Yesterday was the second day that the S&P 500 closed below its 200 DMA, not by much though. I had the share amounts for an SDS purchase all sorted out and the day ended up being a will I or won't I.
In early May I bought a half position in SDS thinking the rally had mostly topped out, with a plan at the time to add more on a 5% move in either direction. Then as we got close to a 5% move up, the 200 DMA came down quickly making a purchase of more SDS at that point a little trickier.
The trade yesterday was simply to double up on the amount of SDS purchased in early May taking most clients to somewhere near 2%. There were exceptions here and there so this should be thought of as generally speaking.
For ages I have been thinking there would be one more plunge that would scare the hell out of people and if that happens I like the idea of having a little more SDS and some cash. If we trade narrowly sideways for a while as some feel will happen then this purchase will neither help nor hinder the portfolio. If we whiz higher than the SDS and cash become a drag--a progressively small drag as the market goes up.
I considered not taking any defensive action because despite the recent increase in tech exposure the portfolio typically has gone down less on down days which is the goal after all. If the S&P 500 were to go down to 700 however I would want more protection than what I had before yesterday's trade.
Despite the little bit of heckling over my comments about this sometimes being science and sometimes being art I do think this sort of thing is more art than anything else. While discipline is important, if you have been reading this site for a while then you realize this conversation not about staying disciplined it is about trying to figure the best way through this.
All of the green shoots talk, increasing confidence among many and Hussman's belief that up to this point we have not gone through a revulsion phase leaves me less confident for the near term. However I could be wrong and by not selling everything as a defensive strategy there is no need to be exactly correct about a real recovery.
One interesting little factoid about all of this; The SPX was at 903 when I bought SDS in May for $59.45. Yesterday SPX was at 894 and I bought SDS $58.73. So in about 7 weeks the SPX dropped 1% and SDS dropped 1.2%. The levered funds draw a lot of ire, perhaps rightfully so but the result from SDS in this microcosm has been far from horrible.
Wikinvest Wire
17 comments:
I love Hussman's comments. Thanks to you he has become a weekly read for me.
While Hussman is usually correct, I find him to be early in identifying sell offs. Hussman seems more rational than the average investor to me so he sees the silliness of bidding equities to high and many market participants are not that good. I said all that to say I think the rally has a ways to go after this pull back (whether it is rational or not)
Has anyone here considered using option spreads to hedge your downside? It seems like it could be more efficient. When I feel we're toppish, I'll usually set up a bearish spread of some sort (to minimize or eliminate the time decay of options). I think just buying puts alone is not a good plan, it should be spreads.
Admittedly, options are not simple instruments, but if you understand them, they pretty much behave as they're modeled to. I can't really predict how the inverse or leveraged ETFs are going to behave.
I think a lot of managers with skin in the game will keep the market bouyant through the end of the quarter, but a little more defense is probably the right move in anticipation of a more pronounced pullback. Richard Shaw at qvmgroup.com has some chart-based projections up for how a pullback could play out.
Roger- I posted last night to wait until the fourth day before adding any shorts. This thing has legs through the end of the quarter. Imo bad timing on sds
maybe the timing was bad (too early to be right or wrong, and given what I said in the post it may not be bad regardless) but it is difficult for you to come back and refer to a past comment when you post anonymously. I have no idea whether YOU posted anything or not. You can make up a nickname which would give stray comments a thread and some context.
Roger,
as I am watching markets I am more convinced that energy price is a key factor on the market. During the 80's an energy department was created and it was headed by Slisinger(?). The price of crude went down to $10 and there was plenty of oil. It was a mistake to have such department disband. Energy is such a key component to our economy that it is crazy not to have a good handle on an energy policy. I think that we might have another slide in the market as crude goes to 90s and approchoaches 100. I will not be fully invested until we have another scare in energy and the calapse of equity prices. Roger this market seems that is going sideways. We need to break the back of oil cartel and need an energy department.
Jeff from Milan Italy
BillB.
The problem with options as you mentioned with your time decay point is that you have to not only be right with the direciton of an equity move but by right about WHEN will it move. I think most peple avoid options for this sort of thing so it doesnt get talked much.
I fall under the "another scary dive is coming" group and switched around my own portfolio from enjoying the rally to defensive just this week. I am always interested in more ideas.
Rhianni32,
That's why I specifically talk about spreads. You can negate the time decay and volatility with vertical spreads. This comes with the trade off of an S shaped P/L diagram (or inverted S if you go with a bearish position.
Vertical spreads huh? Looks like I have some reading to do. Thank you.
i like your new layout, hopefully you will get more $$ out of the blog with the changes.
you may know this already but with the latest layout the commenters' names and "avatar" run into each other in FireFox on Vista.
It looks good when you are posting a comment, but when you are reading the full post with the comments below it it looks a bit off. not the end of the world, but i thought you would want to know.
2% in SDS seems like a spit it in the ocean and lacks conviction to me. With the demand for equities being weak (your definition of stocks below the 200 day MA), it seems that you might reduce your portfolo beta from .7826 to .7516 with that position. SO what is the point? just an observation, I don't understand....
LennyD.
Hey Sami thank you I did notice that, not sure there is an easy fix or not.
LennyD, interesting alias to choose, anywho as I mention in the post this is insurance against down a lot not a 4% decline. All I can tell you is that if the market does go down a lot the SDS and the cash raised will offset a lot of that decline.
LennyD - what is your formula for downside hedging?
Yes Bill, I have thought about option spreads, but I'm an option trader and I like Roger's method better. I feel there will be a big drop and with the SDS you don't have to worry about time decay.
You can just sit and wait.
Mish has a great post today regarding the flaws with buy hold strategies as well as why one should be totally out of stocks when the yield curve inverts... Interesting...
http://globaleconomicanalysis.blogspot.com/2009/06/long-term-buy-and-hold-is-still-bad.html
Roger,
Do you plan on having a search option on your site?
j
Travis,
I'm not sure how better to say this, but I specifically mention spreads, specifically vertical spreads, to greatly reduce or eliminate time decay.
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