Hedging against My Portfolio with Ultrashort Basic Materials

I am going to start a position in Ultrashort Basic Material (SMN). This is essentially a bet against the whole portfolio. Each time the market sells off, the financials, retailers, homebuilders, real estate items go first... the portfolio does well.... then in due time the commodities get whacked for no good reason other than "it is their turn".... and the portfolio gets hit. Since I cannot short individual names, the best way to offer at least a little protection against the inevitable "commodities are dead" time we revisit every other week is this ETF.

I actually like most of the names in the top 10, so again, this is simply a trading/hedging technique to offset a large part of my portfolio. To be truly effective I've have to make it a large part of my portfolio but I already have quite a few other instruments of a short nature so I will probably keep it in the 0-4% range in terms of portfolio weight.

1. Monsanto 11.8%
2. Dupont 7.8%
3. Freeport-McMoran Copper & Gold 6.8%
4. Dow Chemical 6.4%
5. Alcoa 5.4%
6. Praxair 4.9%
7. Newmont Mining 3.6%
8. Air Products 3.4%
9. Nucor 3.3%
10. Mosaic 2.8%

Again, I actually like or have owned many of these names plus others in the index, but at least with some exposure I can derive some benefit on those days when the market bushwacks commodities. And if it works against me (which in some ways I hope it does), I will simply consider it portfolio insurance - that means much of the rest of my portfolio must be doing well.

Technically, the chart is near a recent low, so as I've been kidding, we are due for a "death to commodities" moment in the next few weeks, at which point these ETF should ramp up. I am going to start with a 800 share stake in the $33.70s, or a 2.0% stake. When/if the market breaks below 1350 and we start to see some of these basic material charts roll over, I'll probably double this - obviously Monsanto (MON) and Freeport (FCX) are 2 charts from the long side we can observe for signs of topping out since they make up nearly 20% of this ETF. When the market takes its pound of flesh from these names, I'll quickly reduce the exposure since these are my favorite groups.

And as oil hits $112, I can only smugly laugh at the Federal Reserve's insistence that inflation will abate in the 2nd half of 2008. Well 2.5 months to go. The "cross my fingers and hope" strategy fails again - keep printing paper money fellas, that solves everything.

Disclosure: Long Ultrashort Basic Materials in fund and personal account

Comments

[cpeterka]

Am I dense, or is this a good way to loose money?

[Great Wazoo]

Why can't you short individual stocks in your personal account?

[sinned-eel]

Why don't you just sell 1/3 of your position and then you don't need to hedge and have $$$ in your account to use later? Your hedge limits the upside of your full long position, so selling 1/3 of your long current position would do the same. You can collect interest on the extra $$$ in your account.

[Ex15:26]

The only thing that is holding up are the things you are shorting in this etf.

[Rick S.]

Mark isn't dense, he's a trader. And traders trade rather than invest. It's their nature. Yes, he's probably losing money using complicated positions rather than just exiting the market with a part of his portfolio. If he's having a good time and can afford to lose some money doing it, it's his trade-off. Trading as an investment style is a lot like a trip to Las Vegas. I won't insult your intelligence by pointing out the only people who make money there.