Using a short ETF

[LOL!]

I am going to put my money where my mouth is and to prove it to you, I am going to publicly announce a move that I will make later this week. Since I don't think there can be any good news for stocks in the next few weeks (the current administration has shot its wad and the next administration doesn't mount the problem until late in January), I am going to look at the short side of the market.

I will be purchasing some kind of short ETF such as SDS (ProShares UltraShort S&P500) if the market goes up by 1.5% or more on any given day this week. The average daily volume on SDS is huge, so I imagine that traders are ping-ponging between a short fund like SDS and a long fund like SSO or SPY.

So ... anybody here used these shorting ETFs? Any caveats that I should worry about except losing money? I will avoid owning shares on record date for distributions. Thanks!

 

[dex]

There are ETFs that double and tripple short various indexes or industries.
I guess you could also sell short the normal ETF.

Although this is an unusual year - you might want to look at historical pricing to see what has happened. All the dividends, cap gains/losses done at this time of year could have an affect.

I'm guessing it will be a quiet period - many people on vacation.

With the swings in the market 1.5% isn't too high - also look at the russell 2000 it has been stronger than the S&P lately a sign of strength?

 

[LOL!]

SDS is a S&P500 2x short with reported average trading volume of about 31 million shares a share (SPY, the S&P500 ETF avg vol is about 290 million). SDS is in the top 10 as far as trading vol for domestic index ETFs goes.

TWM is a Russell2000 2x short with avg vol of about 8 million (IWM vol is 98 million).

Both of these look suitable for my purposes.

 

[haha]

SDS is a S&P500 2x short with reported average trading volume of about 31 million shares a share (SPY, the S&P500 ETF avg vol is about 290 million). SDS is in the top 10 as far as trading vol for domestic index ETFs goes.

TWM is a Russell2000 2x short with avg vol of about 8 million (IWM vol is 98 million).

Both of these look suitable for my purposes.

Good luck friend. It may work.

However, this is an historically good time of year to be long, particularly after big down years.

You deserve congratulations for maintaining your gambling keenness.

Ha

 

[Gardnr]

I'll admit that I do feel as if the market's recent run up has it feeling as if we are due for a bit of pull back. But at the same time it's also quite possible that these levels won't ever be seen again. For me there's too much risk that the latter could be the case for me to play the short side, though it is tempting.

Of course there are those out there that believe we'll see S&P 600. If they're right you'll make a mint. I just can't make that bet.

Good luck

 

[RonBoyd]

Any caveats that I should worry about except losing money? I will avoid owning shares on record date for distributions. Thanks!

Other than losing money? Hmmmm. Anyway, this short article doesn't really bring much to the table but it does point out that:

"In rough markets, the ability to go short or long either 200% or 300% of an index’s daily value can prove to be a useful trading tool. But these types of funds should be used with caution, as with any investment, since they amplify market movements. In these times of higher volatility, that means big swings one way or the other than can catch an investor off guard if they aren’t paying attention."
(Also check the link in the quote.)

Not exactly something you don't know... merely a reminder that Dragons live there.

 

[ziggy29]

"In rough markets, the ability to go short or long either 200% or 300% of an index’s daily value can prove to be a useful trading tool. But these types of funds should be used with caution, as with any investment, since they amplify market movements. In these times of higher volatility, that means big swings one way or the other than can catch an investor off guard if they aren’t paying attention."

This is why I don't like these funds and I think they should be banned by the SEC.

I just think it makes it way too easy to make concentrated bets on momentum, helping to produce wild swings in the market which undermine investor and consumer confidence -- both on the upside AND the downside. Constant bubbles and crashes aren't doing the overall economy or market sentiment any favors.

 

[clifp]

"In rough markets, the ability to go short or long either 200% or 300% of an index’s daily value can prove to be a useful trading tool. But these types of funds should be used with caution, as with any investment, since they amplify market movements. In these times of higher volatility, that means big swings one way or the other than can catch an investor off guard if they aren’t paying attention."
(Also check the link in the quote.)

Not exactly something you don't know... merely a reminder that Dragons live there.

I see this type of "warning" on lots of article discussing some volatile investment and I always scratch my head by what good does paying attention do.

In market where 5% intraday swings are common and even 10% happen how does paying attention really help? Assuming I want to use an ultrashort fund to hedge a long position rather than engage in day trading, what I am suppose to do even with my eyes glued to a Bloomberg terminal if the market goes up 10% over a day or two? If I put in stop loss orders I am going to be wipesawed in out of the position constantly. I guess we are just suppose to be able to sense the difference between real trends and short term noise.

 

[LOL!]

I don't know or care about hedging. I want to use my sense of the news (or lack thereof) to make actionable decisions that have a time frame of 2 days or less. I intend to hold cash overnight with this trading and not invest for the long term at all.

I noticed this a.m. about 4 different articles which had headlines or text which stated something like, "Investors hope no news is good news." I just had to laugh at that given my other thread I started on this forum. No news is bad news. I have noticed that it take good news to make things go up. In the presence of bad news or the absence of good news, things will go down. It really is that simple.

And did anybody catch the return of TWM and SDS today? Sweet.

 

[RonBoyd]

I always scratch my head by what good does paying attention do.

Yeah, it is silly, ain't it?... like telling your guests to "drive carefully" when they are leaving. Anyway, I am just saying...

Like Gandalf said: "Always include the Dragon in your plans, if you live near one." (At least that's who I believe said that. If not, he should have.)

 

[dex]

I don't know or care about hedging. I want to use my sense of the news (or lack thereof) to make actionable decisions that have a time frame of 2 days or less. I intend to hold cash overnight with this trading and not invest for the long term at all.

I noticed this a.m. about 4 different articles which had headlines or text which stated something like, "Investors hope no news is good news." I just had to laugh at that given my other thread I started on this forum. No news is bad news. I have noticed that it take good news to make things go up. In the presence of bad news or the absence of good news, things will go down. It really is that simple.

And did anybody catch the return of TWM and SDS today? Sweet.

I think there is another aspect to this thought - it is how the market perceives the news - good, bad or null.

Sometimes bad news = down market - more to come - the roach theory
Sometimes bad news = up market - it is all on the table - things get better from here theory

 

[RonBoyd]

On second thought, maybe there is something to this line of thinking:

Investing in Inverse ETFs

"After all, exchange traded funds that profit from market downside topped all the ETF rankings in 2008... all signs point to renewed momentum for inverse ETFs continuing well into 2009."

"Bears are so dominant right now that playing downside ETFs almost seems like shooting fish in a barrel."

 

[ziggy29]

"After all, exchange traded funds that profit from market downside topped all the ETF rankings in 2008... all signs point to renewed momentum for inverse ETFs continuing well into 2009."

Yes, but at some point, momentum players get burned.

Think tech stocks in March 2000 and commodities this July.

Frankly, I think the proliferation of easy-access financial instruments in almost everything have made it way too easy to form bubbles in financial markets, and I don't think that's healthy -- on the upside or the downside.

 

[LOL!]

Update: market did not pop by 1.5% on any day or hour this week so far, so I have not placed any orders yet.

 

[DragoMuseveni]

Here is another article on short sector ETFs. I skimmed it last night and it was interesting. The article points out that alot of the super short sector ETFs aren't up as much as you think the would be. Don't know how well it applies to an ETF that shorts the Dow or S&P.

Why Short Sector ETFs Aren't So Smart | ETF | Financial Articles & Investing News | TheStreet.com

 

[LOL!]

Thanks for the link. From the article:

And the irony of it all is that these funds, due to their structure, actually contribute to the volatility, thus directly contribute to their own failure as instruments for anything other than a day trade.

I was writing about day-trading, but this also explains why their volume is so high. It appears that no one holds these things overnight.

... more from the article:

But if you would have just been short the two-times long Ultra Real Estate instead of long the two-times-short UltraShort Real Estate since the beginning of the year, you'd have three times as much capital in your account right now.

So it appears that I should just sell-short ETFs rather than buy short ETFs. This is easy to do in my margin account, so maybe that's a different solution. Sorry ziggy29, but you gotta do what you gotta do.

 

[ziggy29]

So it appears that I should just sell-short ETFs rather than buy short ETFs. This is easy to do in my margin account, so maybe that's a different solution. Sorry ziggy29, but you gotta do what you gotta do.

As long as they are legal I don't blame you. But I think they are market WMDs and should be banned.

 

[TheSweetLife]

SDS

I purchased SDS in August 2008 and got out on 10 October 2008. I made approximately 30% on my investment; so I was happy. Planning to do this again in the very near future.

 

[LOL!]

Well, this has not worked out like I expected it to. Since the market didn't pop enough for short Christmas week, but instead fell, I was compelled to go long and buy VTI. I sold VTI this afternoon after a very nice gain.

Some of the drop was due to payout of the dividend which buy-and-hold investors received, so the nice gain is not as good as it appears.

I do have some other things that I'd like to sell, but I also want the recent dividends to become qualified, so I have that pesky holding period to deal with.

Good luck to all!