Ivan and I have been running the SocialLeverage50 now (formerly Stocktwits50)) for over three years. Until February of this year, life was grand, returns great and win rates were high.

The markets had good price momentum and our job and style were to capture this momentum.

As part of the service, please try it out – we run a ‘model’ portfolio that let’s people follow along and own what we own in a simple way. We track every investment in a simple spreadsheet and always give our subscribers ample time to buy or sell the security as we do.

This weekend we shared the following with subscribers (we have been very light on stocks for months):

There are times to be aggressive and on margin. There are times to be more cautious, raise cash and cut position size. There are times to just go on vacation. And I don’t say this just on the top of my head. I have numbers to back it up.

We can say a lot about the health of the market not only by watching the performance of the Sl50 list, but also by paying attention to the performance of the stocks after they are booted from the SL50 list. At the end of February, we published the results of the SL50 stocks since July 2013 – the success rate was 61%, the average winner was up 20% in 11 weeks on the list, the average loser was -5.8% in 3 weeks, expectancy was extremely positive 10.2%. More interestingly, the average performance of a stock after it left the list was +12.9%. We made the comment that the list sold too early, because a large number of new great setups were showing up.

Since then, the results have changed drastically, which reflects the new market environment we are in. Since March 3, which was the YTD high for Small caps (Russell 2000, $IWM), the average performance of a stock that left the SL50 list has been -12.4%, after it was sold from the list. Success rate on the list has dropped to 32%. The average winner has been 11.1%. The average loser: -7.7%. Overall, the expectancy has dropped to -1.7%. There are periods, when owning high-growth stocks is a losing proposition.

The best move for active swing and position traders is too keep very large cash position, be extremely selective in new trades and use small position size. We have gone a little bit further in the model portfolio and added a few hedges, for the simple reason that small caps gave signals for a potential breakdown. We are open-minded and nimble enough to increase or take those hedges off quickly when needed.

For the 10 months since starting the portfolio, we have gains of over 8 percent, but most important, we have avoided the brutal drawdowns that most momentum investors at funds have expericed since February of this year. Our gains have been made and kept using on averagevjust 30 percent of the portfolio long.

Things can change quickly this summer. The markets don’t feel ‘bubbly’ or ‘doomed’ as many are yelling in the media. It feels like a churn before another move higher but we have to honor the price action our leading stocks have encountered in case the price appreciation that comes with growth stocks comes back into favor

I like this post from long time Global Macro ‘behaviorist’ Mark Dow:

Hedge funds are chopped and flat. Real money managers are more worried about getting caught out in a downdraft than missing an upside breakout. Risk positioning is light. The decline is bond yields is more about bad positioning and a shortage of AAA assets than it is about the bond market “knowing something”.

But the vulnerabilities are also there: markets have had a big run, economic fundamentals are still tepid and falling on the short side of expectations. Implied volatilities are low. Market internals are bad. Bottom line: It will take a growth breakout into escape velocity or something like it to get a resumption of the rally, or, more serious disappointment to get the washout that so many are already expecting. Unsatisfactory though this is, the right move is to be patient. The bull market is not over, but it’s not a smart time to press your bets. The longer we twist in this limbo, the more attractive the upside will become. Time heals. Keep your strategic positions and hedge out market beta as best you can. Sometimes you have to keep your bat on your shoulder—something guys collecting two percent management fees have a hard time doing.

Have a great week.