For now the SPX feels like it is flirting with its 200 DMA and it would not be the least bit surprising to see it back below in short order and if it happens (I would wait for a second day as a sort of confirmation as I always do) I will again buy a double short ETF as a first step of defensive action. I should say a double short ETF is the most likely first step, were it to happen in a few months or few years I might have a different idea about how to go.
The possibility of a whipsaw always exists with this strategy but I believe it is a very effective way to avoid the full brunt of down a lot which is a very important objective for us. The possible drag from being "wrong" for a few days or weeks is minuscule compared to the protection should a given breach be the one that leads to down a lot.
I remember one time a reader asked why I don't do something like Jack Ablin talks about which is waiting until the market gets 5% or 10% (I'm not sure which) below the 200 DMA. During a given breach taking action right away as I do might be better than what Ablin does or it might be worse, there is no way to know ahead of time and no way one strategy like this can always be the best of the bunch. If you do something that allows you to go down a lot less than the market when it does something very bad then that is what matters.For now it seems clear that the event is not over. The many days of panic buying and selling are not signs of health. I continue to believe that the fallout from the entire crisis will be headwind for US markets, more so than quite a few foreign markets, for quite a while to come. For now the portfolio remains less volatile than the broad market.
On an unrelated note the WisdomTree International Energy Fund (DKA) has a large position in BP. As you may have heard BP will not be paying a dividend for a while so per WisdomTree BP will be removed from the fund June 18. I mention this as DKA is a client holding.
9 comments:
I totally agree with you that the goal is to avoid down a lot. It is unfortunate that you might get whipsawed following your strategy but keeping your eye on the over all goal of missing down a lot is correct.
I am also trying to avoid down a lot through different methodology and I still view this a correction. while some may view me as wrong my take is this is simply a LOT of volatility not the end of this bull market. I do not know if this correction has ended, but I still view it as a correction that just must be accepted as the way things occur.
SEG
Coincidentally :-) I opened a small long position in SDS for myself and also had my sister do same, the same day you did, Roger. Perhaps that was premature or not but for us the avoidance of down a lot is most critical as well. For now I am gritting my teeth and riding it out, as I think that SPX needs to break out above 1150 to re-establish the uptrend, also that would complete the right shoulder of a head-and-shoulders pattern (more apparent on the weekly chart).
BTW, thank you for this blog and all the great insights!
Mark from L-Ville
Hi Roger,
I always wondered how much cash you typically have on the sidelines to buy a double-short fund position when the market falls below it's 200 DMA? Also, I've wondered what you consider to be a typical equity/cash allocation when you're bullish vs. when you're bearish?
Thanks!
Seg,
may I ask you if your monatary system gave you any warning ahaead of time before this correction started.
tx,
Jeff from Milan, Italy
Seg,
may I ask you if your monatary system gave you any warning ahaead of time before this correction started.
tx,
Jeff from Milan, Italy
I saw the same over bought condition everyone else saw, but there is no easy way to see if the correction would be small (5 - 10%) or larger as we have experienced. There is no easy way to pick the top or bottom of these corrections either so I view trading them as rather difficult and simply something that must be endured.
I will sell if I see a major decline coming, but do not want to get out of the market for every correction that comes along - and there are always plenty of them.
I did pick up some QLD though with the little cash I had left when this correction was lower.
SEG
Thanks for sharing your process Roger an SEG.
I personally exited at the beginning of the correction just do to hitting stops as the market rolled over into the flash crash day. My quantitative models have been liking gold and currency trades so I haven't bought or sold stocks as the market went lower.
I personally think that we have put in a bottom for this correction because it looks like the right size and length on the chart ;) I put on a small discretionary long (DRN) a couple days ago but haven't done any systematic buying of equities so far...
Did anyone make money shorting this fall?
I can't predict the direction of the market. However, I do have a very queasy feeling about the current market. It doesn't seem normal (what is normal?).
I don't think anyone would be surprised by a crash. Up days have lower volume; down days have a big flow of trades.....not a good sign. Does anyone think the U.S. is the land of opportunity? Not on any of the blogs.
I respect you following your rules with that much discipline. I followed your logic on the SDS, picked up a position, but will hold it for a while. I've only got to answer to myself and my wife, and the SDS is not a back breaker if a real bull takes off. Thanks for sharing your process. It's good to understand how the pro's make decisions, and your site has quite a few honest folks contributing. It's interesting to contrast you, Swedroe, and a few others who follow a consistent plan, though not anything alike.
Sam
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