We stood aside throughout the month with high cash and short exposure, ignoring the pundits call for the repeated "the bottom is in" and "it's time to get into this market full of great value". Our buying has been sparse throughout June, as we were waiting for merchandise we were focused on to finally become discounted. This past week was the first week we really saw that begin to happen. So following our strategy we began layering into favorite names, recognizing we have no idea what or where the bottom is, but when we see stocks we like faltering 20-30% in a week's time, we want to begin increasing exposure. Is this the bottom? I *still* don't think so, but that is a gut call and the market is famous for making people look foolish. If past is prologue we might have one of these transition weeks where the markets do falter (some) but not as bad as previous weeks - however the strongest groups of the past (global growth) take much more serious damage. So I'm looking to see a market that once again looks better on the surface but with potential for some individual damage of much higher degree - there have literally been weeks during previous corrections where the indexes were up, but the fund was down 4-5% as specific sub sectors of global growth were hammered as people ran to "early cycle" recovery stories in financials, retail, and homebuilders. To whit, I've cut back our short exposure to those sectors since when "this type" of week happened in the past, not only were some of our long positions losing 10-15% (sometimes in 1 day) but our Ultrashorts in Financials, Real Estate et al were hammering us to the tune of 6-10% losses. Again, there is no guarantee this is how it plays out but in each of the previous 4 rolling corrections we had a period like this so it would not surprise me to see this action soon. I've tried to position us better than in the past if this indeed is how it plays out. Again, one advantage of investing in a fund like this is, sometimes I will be correct - sometimes I will be wrong - but instead of staring at a NAV and not knowing the thinking behind the drops or increases, you'll at least be in on the thought process (even if you disagree with it).

I thought this week, I'd take the time to do something I use to do more often, but since it is a time heavy exercise with the data tools I have in Marketocracy.com (i.e. I need to do this all by hand) - and that is to break out the portfolio by sector. This is a good time to do it because (a) I want to explain why the # of portfolio holdings are increasing and (b) it shows a little of the strategy as we enter what I believe might be the tail end of this leg down in the market. What I have below is all our holdings by sector - the number next to each sector title are the # of stocks we own in this sector, and the percentage is what % of the portfolio that sector is as a weighting in the fund.


First, I've tried to keep the number of holdings generally in the 50-55 range (on the long side) but we are currently up to 60. Why? I am using a basket approach in every sector - and have increased this especially in the solar field (where we've been burned by focused holdings in 1-2 names) and our new "non solar alternative energy" sector which we've made a 3 stock mini basket. The way I view it is fertilizer, while being 4 stocks, is 1 position. Coal, while being 5 stocks, is 1 position. Natural gas, while being 4 stocks, is 1 position. US housing, while being 2 stocks, is 1 position. Why? These all tend to trade in tandem (directionally) although the degree of gains individually does differ. But which will be the "favorite" of the market - is anyone's guess. So while we have 60 names on paper, we have far fewer "positions" from a practical point of view. Please note - this basket approach doesn't apply to say technology or even financials where a Goldman Sachs (GS) is a very different company from Mastercard (MA). But contrast that to say natural gas where there are upwards of 40+ public companies - I have my thoughts on which are my favorites but the market may go in a completely different direction so I'll place out multiple fishing lines and hope the market chooses one (or multiple) of our holdings as the "Golden Child" of the next move up.

Second, what is the current strategy? Entering the week we had cut back our commodity exposure (global growth if you will) - coal was much lower, fertilizer was somewhat lower, natural gas has been cut back, and oil services has been cut back. Financials were lower as I just bought Ultra Financial (UYG) this week. Solar was far lower exposure - but these stocks have been decimated the past few weeks, so I finally created a sizeable correction after some of these names have lost 40-50% of their value from recent hights. The "non solar alternative energy" was a target list of 3 names - 2 of which I was waiting for sizeable pullbacks - which we finally got over the past week and a half (I did not want to chase these names like most people do and then see them reverse 20-35% on me, which happened to a lot of people). So with the sizeable pullback in coal I did begin to make a serious exposure there - is this the bottom in these names? Doubtful... we'll add more if they fall more. Same for fertilizer. You can see I still don't have much exposure to oil & natural gas - while everyone throws "commodities" in 1 bucket, I am discerning. Natural gas has held up the best, so I think it still remains most at risk - I am willing (and wanting) to add exposure here but I want to see some pullbacks like we saw in coal this week. Will I get it? Maybe - maybe not. If not, we'll apply the money elsewhere. Same for oil services. The metals have been trashed and we began increasing exposure to Cleveland Cliffs (CLF) for example but I'd still be wishing for more of a pullback in some of these names to increase exposure. So this is a general "roadmap" of what we are doing - we began to increase exposure in names that have been hit the hardest but still holding out for worsening action in groups that have not. Meanwhile we're "rotating" to the absolutely trashed groups in the meantime, trying to catch a 2-3 week wave of "oversold" bounce in those groups. Which we'll sell - and then eventually short against (retail, financial, homebuilder). Could we have what I term a "waterfall" selloff and each and every group demolished next week(s)? Definitely - but hard to model a long mutual fund in that regard. We have followed our gameplan to the maximum, and still hold 3%ish cash and 10%ish short exposure. To start rolling that over to the long side we are going to be needing to see 8-12% type of drops in individual names. And if that happens, we're going to be like 99% of other mutual funds (for once) and be quite near 100% long. While I think this market has a long period of sideways to down (with large rallies contained within it) nothing goes straight down (or up) - although it has been straight down for 5 weeks.

As for the week ahead, believe it or not we have earnings season kick off with the traditional first big name - Alcoa (AA) on Thursday. As if we did not have enough to deal with ;) Only a few interesting names on the docket from my end with global infrastructure name (and former holding) Shaw Group (SGR) out Wednesday but we do have General Electric (GE) out Friday.