Buying SDS to Hedge the Downside

Tuesday was the second day that the S&P 500 closed below its 200 DMA, not by much though. I had the share amounts for an SDS purchase all sorted out and the day ended up being a will I or won't I.

In early May I bought a half position in SDS thinking the rally had mostly topped out, with a plan at the time to add more on a 5% move in either direction. Then as we got close to a 5% move up, the 200 DMA came down quickly making a purchase of more SDS at that point a little trickier.

The trade Tuesday was simply to double up on the amount of SDS purchased in early May taking most clients to somewhere near 2%. There were exceptions here and there so this should be thought of as generally speaking.

For ages I have been thinking there would be one more plunge that would scare the hell out of people and if that happens I like the idea of having a little more SDS and some cash. If we trade narrowly sideways for a while as some feel will happen then this purchase will neither help nor hinder the portfolio. If we whiz higher than the SDS and cash become a drag--a progressively small drag as the market goes up.

I considered not taking any defensive action because despite the recent increase in tech exposure the portfolio typically has gone down less on down days which is the goal after all. If the S&P 500 were to go down to 700 however I would want more protection than what I had before yesterday's trade.

Despite the little bit of heckling over my comments about this sometimes being science and sometimes being art I do think this sort of thing is more art than anything else. While discipline is important, if you have been reading this site for a while then you realize this conversation not about staying disciplined it is about trying to figure the best way through this.

All of the green shoots talk, increasing confidence among many and Hussman's belief that up to this point we have not gone through a revulsion phase leaves me less confident for the near term. However I could be wrong and by not selling everything as a defensive strategy there is no need to be exactly correct about a real recovery.

One interesting little factoid about all of this; The SPX was at 903 when I bought SDS in May for $59.45. Tuesday SPX was at 894 and I bought SDS $58.73. So in about 7 weeks the SPX dropped 1% and SDS dropped 1.2%. The levered funds draw a lot of ire, perhaps rightfully so but the result from SDS in this microcosm has been far from horrible.

Comments

[whidbey:]

Roger old boy, you are cramming everything in some undefined paradigm that works out by the fall, or a technical pattern?? The unfolding of the future is determined by a market which is scared of missing the train or being run over by the train. The market does not have to do anything until the Fed comes off the dime and says when the liquidity will be modified. When it does start the final dip will start and housing will crash to a bottom. In the meanwhile, the consumer is not spending, but saving, and without him the market is just an exercise in futility (like the last rally). Use cash until you can see a clear vector.

Jun 24 08:48 PM

[squark62:]

from a pure technical perspective, the "vector" has been pointing down for the last 8 consecutive trading days despite the apparent sideways motion of the S&P 500. sellers have been in control of the market particularly in the last hour trading. might be prudent to buy SDS on any market rallies for the next few weeks. that's if there are any market rallies.

Jun 24 09:28 PM

[TripleG:]

I'm a firm believer in using Contra ETFs (SDS). Contrary to Cramer's hatred of them, they are insurance against a downfall

Jun 25 01:27 PM

[Northstar10000:]

SDS does work period. Perfectly, no, period. Too soon to buy. Buy when SPY crosses 93. Anyone who believes there will be a side ways move or up move prior to the next plunge in an idiot. Lets scare the hell out of the long fools. Green shoots are shot.

Jun 25 08:13 PM

[Ames Tiedeman:]

This is not a classic stock pickers market. I think SDS up, and most stocks down. Today, yet again, the majority of stocks fell. Even though the NASDAQ was up on this day, the 26th of June, the majority of stocks that trade on the NASDAQ were down. The DOW closed down and most stocks on the NYSE were off for the day. I feel the next leg is down, not up. I may be wrong, but the market just doesn't feel right to me. 3 days ago it looked like we would break the 200 and 50 DMA. The S&P 500 changed direction and went up fast on June 25. I am not sure it can hold. I think SDS is a brilliant way to hedge this summer...

Jun 26 08:03 PM

[Sovestor:]

It is not that easy to conclude yet.

Jun 29 12:48 PM

[optionsgirl:]

With the federal government going full throttle and goldman,morgan stanley and credit suisse upping their program trading and etf pair trading, it is very possible these big players will drive the market higher. Then, they will push the short side and create a fall. This isn't an even playing field.


On Jun 25 08:13 PM Northstar10000 wrote:

> SDS does work period. Perfectly, no, period. Too soon to buy. Buy
> when SPY crosses 93. Anyone who believes there will be a side ways
> move or up move prior to the next plunge in an idiot. Lets scare
> the hell out of the long fools. Green shoots are shot.

Jun 29 01:35 PM

[yellowhoard:]

SPX 930 could be the right shoulder.

Jun 29 04:35 PM