Preparing to Hedge with UltraShort ETFs

| About: ProShares UltraShort (SDS)
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Everyone takes a beating sometimes.

Ray Liotta's character Henry Hill in the movie 'Goodfellas'

I'm tired of taking a beating at the hands of the stock market these last few months. Although I've outperformed all indexes on a relative basis, my goal is absolute return. My gut tells me that I'm looking to hedge so the mid-January bottoms will hold here, making the last few days a successful retest. But, my mind and my models tell me otherwise.

While my most recent market outlook states that demand is in control and must be given the benefit of the doubt and that still remains the case as of the writing of this post, the NYSE Bullish Percentage is very close to signaling a reversal in favor of selling pressure. In fact, another day like Tuesday, and the reversal will have taken place. On February 28, 2008 the NYSE internals were >2:1 decliners to advancers and down volume to up volume, while the next day, decliners to advancers and down volume to up volume were >6:1. Two consecutive days such as these typically herald the beginning of 17 to 27 trading session selling stampedes. The beginnings of selling stampedes tend to take place near reversals to selling pressure being in control of the NYSE Bullish Percentage.

My models tell me that if we see the reversal to selling pressure being in control within the next few trading days, we should expect a bottom in the area between S&P 1210 and S&P 1240 sometime between the middle and end of April.

Therefore, once the seemingly imminent reversal in the NYSE Bullish Percentage takes place I will be implementing a hedge. My hedging vehicle of choice will be the UltraShort S&P500 ProShares (NYSEARCA:SDS). I plan to dedicate between 10% and 15% to the hedge leaving me 60% to 70% net long given that SDS seeks to replicate 2X the inverse performance of the S&P.

Given my net long exposure I would prefer not to make money on my hedge. But I'm afraid I will.