Why I'm Cutting Ultrashort Financial

I usually don't break out the Ultrashort moves since they are very frequent (probably 50%+) of trades as I hedge against this incredibly difficult market, but since this is significant, I am going to break it out.... and be contrary again and say, I am cutting Ultrashort Financial (SKF) to nearly 0. (keeping 5 shares)

I know the financials are the bane of the market. But here we are approaching January 2008 and March 2008 highs in the chart. In fact if I didn't know better this looks like a chart for a coal stock since early May: 55% gain since that time - it's been a good ride and a wonderful hedge - and this does not mean it cannot continue going up.

I just think this is nearly played out for this "cycle" and/or risk/reward stops being in my favor. Just following previous correction playbooks - when SKF reversed on me in the past it caused a lot of dislocation (fancy word for losses) in our portfolio. By ignoring the serial bottom callers on TV since last summer re: "time to buy financials!" we've made this our 2nd biggest winner in the fund, now approaching +$40,000 in gains (akin to nearly 4% of our entire fund performance since last August)

 

 For a short term trade only (I reserve up to about 10% of the fund for shorter term actions) I'm eying Ultra (long) Financial (UYG) - but not yet. I've cut back Ultrashort Real Estate (SRS) to about a 0.6% stake as well. I'm keeping the hedges in the parts of the market everyone loves... [Mar 19: Alt A Mortgages Beginning to Break Down; Ultrashort Financial Not as Cool as it Used to Be]

Disclosure: Long Ultrashorts mentioned in fund; no personal position

Comments

[kkin365:]

Good discussion. While I can understand the volatility in mid-March (re SKF), I cannot pinpoint the volatility now -- which, it seems to me, is influenced by many regional banks with little impact individually.

2008 Jun 27 08:56 AM

[Alan Young:]

I don't understand why you would do T/A on an ultra-short fund, which is an artificial derivative, rather than on the underlying index. If the index shows indications of being oversold, that would justify getting out of the short position, but Mark doesn't say that.

2008 Jun 27 08:48 PM

[Mike in NoLa:]

Smart man. My limit order to sell the last of my SKF's was triggered today. I had some regret that it may go up another 5-10 pts but, if a big bank gets into trouble (more properly, that their trouble becomes public), we'll have another BS rally in financials when BB bails them out. I had just taken a position in SKF when he stepped in and it took three months to make 25% on it when it should have been a gimme. Not going to give him another chance.

Looks like SMN might by a good buy. China and India are joining the slowdown.

2008 Jun 27 11:57 PM

[Ames Tiedeman:]

UYG should get a nice pop next week. Whether it is done going down is anyones guess. I doubt the financials will go into a full recover mode that has legs.

2008 Jul 13 11:12 PM