Going Flat For Safety

| About: Direxion Daily (TZA)

Going into the worst of August and September we were long in precious metals in our premium service and managed portfolios. The idea was one of owning “non-correlated” assets. We viewed precious metals as rising or falling independently of the equity markets. We all know how that ended. We ignored the old saying of traders “Throwing the Baby out with the Bathwater.”

Precious metals took a dive as equities sold off and traders had to raise cash. It didn’t help that CME raised margin requirements. Bottom line, when any market is under pressure, it drags down every other market. Crude oil, base metals, cotton, corn and precious metals all were under pressure as traders and investors liquidated positions to exit the market for safety.

Go Flat for safety

We hadn’t heard the term, but knew what we wanted. We used the term “non-correlated” assets in letters to our premium subscribers to describe our reason for the heavy precious metals positions. We have since learned the term “Going Flat.”

We have now employed this practice during the worst of the markets down days, except we are not buying precious metals! We are buying “correlated assets.” Except our correlation is almost exactly reverse of the equities we own in our portfolios.

What does “Going Flat” mean? When the market is moving lower, we want to buy an asset that will move exactly opposite of the equity positions we are currently own. When our portfolio goes down in value, our correlated asset increases in price.

This has been a revelation. It is easy to freeze when the computer screen is all red. What do you do? Should you start selling? Should you ride it out and see if the market will bottom and bounce in the last hour?

Every one of us has sold out of fear, and then watched the (now departed) stock rally and close back at its opening price the same day! This is one of the fundamental truths, and challenges, of investing.

“Going Flat” takes the fear out of the trade. You are simply making a decision to remove risk from the market. Your goal is to freeze your portfolio value at present. We do this by buying a reverse ETF that rises in price as our equity positions fall in price.

It allows you to relax and watch the stock market with detachment, as you are not being injured. The difficulty is sizing. We use the TZA (Small Cap Bear 3X) ETF. All of our premium services use strict asset allocations. Five-percent of total investment per position in the long-term and 10-percent in Buy, Sell, Hold and SwingTrader. When you want to Go Flat, you have to throw this out.

This was the hardest part for me, because I believe in small relatively equal size positions for investing and trading. But we are not investing or trading, we are Going Flat. In other words, there is no appreciable risk. If the market goes down reducing our portfolio value, our correlated asset should increase by roughly the same dollar amount. If the market goes higher increasing our portfolio value, our correlated asset will decrease by roughly the same dollar amount.

How do we do this? The TZA is a three times Ultra ETF, so we need to buy a “super position” equaling one-third of our portfolio in TZA. If our present investments total $100,000, we must buy $33,333 in TZA to Go Flat and offset the changes in value of our investments.

There is minimal risk. If the market moves higher, the TZA position will lose value at roughly the same rate your portfolio is appreciating. No Gains, No losses.

That is Going Flat. I like it.

We have started recommending hedging with TZA to our premium service subscribers. We have been employing large “Super positions” to Go Flat in our managed funds to good effect. If you are fatigued from fighting the market, consider "Going Flat" when the market is moving against your portfolio.

Disclosure: I am long TZA.

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