Q2 2022 Review

Summary of The Coal Trader's Performance

Jul 04, 2022

This is a short overview of my performance for the second quarter of 2022. Historical quarter write-ups can be found in the links below:

Summary

Q2 2022 was positive despite May and June being largely unproductive. April’s performance carried the bulk of the load:

April performance: +37%
May -5%
June 0.1% (basically flat)

Overall for the quarter I was up 30.2% (and +256% YTD). The strategy of shorting non-profitable tech with short term puts, while remaining long energy and resources stopped working in May. Then in June energy and resources completely got slammed. I was tactical enough, or lucky, with a handful of trades and aggressive hedging to prevent/protect the overall portfolio from getting slammed along with energy, mining and metals.

The last two months have seen very choppy trading results due to bear market rallies in which I’ve been slow to cover short positions, followed by equity rug pulls where I’ve been too slow to add back to downside protection. In reality, I’ve just been a touch out of sync with the rhythm and timing. Bear markets are notoriously hard to trade and this is beginning to show in my pnl over the last two months where I’ve been whipsawed a bit.

Performance

Herewith the performance metrics and risk analysis for 4/1/2022 through 6/30/22, according to IBKR’s reporting functionality:

Overall Performance = 30.17%
Max Drawdown = 16.91%
Peak to Valley = 6/162 - 6/24/22
Recovery = Ongoing
Sharpe Ratio = 1.72
Sortino Ratio = 2.96
Standard Deviation = 4.90%
Downside Deviation = 2.86%
Mean Daily Return = 0.52%
Positive Periods = 33 (50.77%)
Negative Periods = 32 (49.23%)

Capital allocation throughout the period was as follows:

Position Contributions

The top 5 individual trade contributors during the period were the following:

BTU July15 25 Calls contributed to 4.05% of the overall performance
RCL July15 55 Puts contributed 3.88%
TSLA Jun17 800 Puts contributed 3.81%
ODFL Jun17 290 Puts contributed 3.09%
TSLA Jun17 600 Puts contributed 3.02%

Bottom 5 trade contributors:

SPY Jun24 360 Puts contributed to -3.73% of the overall performance
AMR Warrants contributed to -2.45%
VAL Warrants contributed to -2.33%
AMC May20 11 Puts contributed to -2.25%
NUE Jun17 125 Puts contributed to -1.97%

Looking Ahead

As we look ahead into Q3 and the remainder of the year, there’s a few general ideas in which I’m going to try to structure a portfolio around:

Thermal coal prices are headed higher.
Thermal coal equities represent very deep value, but energy overall has taken it on the chin in recent weeks. Earnings season for coal stocks is about a month away and I expect it to be a positive catalyst. Fundamentals matter during earnings season and thermal coal fundamentals have literally never looked better.
Semiconductors are heading lower.
Semiconductors believe it or not are a cyclical industry, and as a coal guy I know all too well what happens when the cycle turns against you. I expect the recent ramp-up in semiconductor capacity to lead to oversupply at exactly the wrong time - as demand begins to wane while we enter a recession. Given where semiconductor equities are priced, I expect them to continue to correct severely.
Value will outperform growth.
There was a point during the 2000-2002 bear market where value began to significantly outperform growth. Many portfolio managers basically made their career by getting ahead of that move and riding it for a few years. I expect a similar value over growth move to start sometime in this downturn. Timing it is never easy, but using a paired trade might be the way to go. For example, going long the Vanguard Value ETF (VTV) and short the Vanguard Growth ETF (VUG) as a pair has been profitable so far this year. I think this spread will become more profitable by year end:
An easy strategy of adding to this paired trade when the RSI4 is less than 30 should continue to work well.
Energy will be a higher portion of the S&P 500 by year end than it is now.
I think O&G is an irresponsibly small portion of most index funds given how important it is to society. Now that O&G company balance sheets are being rapidly repaired, and equities are trading at seriously low FCF multiples, capital allocator’s will begin shifting money into the sector despite the ESG concerns which are currently preventing/slowing this shift.

Given these 4 items of focus, I could easily stop trading and staring at screens all day by developing a few paired trades to sink my entire portfolio into. Then set it and forget it until New Years:

As mentioned already VTV:VUG
Or how about a simple portfolio of thermal coal producers (CEIX, WHC, TGA, & ARLP at 25% each), paired with an SMH short.
Or 1/3 each of GNR (natural resources ETF), XOP, and OIH; paired with an SMH short.
Or VTV long, SMH short… I think you get the idea.

Anyway, this is generally how I come up with an overall strategy looking forward. I probably will not simply sit on a few paired trades. But I will try to mimic this type of paired action by tactically shorting semiconductor stocks, while being long value, thermal coal, and energy in the handful of companies which I believe I have a minor edge in.

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The Coal Trader