Wednesday, May 5, 2010

Bookkeeping: Throwing Some Hedge On

With this gap down open, and then retrace we have a nice opportunity to throw a lower risk hedge on the table. With the S&P 500 below the 50 day moving average, we can use that as a ceiling to stop out of an index short position. While we're heavily in cash, I want to marry the remaining longs with some index exposure short, so I'll go with short TNA ETF at about a 7.5% exposure up here near S&P 1166. I am not ready to play the SPY game here after having my teeth knocked in 3 times in the past 7 sessions.

Any move over and above S&P 1171 will basically make this form of insurance policy one that did not work out, and my main worry nowadays is that sort of chicanery would happen in a premarket session. As always, the close of the day is far more important than the intraday action but this early morning bounce after a combined 3%+ drop in most markets yesterday and the opening minutes today makes sense. Now, if the market acted like it used to, it would stop at or below the 50 day and roll over. I can only go by probabilities and assume at some point this market acts like it used to. If the market just goes straight back up through the 50 day like a knife through hot butter ... then we'll exit this position with a loss.

On the flip side, any move below the low of the day (i.e. S&P 1160 is broken) would be a cherished victory for bears.

EDIT 10:22 AM - Already right back to 1170.40 so here we are at the 50 day moving average not even an hour into the session; let's see if there is an ounce of resistance or V shaped bounce it is.

EDIT 10:26 AM - the 50 day seems to have restrained the bounce, so I am going to attempt a SPY put (May 116) position for the very short term with same logic as used above but with an even more low risk entry point. Since my directional plays on the market have been horrid the past 2 weeks, I will go smaller than usual, about a 4.5% exposure. S&P 1172.50+ and this will be gone. Period.

EDIT 11:44 AM - ok I tried.. failed again. This is an epic winning streak - sheesh. April and May the past 2 years have not been kind. I stopped out of both the TNA ETF and and SPY puts since we seem headed higher and the 50 day moving average is going to be an after thought.


Over the intermediate time frame, I will be looking to purchase some of the better performing stocks (based on fundamentals) whose charts are still ok.... or stocks in sectors I have little exposure to in increments over time. However if this is a more serious correction of 7-10% (which it looks to be the beginning of) some of those positions might be punted right back out since there is 100 S&P points before all gaps are filled.

In the long term, if the gaps we discussed this morning *are* filled it is going to be one interesting moment in time since it will mean the indexes broke through the 200 day moving average. Which almost seems impossible in this era of constant liquidity pumping by the Fed.

Short TNA ETF in fund; no personal position

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