Managing Sector Volatility

One part of how I manage the portfolio is monitoring and changing the volatility profile of each sector based on what I think is going on now and what I think comes next based on what is going on now. I mention this in passing far more than I actually spell out what this looks like.

Yesterday on Fast Money Halftime they put a chart on the screen of Under Armor (UA) and client holding Nike (NKE) that serves as a very good way to illustrate this. I grabbed the same chart from BigCharts below.

For my money UA and NKE are proxies for the same thing. Each stock has different trading characteristics but it makes sense that the correlation should be high even if the magnitude of the moves is noticeably different.

Someone who holds NKE is favorably disposed to the demand for athletic apparel and equipment and the willingness for disposable income to continue to go toward the products--probably.

At that level the story at UA is very similar. The two are a little different when you go more in depth. In an environment where the portfolio manager wanted to increase the volatility of the portfolio (presumably because the market was going to move higher) he could sell NKE and swap into UA. If correct about the market in this case then UA should go up more than NKE.

As a practical matter NKE has enough volatility for me for being a discretionary stock so I don't think I would do this exact swap but have done similar ones before. Part of our defensive strategy in 2008 was to shift most of our energy exposure into what was then the WisdomTree International Energy ETF (DKA). Then as we started to get less defensive we came out of DKA into an oil sands stock, a coal ETF and a Colombian oil stock (not all at the same time). We also increased our position in Statoil (STO). To be clear these trades go back quite a ways now.

This portion of the strategy seems like an obvious type of trading and I know that plenty of people do this, anecdotally I also know this is new for some folks.

Finally, last night we had a skunk wrangle. We knew we've had a critter since Sunday morning. He woke us up early Monday morning so I borrowed a trap Monday afternoon from a neighbor but did not set it. We heard nothing Monday night into Tuesday morning but then Roscoe let us know he was back yesterday afternoon so I set the trap and checked it after dinner and that is what we found. He has white stripes all over and actually it took a minute, at a distance, for me to figure what he was. He sprayed once but I was far enough back that he didn't get me.

I approached with a big towel covered the trap, took it out to the pick up truck and drove it out to the forest to let him go. Funny thing is he wouldn't leave, maybe because I was too close so I pried it open with a rock, backed up and it still took him about five minutes to finally leave.