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.