Author: Brendan Ruchert-Dixon

Covestor model: Alpha Trapper

At the end of July I predicted the S&P 500 could finally break out of its 1250-1350 range after the debt ceiling standoff ended (http://blog.covestor.com/?p=11825). It certainly did that - to the downside. Meanwhile, Treasuries continued to rise to near-record prices as investors fled to safety during the first half of August.

I made several adjustments as this was all happening. For now, I've closed out my PST and TMV short positions, as I now see the risk of treasury yields rising as higher than the potential reward from them going even lower. I covered those, as well as my FAS hedge, a little too early in the month, causing the model to experience a few very volatile days along with the rest of the market, but overall I'm pleased that the model managed to finished the month of August positive - much better than the market as a whole and my benchmark.

Going forward, there are still a lot of risks, even with the stock market at lower levels. The economy is at a tipping point where any more significant shocks in the coming year or so will probably send it into recession. And potential shocks abound.

For one, the sovereign-debt and banking crisis in Europe is still nowhere near resolution. I am now holding a pretty large cash position, and have opened more leveraged ETF short positions (FAS again, among others) in response to the volatility. I also tiptoed back into a small VXX short position late in the month. While I expect volatility to remain high for a while, the futures market has started to price this in, and the VIX won't stay above 30 forever. I've kept the position small because I think there's a pretty good chance of further market shocks and VIX spikes, which could give me a better entry point.