Using ETFs to Capitalize on Market's Recent Patterns

As I had highlighted last week in my "Selling the Rallies" post, the market has been following a somewhat predictable pattern of maniacal upswings of 10% or greater in a quick run, followed by severe downturns to the tune of 5%+ in a single day, usually culminating in peak to trough patterns of 12-20%. Monday's fall was in line with what we've seen lately and should come as no surprise to investors who have been active during that time. During last week's upswing, I took a 2X short position in the S&P500 using the ETF SDS, which is now nicely in the money.

What I missed was that the new 3X ETFs are finally out! So, as I wait out a bottom here and sell off SDS later in the week and wait for the next bounce, I will utilize the 3X Short ETF for the next swing. As outlined in my rally-selling post, I'm net long, but while the markets gyrate up and down like this, why not capitalize on the volatility. If I'm wrong on the next downturn and my 3X position gets wiped out, I'm more than OK with that, as I'll see my higher Beta positions in the other 90% of my trading account recover, as well as the order of magnitude greater that I hold in retirement accounts.

I'm also considering the 3X Long Energy ETF, given the current oil contango (without doing a whole post on this, the forward futures are at a huge premium to current spot prices, even over carrying costs...so much so that investors should be renting tankers and storing the stuff, but there's no more credit out there to do so!), but I think there might be a bit more downward pressure given global slowdown and the inability of OPEC countries to actually hold to their agreed quotas (a cartel that cheats isn't much of a cartel!).

Until then, it's reversion to the mean hedging time!

Disclosure: Currently Long SDS (which is a short ETF of course!)

Comments

[BobTrader:]

On the price of oil, what I don't understand is if global demand for oil is consistent, maybe growing at 3% a year, how did oil hit $145, then back to $50? Makes no sense to me. I know the US was buying for the Strategic Reserve, but I can't believe that caused so much price pressure.

2008 Dec 02 11:42 AM

[Everyday Fi...:]

Many factors (not purely speculation as the politicians would have you believe), but there were certainly some great opportunities to cash in on both the upswing and downswing; same opportunities presenting themselves now. I think the biggest factor was the "peak oil" scare, which although they may be onto something, global demand is now falling for the first time in years.

To capitalize on what's going on now though:

Here's an oil credit spread post:
everydayfinance.blogsp...

A neat one to consider as well is using easy to trade futures on gasoline to hedge your personal exposure:
everydayfinance.blogsp...

You could combine the gas futures in one direction with the oil spread on the other for a neat hedge with income from spreads.

2008 Dec 03 06:31 PM