Monday, October 13, 2008


S&P Short

Today the market rallied.  And it rallied big.  This is not a time to get excited.  This was actually not a good thing.  I'll explain in a minute, but let me get to what I did today.

I woke up to find that the market had rallied 5% up.  This was to be expected after a brutal week.  But the fact that it continued to hold up throughout the day was kind of surprising.  Too add to my skepticism, it was a bank holiday and volume (the number of shares being traded) was relatively light. So what did I do?  I sold at the end of the day.  I bought the Ultrashort S&P ETF, essentially betting that the market would go negative soon.  I bought the ETF right at the red arrow.  Notice how the market continued up (and thus my stock went down).  I actually ended up losing about 10% for the day on this stock.  The thing is, I'm fine with it.  Why?

I got into my position to essentially balance out the rest of the portfolio.  I'm long everywhere else, and thus when the market goes up or down, my whole portfolio goes with it.  I prefer not to have so much volatility.  Volatility makes people do stupid things.  So I decided to hedge the rest of my portfolio by going long here.  Now, if the market goes down, this position will act as ballast to the rest of my portfolio and I should be OK.  This is a peace of mind move to be frank, so losing money on it is no big deal.  The rest of my portfolio was up big today, so losing a little bit on this position is no big deal.  For anyone else who can't take their eyes off the market, I recommend they do the exact same thing.

So back to my opening paragraph, why is it a bad thing that the market rallied this big this quick?  Fear.  There is still a great amount of fear in the market.  On the way down, fear drove people out of the market, causing huge down moves in the market.  Fear of missing the rally caused the market to rally up today and rally big.  It is hard to make any money in a market driven by fear.  It is bad for the economy when market makers are driven by fear.  So all this move shows me is that the market is still a pretty dangerous place to be.  All the more reason I'm OK, and actually feel pretty good, about my short position today.


  1. [...] The hedge is doing exactly what it is supposed to, it is creating ballast for the rest of my portfolio.  I still lost money today, quite a bit actually, but I’m not nearly as worried about it as I would be otherwise because my short position is balancing everything just a little bit.  Considering that this is a short term trade for me, and my other positions are long term holds, then I’m not worried about it. [...]

  2. [...] staple large cap space right now.  Things that should survive even in a down economy.   To hedge, I will short the S&P even more than I currently am. written by [...]