Seeking Alpha
Peter F. Way, Blockdesk (702 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
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When the market-makers [MMs] self-protecting hedges - on those at-risk positions they must take to get orders filled on ProShares (3x) leveraged Dow30 ETF (UDOW) - say there's over 3 times as much downside as upside ahead, prepare to jump. That's where they are now.

Out of its 923 market-day existence, UDOW has had the MMs hold that extreme a view only 57 times, and bad price things tend to happen to its holders subsequently. Here is a recap of the MMs price range expectations during the past 6 months, daily. The heavy dot in each vertical range line is the contemporary market price at the time of their implied forecast.

(click to enlarge)

(used with permission)

See how the upside prospect for near-term price gains gets squeezed down when prices rise faster than expectations, as they are now, and have been before (in yellow). Now there is only a 2% potential - from an instrument whose probable price change is 3 times the move in the DJIA index - or only 2/3rds of a percent in the underlier. Today's move was greater than that, and could happen again.

It did in late 2011 despite warnings similar to today's, and again in February-May of this year. Here is a longer-term picture of the past two years daily forecasts, sampled weekly.

(click to enlarge)

But so could downside moves which at their worst in UDOW have been as bad as -13% in July-August, and -16% in September. And have been persistently present at other prior times.

To us, it looks like the UDOW donut tray is being passed with a yummy treat on it; time now to put this capital to work at less risk and more promise elsewhere. Put the profit in your pocket now as a first step if you hold this ETF. That is how wealth-building gains get cumulated by active investing, and get lost in sleepy passive investing.

Source: Got UDOW Parachute? Time To Bail Out