With any portfolio, whether it be for long term capital preservation or short term aggressive growth, it's always good to revisit your positions and review the reasons why you chose them in the first place.
Having a look at our HED (Horizons Capped Energy Bear Plus ETF) pick, the original reason was as follows:
The growth prospects for Canada, at least in the short term, do not warrant the general prices of equities on the TSX. There are a lot of reasons they got this high in the first place, but real economic growth after the financial crisis of 2008 is not one of them. Maybe we’ll reach the old 2007 market high eventually, but certainly not this year, and some say maybe not even this decade.
The market is probably ripe for a correction right about now, and one of the segments to get hit will be the energy sector. The S&P TSX Capped Energy index is an index of companies involved in the exploration and production of oil and natural gas, such as Encana, Talisman, and Suncor Energy. These companies made a killing in the early 2000?s as oil broke $100/barrel and demand was high, but as the economy slows, so does energy demand, and down should go the share price of these companies as they miss earnings from quarter to quarter.
Let’s add 300 shares of this ETF to the virtual portfolio. In this case we’re only investing $1,300 with minimal downside. The ETF cannot go to zero, and for it to go down any further than it is now the underlying companies will pretty much need to have a record quarter.
While the premise for picking this ETF is still sound, we are now up 35% on this one position, so it's definitely time to take some money off the table. The other good reason to book some profit is that oil has had a 20% drop in price since we first entered the position in March, from $108/barrel down to $88, and while it's probable that oil will drop even more in value in the coming months, the price will likely rebound higher before it goes lower. Why? Because many institutions who have a short position in these companies will need to book their own profits at some point... and this usually happens near their fiscal quarter end, which would be right about now. This means they will need to buy back the shares that they shorted, which will likely move the stocks of these inflated oil companies higher.