Why I Increased My Double Shorts

When he's not clothing the naked natives of Bantu Besh with the pygmy pullover, Jay Peterman might be taking defensive action in his portfolio.

But in case he isn't, I am. I increased the double short ETF yesterday with about 83 seconds left in the trading session. The trade added 30% to the existing position.

I am convinced that the market has started to turn down into a bear. One thing is clear: the action thus far in the market has been a rolling over. The variable of course is whether this really is the start of a bear or just a run-of-the-mill dip.

I've spelled out my logic before; inverted curves lead to recessions most of the time, the decline in the dollar is a sign of something being wrong, the mortgage/liquidity/credit crunch is a big bad event with serious repercussions, the market being below its 200 DMA is something that I view as a signal that demand for stocks is weak, and, if this has been a cyclical bull, it has been very long by historical standards.

If this thinking turns out to be correct then the decline will take several months, and it will make sense to look progressively less like the index.

Over the last few months I have made a few tweaks in this direction, and blogged about them as I went, which have created the desired effect of pulling away from the benchmark.

If this thinking turns out to be wrong and the market rockets higher, I would expect to lag but still participate. Given where I am now, I don't view this as a real problem. Every time I disclose this sort of action I always say that lagging a huge move up is not a problem, but missing one is which is why I move in such small steps.

Editor's note: See full list of Inverse (Short) Market Cap ETFs

Comments

[jswede:]

your signs of recession - a contratrian view:

1) what's the old adage? Inverted curves have predicted 11 of the last 4 recessions? (wait - we just came out of another one last year - make that 12 of last 4!) This curve has to do with a flight to quality due to extraneous events, the magnitude and effects of, not yet fully understood - USTs is where the market puts their cash in times like these. 1998 LTCM/Asia created the same reaction, and was NOT followed by a recession

2) The decline in the dollar started with a correction from an overvalued greenback as US rates were cut to 1%, continued as Europe's economy began to wake, then further as the 800lb gorilla (BRIC) could no longer be ignored. It's a global rebalancing of investments - the dollar was too high, now it's way too low: of late, exacerbated by sub-prime (a headline risk in macroview), and ubiquitous talk of the US's borrowing "problem", and sovoreign funds discussing "better options" for reserves. Sooner before later, the dollar will gain footing, and come back -- not to the $.80/Euro extreme, but somewhere in between, and stable. You see, there are very limited "better options".
(The dollar as the world's currency is not going away - there's no more stable (better) place in the world to do business, therefore no better (stable) currency - this is a big swing, may even happen again after this correction, but the dollar will be the world's currency until another nation with the same size, imprint, infrastructure for business/banking, and so on, becomes as, or more, FREE. It's a joke to even speak of socialist Europe as more business friendly, more stable, and freer than the US. All other currencies are WAY down on the list and can't be taken seriously.)

3) The sub-prime and very temporary liquidity problems are in a macroview, small problems. This has turned some home"owners" upsidedown and will end HELOCs for the smallfrys, but it's not - in a macroview of the economy - a big problem. Funds lost money due to forced selling into illiquid markets, yes, and some lending operations that should never have been there to begin with went away, but this is not economy shattering - this is a small bubble deflation in terms of the US economy. Credit "crunch"? There is credit available ot most anyone who wants it - it's just repriced and the lender wants SOME collateral. At first credit repriced violently, but has since stabilized and now just represents a more sane pricing of risk/reward. Further, these huge PAPER losses being reported by banks and, for example, insurers - that are scaring us all to pieces - will in 6-18 mos (perhaps longer) look like dot.com overestimations - most all of this paper is still money good, but has been marked to ridiculous levels. (Citadel etc for example - sitting on cash, bottomfishing - will have returns unheard of over the next 1-3yrs as these assets are more rationally repriced)

4) 200 DMA behaves like this as markets are sorting out and getting their arms around issues like this - you know, the ones that are crammed down our throat everyday from so many outlets.

These issues have resulted in opportunity to buy some of the greatest companies, and growth potential on the CHEAP - (as well as, admittedly, some isolated pain here and there for some) - not a bear market.

Just my view - much respect and happy holidays - jswede.

2007 Nov 24 01:55 PM

[Roger Nusbaum:]

all things considered I would prefer it if you turn out to be correct;->

2007 Nov 26 03:30 PM

[NoFate:]

jswede - Here is a good argument for recession:
www.hussmanfunds.com/w...

Personally, I think we will end up with a slow-growth stagflation or a deep deep recession (maybe depression), but not sure which yet. Partly depends on the Fed, but their decisions typically have a 6-9 month lag time.

2007 Nov 25 12:59 AM