What a great day yesterday was! It makes me very happy to see the market go up a lot and go into the green for the year. That type of sentiment is pervasive and IMO counter productive.
As I talked about at the start of the year and at a couple of other times, I added a 1% weight almost across the board in the ProShares Ultra Short S&P 500 (NYSE: SDS). I used SDS for quite a ways down on the market but should have held it longer. Now, after a 36% rally in two months I am adding a touch of defense with SDS.
I view the 1% as a chicken’s way in and would expect I may add another 1% if the S&P 500 goes 5% in either direction. I am not trying to hedge against a 5% move I am trying to hedge against a move that scares the hell out people which I think is quite likely. Bear market rallies tend to be huge and create a sense of security that is often incorrect.
In past posts (too numerous to link to) I had talked about putting some sort of SDS position back on if we rallied 30-40% off a bottom in a fast fashion and I had also toyed with the notion of buying some SDS at 900 or 1000 on the SPX. The reason I went in at 900 is because the rally has fallen in the middle of the 30-40% range.
If the trade is wrong then as small of a drag it would be at 1% it would become less of a drag as the market went up. The market going up would increase the value of the other holdings and the SDS position would hedge less of the portfolio as the portfolio went up and the price of SDS went down.
I would just add that if you've been reading my posts for a while you knew that this has been on my mind for months. That Seeking Alpha post I linked to yesterday that I wrote in late December had my thought process in it. A 30-40% rally was in my sights as a possibility and I laid out a rough framework of what to do months ago before it happened. Had the market not gone up in the manner I spelled out then there would not have been a trade yesterday.
At other points I had talked about putting some SDS back on at SPX 1000 but then the market moved a lot lower, then I talked about maybe 950 and again it moved a lot lower and then I believe I set my sights no lower than 900, we got there via a 36% rally in just under two months and I did the trade as spelled out above.
I'm glad I had thought it out early because it was not an easy decision, gut-wise to make but I feel as though pre-planning months in advance removed that emotion from the actual decision process. I felt emotion but did not let it determine the action taken.
12 comments:
I am not so sure I agree with you on buying SDS ( although I thought about it also). I am still concerned about a melt up.
Your main point about preplanning to eliminate emotion from your decisions is of course excellent
From a tactical perspective this appears to be a swing traders market and I'm working it as such. Gives me some time for trend to establish, if it does (strategically I am always late for new bull markets but that is par and acceptable -- half of the up moves and no more than a third of the down moves can take you a long way).
As I may have commented here back then, I did increase strategic long exposure by about 10% early this winter strictly based on market valuations but neither economic scenario nor market behavior since then encourages me to go further.
Is a 1% allocation going to really make a difference? My thought it why bother. If you wouldn't mind explaining I would appreciate it.
as i mentioned it is a half position and I would likely add in more with a 5% move in either direction (described in the post as the chicken's way in). 2% will make a difference if there are days the market goes down a lot. if the market goes down slowly over time then I believe SDS will capture it for the most part even if not exactly.
I don't have the confidence that you do about 'predicting' where we're at (new bull / bear market rally), but I think there is a high probability that sub 8000 will be seen just based on technicals. I'm looking at bearish positions to protect some profit.
As you say, it's much better to think about these things now instead of when the market is going off a cliff.
Roger, can you tell me why JPS has been going up so strongly? I'm pretty sure I know, but your second opinion would be welcome.
I'm new to your blog, it looks like it will become daily reading.
Second question, kind of related to the first question: When will credit default swaps become good investments, and what etf's or closed end funds would you buy to get exposure to them?
FWIS, I’m hearing tales from the front line of lots of traders throwing in the towel today…giving up on fighting the upward momentum. No SDS for moi as I am awaiting the trend reversal first. No sense fighting the fed
I have moved my sights from the 875-900 area to the 940-960 area which is around the 200DMA. I’ll keep half an eye on the market here but I don’t see any reason why the rally could not test that level, so I’ll play small for now.
I'm sorry I don't know JPS but everything is up a lot. Not aware of a fund for CDS--not my trade.
I am thinking that I would like to see the 200-day cross and also the 50/200 cross. The 200-day alone is too noisy. Whipsaw
Credit markets have clearly improved but now that money is available to lend the question becomes not simply one of who is willing and able to lend but who is willing to borrow and actually has a reason to do so beyond repairing balance sheet: Insider selling continues to be heavy; I sense the force is not with us.
IOW it still looks (mainly) like balance sheet repair: If economic activity catches up with that within the next 4-6 months then current stock prices may hold; if not they will not. JMO
PS: 50/200 crossover can whipsaw you as badly as anything else. There are no mechanical rules for complex, nonlinear systems, there are only heuristics, rules of thumb - the 200 DMA (or any other trend indicator) is an alert, the sound of a breaking twig in the forest, that's it; it's your response that makes the real difference. Once again, JMO
"All I say is by way of discourse, and nothing by way of advice. I should not speak so boldly if it were my due to be believed." - Michel de Montaigne
be prepared to take big loss though, i c spx 1400 by ear end.
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