulated only reinforced my bearish stance on the yellow metal: Gold is in a bubble and it seems like the last retail investor has finally bought into the asset. From a contrarian viewpoint, going short is the logical conclusion. However, there are more reasons to support my bearish thesis: Gold is showing some serious technical weakness and if the "risk trade" is actually on again, a thesis I will discuss later in this review, Gold could correct significantly. Note that I'm long term bullish on Gold , but at this point, we might see a drop down to levels around $1000. Price action will dictate my moves in the next weeks: should Gold indeed close below $1170, I plan to even increase the short position. However, I also will close the position quickly if my thesis turns out to be wrong and Gold prices remain stable despite stronger equities.

The term "risk trade" basically means that investors prefer to hold assets that can make them profits instead of holding cash. In a risk trade environment e.g. small cap stocks, emerging markets and certain commodities tend to outperform while "safe haven" currencies such as the Dollar or Yen decline. I believe that the risk trade, which drove stocks higher in 2009 is back on. The low interest rate environment, Mr. Bernanke's indications to support the economy if needed, a possible win for the Republicans in the November elections, better than expected Q2 earnings are factors that seem to overwrite weak readings of key US economic indicators and could trigger a stock summer rally. I'm therefore looking for good entry points on the long side in technology and industrial stocks. Some of the names I'm currently watching closely are Finisar, NCR or Netezza.