The S&P 500 closed below its 200 DMA for second day in a row yesterday after having recently going back above the 200 DMA.We did not buy the ProShares UltraShort SPX ETF (SDS) however, instead we bought ProShares Ultra Short Dow 30 ETF (DXD). The reasons for DXD are pretty simple. We wanted to preserve the small loss taken on the last SDS trade for anyone who would want it, we wanted everyone to own the same ETF and needed a fund with sufficient liquidity.
At times the Dow 30 will look a lot like the S&P 500 and other times not so much. If the SPX were to drop 5% I'm not sure what DXD would do but if the SPX drops 40%, which obviously would be down a lot, then I am quite confident that the Dow 30 would also drop a lot and the DXD position would provide the desired hedge.
As a reminder the desired hedge is to protect client accounts in case the market goes down a lot; philosophically, enduring down a little simply goes with the territory.
When I blogged about the recent SDS trade I noted my gut feel that things were not over and the expectation of going back on defense fairly quickly of course I wish we didn't need to take the action. While I am not certain I think if it goes back above the 200 DMA in very short order again I may give at a week before taking DXD off. While this would not guarantee avoiding another whipsaw it might help. Additionally I would rather hold onto a defensive position a little too long than have no hedge at all for too long.
In the very short term this sort of thing either turns out to be correct or not but the short term is not the objective. As I have been saying for almost six years now the goal is to avoid the full brunt of down a lot when it occurs.
8 comments:
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We have been adding SH for similar reasons.
I understand what you did, but I wonder if criteria other than a week might serve you better.
Personally I still view this as a correction. That does not mean you will not get whipsawed again. But I am glad to see all the pessimism.
SEG
Outside of the tax loss question, I'd be interested in any thoughts (from anyone) on the pros and cons of SDS vs SH vs DXD for purposes of broad market hedging.
Would there be a specific reason to lean towards one in particular?
forgot to click e-mail comments
i believe the double short to be more efficient because it hedges more and since we benchmark to SPX i would rather use that index to hedge when possible.
Man. Changing jobs really affects your knowledge of what's going on in the market. I did not know we'd crossed the DMA twice in a week. Luckily I can check here and see what's going on!
Going through a market "panic" with a job like this could potentially be very problematic for figuring out what to do on your portfolio.
Playing to avoid getting hit is a good idea.
With President Ryne Duren on the mound, no one knows when his next wild fastball is going to cause further damage.
Just gotta say I love your way of thinking, very similar to mine.
"Additionally I would rather hold onto a defensive position a little too long than have no hedge at all for too long."
I've always been a big fan of this. It definitely saved my butt a few years back.
It's well worth the cost to have the piece of mind that if a big move down occurs there will be something to benefit from it.
Besides the Ultra short index ETF's I also tend to have some deep out of the money puts on hand, simple insurance more or less. But this can obviously present a large dilemma when trying to figure out the proper put to buy including many other risks.
I do not suggest using any options unless you have some knowledge of them before hand. It can be a dangerous game and not for the faint of heart.(Just a disclosure for anyone that may stumble upon this. Present company excluded I presume. ;))
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