Selling My Hedges on Today's Hard Fall

At the open today, I sold all of the double short ETF I own for clients. Actually I hit the button four minutes in.

For the first hour it looks OK, but the thought process is a little different than that. I decided over the weekend (before Asia opened on Sunday night) that I would sell SDS if there was a down open on Tuesday.

When markets go in one direction for so long with such emotion, they tend to correct back one way or another.

If the move turns out to be wrong, the sale takes me to 20-25% cash for most clients. That sort of cash position riding down more decline gives a good chance for me to continue the streak of going down less, but clearly if we plummet from here it would have been better to hold the SDS.

A common thread to action taken at points like this is that there may be discomfort with these moves. That is just how it works.

The reason I did not post this a little earlier is that I obviously cannot front run what I do for clients. The trade is long since executed and if there were any issues with it they should have arisen by now so I am able to disclose.

For long time readers, I doubt this trade is a surprise.

Comments

[BarryRobbins]

I sold about 25% of my SDS & QID shares this morning. I made pretty good money on them in just over a month.

Although financial shares are up big today, I have not sold SKF (ultra-short financials). I think the market refuses to accept that the consumer has gotten into a mountain of debt, and it will take a long time to work through this. I think it will be a long-time (i.e. 2009), before financials make a meaningful recovery.

[Seriously ?]

Nice move, definitely 36 hours of panic here and there should be some sort of uptick this week to correct.
However, I don't think the type of corrections you are looking for are going to continue through this recession ( yearish outlook ) because I frankly see no way out.
What I do see is stereotypical irrational bubble behavior, articles begging for the market to go up, a "stimulus plans" that aren't and shouldn't work, lightening quick changes in opinion on very macro-economic issues ( US consumer power, china's bubble, "subprime" , cheaper oil; what!?)
China has too far to drop and who can say what will happen if the dollar inflates at an even greater rate and something like the petrodollar disappears/gets heavily contested. I can only imagine something like this causing severe panic throughout markets.

Maybe it's time to straddle the VIX ? ( panic subsides in deep recessions/depressions )

What I keep wondering and frankly bewilders me; is why are no economists/analysts talking about peak oil or food inflation.

The rise of global population and the BRIC countries etc is very real, Oil is simply not going to get cheaper sans a global depression. The demand is rising much too fast, food and water are becoming similiar problems.

The Financial Times recently ran a small article mentioning oil demand would outstrip supply by 2013 ( peak oil ). Forget the great depression, how is the industrial age supposed to maintain it's economy without moderately priced energy ? How can the american consumer ( whom we all very recently said "drove the global economy" ) survive when they are already in debt on average and can presently barely afford gas.

My point is:
I don't think its naive to think this "recession" could quickly become a global depression. It would not require many unlikely things to occur, but only a few of the many likely things that could trigger it . ( Oil, inflating dollar, starving/thirsty populace, present day economy etc )

I am not saying armageddon is upon us, I suspect industrialized nations will start relying on nuclear power eventually, but I don't think things can be anything short of ugly for the next 5 years.

But 'till we go nuclear ( or discover a magical form of energy )
where will the energy/ food / cheap materials / consumption come from ? China is running out of these things too.

Does any economists dare contemplate that we may hit some kind of global carrying capacity limit for an industrialized fossil-fuel dependent populace ?

[Pilot Guy]

Yikes! Bring on the aliens and the second coming. It is a slow-down possibly a prelude to a recession not a Global Depression - whatever that is. Oil reserves and consumption have not changed by an order of magnitide in six months. Crops are still being harvested. Famine still reigns in Africa due to a corrupt leadership. I hope you look back in May and smile at your post.