More Uncertainty? Try Ultra ETFs

In previous letters we have said that “markets do not like uncertainty”.

These words certainly bear repeating now, because the markets are getting ever-increasing doses of same - - - and are reacting just as one would expect - - - lurching severely downward on high volatility.

Much of yesterday’s reaction can be explained by the fact that this latest dose of uncertainty was delivered by an entity we normally look to for help: our own government. (Was it Reagan who said the scariest words are: “We are from the government, and we are here to help you.")

When Secretary Paulson announced that his bailout plan for the banks had been switched from buying troubled assets to providing capital, all hopes of ridding the bank balance sheets of their toxic paper were dashed. Those loans will remain on the books. No one knows their true value; and only the bravest of speculators will venture near them.

Thus, it will be a long time before the market clears itself. The economy cannot recover until the housing market is stabilized, and who knows when or how this will happen. Without a fix of this most important segment of our economy, house values will continue to fall; foreclosures will continue to rise.

Meanwhile, more uncertainties appear: regulators nix a credit card forgiveness plan. Then Detroit hears the rescue package is not for automobiles, so Congress helpfully waves the possibility of tax credits for auto buyers as a solution.

Those of us old enough to recall the slogan: “a car in every garage and a chicken in every pot” should not be surprised. But instead of giving us a tax credit, why don’t Reid and Pelosi just buy each of us a car? ‘Nuff said - - - the economy is in deep doo-doo.

Last month we expected the Dow to bottom at around 9,500. Given yesterday’s events and the unresolved storms still on the horizon, we now expect the Dow to continue falling, and to reach 7,200 sometime during the 1^st quarter of 2009.

That is 1,000 below where it currently stands. Absent any sudden exogenous event, the decline will more likely resemble Chinese water torture: a slow, continuing erosion of value. Wise investors have already moved into cash, and more should do so as occasions permit. There will be moments of euphoria when individual stocks reach into their Exit Zones, and these are times to act.

Swing traders using the E-Zone system have been successful, especially with ultra ETFs such as SDS, QID, QLD. With the VIX still at an historic level, these trading opportunities should continue.

For all, investors and traders, there should be ample opportunities to adjust your portfolios. Be patient. Do not act in panic.

Best wishes for brighter days ahead.

Disclosure: Author holds a long position in SDS

Comments

[David Lentz:]

But if the markets do not like uncertainty, then they should be pretty pleased, as it seems certain that we are all going to hell in a handbasket, with equities continuing lower and lower. Seems perfectly predictable to me. The (short) markets should be ecstatic.

:-)

2008 Nov 13 10:17 AM

[User 161034:]

David, you comment is appreciated, and even tho it may have been made "tongue in cheek", there is a certain bit of truth in it.

However, no one has the perfect crystal ball.
All of us are playing the odds, and you are correct, they do favor the short end.

That being said, in addition to the contras, there are always stocks that rise on days that the Dow and/or S & P fall - - - and visa versa. It is those moments when investors can take dollars off the table - - - and should do so, depending on their time horizon (age).

Some of us do not have the luxury of time in which to recover, especially if we are dependent on dividends and interest payments. That is why this geezer switched strategy to trading the contras. Even after tax consequences, the resulting income is greater than what the market currently provides in divvys and those safe munis.

Best wishes, Fritz H.

On Nov 13 10:17 AM David Lentz wrote:

> But if the markets do not like uncertainty, then they should be pretty
> pleased, as it seems certain that we are all going to hell in a handbasket,
> with equities continuing lower and lower. Seems perfectly predictable
> to me. The (short) markets should be ecstatic.
>
> :-)

2008 Nov 13 11:49 AM

[Smarty_Pants:]

For the true go-getters, there are also options on some of them Ultra funds. QLD and QID in particular. If you plan on swing trading anyway, the use of options can further limit your risk for an equivalent return.

There is also the possibility of selling the very high option premiums around your position(s) based on swing signals. Many ways to skin the cat if you're keeping up with the market on a daily basis.

Best of luck trading.

2008 Nov 13 04:07 PM

[sachin prabhu:]

sds and spy don't show same price movment (double inverse). Why ?

For example on NOV 13 TH. at 13:03:19 spy was at 82.53 and sds at 112.75

at the end of the day 15:59:03

spy was at 91.48 and sds at 90.61.

so for +8.95 move in spy sds has moved -22.14 and not -17.90 as it should have.

2008 Nov 13 08:07 PM

[Old Trader:]

sachin,

The bottom line is "slippage". Both SPY and SDS have many "moving parts", and they're not the same "moving parts'. Same is true of other Ultra ETFs (DIG and DUG, for example). The inverse correlation is pretty close, but not perfect.The same holds true on just one side of the trade, over a span of time, because the Ultras basically start at "0" each day, so if you track the S&P, and it drops "x" over a 3 month span, SDS would NOT be up "2x" over the same period, but hey, they still make a decent hedge, or allow for some nice profits ;-)

2008 Nov 13 10:03 PM

[User 161034:]

Thanks, Old Trader.
As a further reply to Sachin,This is from Pro-Shares site:

<<< Investors in any ETF, including ProShares, should be aware of potential differences between daily net asset value (NAV) and closing price. ProShares NAVs are calculated using prices as of 4:00 PM Eastern Time, when equity markets close. Some ETFs calculate NAVs earlier in the day based on the time their benchmark prices are set (Fixed-Income ProShares NAVs are set at 3:00 PM when the bond market closes). Through October 7, 2008, ProShares traded until 4:15 PM ET, when the equity futures markets close. Beginning Wednesday, October 8, 2008, trading in ProShares ETFs on the NYSE Alternext U.S. (formerly the American Stock Exchange or Amex) will close at 4 p.m. ET rather than 4:15 p.m. ET (see separate announcement).

The closing price of any ProShares ETF, which is the recorded price of the last trade, can occur before or sometimes after the NAV calculation, and may be different from the NAV.

Investors should note that each ProShares ETF is designed to track the 4:00 P.M. value of the index underlying its benchmark. >>>




On Nov 13 10:03 PM old trader wrote:

> sachin,
>
> The bottom line is "slippage". Both SPY and SDS have many "moving
> parts", and they're not the same "moving parts'. Same is true of
> other Ultra ETFs (DIG and DUG, for example). The inverse correlation
> is pretty close, but not perfect.The same holds true on just one
> side of the trade, over a span of time, because the Ultras basically
> start at "0" each day, so if you track the S&amp;P, and it drops
> "x" over a 3 month span, SDS would NOT be up "2x" over the same period,
> but hey, they still make a decent hedge, or allow for some nice profits
> ;-)

2008 Nov 13 10:09 PM