As mentioned the past few days, rallies are not to be trusted in bear markets, and "buy and hold" really doesn't work. Each rally will bring you in, and then crush you. Over time this just saps your will. I speak from experience.
I had hoped we'd rally to at least early next week, and then most likely a sell off on the Fed meeting but it looks like we cannot even hold a rally that long. This action in Microsoft (MSFT) is simply troubling - if you cannot buy a company that shot the lights out and expect gains, what can you buy?
Anyhow, I positioned the fund as I had hoped to have it positioned around next Tue-Wed. Since things just don't seem right, I went back to about a 20% short exposure which is how I entered the month of January. However, I cut back these positions much too early about the 2nd week of January and got hit with the brunt of the selloff last week with very little insurance. One misstep like that wasted away about 4 weeks of good work. This time around I plan to just sit with this short exposure to help offset damage to long positions in case of a selloff. Here is how I currently have it set up:
UltraShort Real Estate (commercial) 4.4% of fund
UltraShort Financial 4.3%
UltraShort Russell 2000 4.2%
UltraShort Technology 2.7%
UltraShort Emerging Markets 2.5%
UltraShort China 2.4%
In total about 20.5% exposure. I don't have cash up to the level I was hoping (20%) because we turned direction so promptly, but at least now I have some insurance. It won't offset the type of damage we saw last week (when individual long positions were being hit for 10-12% a day) but it will help. It is just very difficult to be long anything right now as the rallies are very short in duration and unless you time it perfectly (which is nearly impossible) you won't have success.
And if the market goes up? I'll be happy to lag the market upward for now, as I am confidant that when we eventually turn back to a real bull market the type of stocks I own will out perform. I just do not want to give back 6 months of hard work and out performance in a span of a few weeks like we had been doing the past 2 weeks. So hence this positioning which will continue for the foreseeable future.
I am just wondering what the next catalysts are? The government is running out of bullets. What else can we bail out, send checks to, or shelter from? At some point we have to face the music. I think all of Washington just wants to make sure it is after November 2008.
Friday, January 25, 2008
Short Exposure Update
Posted by
TraderMark
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2:54 PM
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4 comments:
Foremost, I appreciate your analysis that you do daily and find you to be a very intelligent and educated investor. Many of the stocks you are interested in I also find myself either watching or owning in my own portfolio. However, I do have one question.
In this recent update you noted that you had adjusted your short exposure up to 20.5%. However, all of these are UltraShorts (reflecting 2x leverage). In essence, wouldn't your true short exposure simply be 41% with you only needing to put up half of that in cash to gain such exposure? Either way, I think upping the exposure is a smart move but I'm just wondering if it is me or you that has misunderstood the effect of the UltraShorts here.
Keep up the good work!
Hi, here is an article that probably better explains how Ultrashorts work, and why its not truly double leverage
http://seekingalpha.com/article/35789-the-case-against-leveraged-etfs
It works on a 2x effect on a daily basis but not over time. Further when I state 20.5% I am speaking of the % of the fund devoted to that position.
Ah, this cleared up what questions I had. I still think that within a short term period of weeks they would still be fairly close to reflecting double the gains or losses but I see your point. Thanks for clearing that up.
Also, why did you decide to go with SRS and SKF instead of more REW or SDS? Is this just a short bet you've made for the portfolio? I noticed you had little financial exposure already so I wasn't sure if it was supposed to be a hedge. Thanks in advance.
Hi, if you click on the label cloud for each you will see old posts for both.
SKF is a bet against financial stocks I began making in August. It hurt me early in the fund as the financials ignored the bad news and kept going up as the market was drunk on the kool aid of Fed cuts. So it worked against me in late August through September, before the market "faced reality" and this turned into a winner October forward. I don't think the disclosure game is over in financials and I expect consumer loans, car loans, student loans, and higher grades of mortgages to continue to implode. Hence financials continue to be a risk. Even with the Fed bailing them out. That said, the easier money was probably already made in Oct - Jan.
SRS is a way to bet against commercial real estate. In a slowing economy led by a consumer slowdown, this will hurt the rental rates for office space, retailers etc. So I can target more specific niches.
SDS is a bet against the S&P 500. I am more against small caps than large caps. The large caps at least have international exposure which can help them to some degree. Most small caps are stuck to the US consumer... so I have been using TWM instead of SDS - and while all move the same direction, the small caps have been the weakest by far since August. I expect this to continue as smaller companies don't have the benefit of export sales (usually). Even the TWM is not perfect - I'd rather have something short say the smallest 3000 companies of the Wilshire 5000, but this is the best instrument I have available.
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