Friday, October 30, 2009

On the Topic of Money Management

I write this somewhat amused.  You see, when you post into an open forum, you immediately agree (implicitly) that you allow yourself to become a lightning rod.  Even if you don't agree to this outwardly, inwardly, it comes with the territory.

Today saw this exemplified.


Yesterday, I posed my commentary on what I saw as the state of the market.  I specifically stated

"...but this is a tell on what I am going to do today:



1) Purchase 25% positions in my LONG ETFs, such as UWM, SAA, QLD, DDM, SSO, and MVV.

2) HOLD my 100% positions in my contra ETFs, which are FXP, TWM, MZZ, SDD, QID, SDS, and DXD.



If we get a move upward today in the long ETFs, followed by another long move tomorrow, I will sell my contras and add another 25% to my long ETF positions, provided that we're moving above the previous day's trading range (e.g., buying on strength)."

Now, let's look at why I did what I did yesterday ...

In that same blog I posted a chart entitled "Strength of Various Major Indexes".  Here's the chart:



See the right most portion of the graph?  See that it's near 0?  Take a look at the previous two times we got this low ... what happened?   Do you think it's prudent to at least consider some long positions?  The correct answer is "Yes, it is prudent".

So I did.  And I purchased 25% positions in the following:

INSU, UWM, SAA, QLD, DDM, SSO, MVV, UYM, UYG, DIG, & HRS.

Note that I was already holding 100% positions in the following contra ETFs:

TWM, SDD, QID, DXD, SDS, MZZ, SMN, SKF, & DUG

as well as core (100% positions) in UWM, QLD, DDM, and SSO.

If we ignore the core positions (since they're up a bazillion and form part of a different strategy), it should be obvious that I'm:

  1. trading pairs of ETFs
  2. have a 4:1 bias to the downside
I listed the ETFs in orders of the pairs of the long side / short side.  Making it easy for you:

  • UWM/TWM
  • SAA/SDD
  • QLD/QID
  • DDM/DXD
  • SSO/SDS
  • MVV/MZZ
  • UYM/SMN
  • UYG/SKF
  • DIG/DUG
Why 25% positions?  Why not 100%?  Because the trend is your friend, and prior to yesterday, the trend was DOWN. ***BUT***, I had a chart that indicated we were certainly within buying range, so I bought the long side of the list above by about 10:15 a.m.

Futures were up, and the markets roared yesterday.   I stated in a NoVA VectorVest forum posting at 2:51PM on 10/29:

"Is today window dressing by the hedge funds to maximize value in face of redemption requests that have to be tendered this month (tomorrow) to be effective by the end of the year?  Possibly.  [I had] the talking heads on CNBC all day and haven't heard one mention of this, increasing the probability of a down draft."


We'll never know the answer to this question but in our rear-view mirror analysis from today (Friday's action), it certainly appears that this is EXACTLY the case.  Again, we'll never know.


Every position made money by the close.  NOW WHAT?


I let the positions ride over night.  This morning (Friday, 10/30), I checked futures -- all seriously heading south.  Every ETF and stock was up that I had purchased on Thursday, so I set 1 ATR as a trailing stop loss (TSL) on each of the positions purchased Thursday, and 2 ATR TSLs on the contra positions that I was holding.  I set the period for each of these TSLs to "DAY", rather than "GTC".


Not one of the long positions triggered at the open ... the EXACT desired purpose of using an ATR TSL.  No question the day was ugly ... every single one of my new long ETF positions was underwater by 11:00 -- not good.  By 12:48 the TSLs began to fire, and by 2:55 PM I was out of my long ETFs.


Did I lose money?  NO.  Here's why:


The long positions were a 1:4 hedge against contra positions, and for every $1 drop of the long, I made roughly $4 on the contra side.  If you separate the transactions, yes, the longs lost money.  The worse transaction lost about 2% ... of a 25% position.  So if you invested $10,000 per position for 100%, then $2,500, would be 25%, and 2% of this is ... $50.  50/10,000 is 0.5% total loss per position.


So, I was wrong, but only about the market direction.  Because I was hedging, I could have gone either way independent of market conditions.


Let's take this the other direction ... what would I have done had the market gone up?


Per my original quote above:



"If we get a move upward today in the long ETFs, followed by another long move tomorrow, I will sell my contras and add another 25% to my long ETF positions, provided that we're moving above the previous day's trading range (e.g., buying on strength)."

==============

Please, all, understand what I did.  This is not posted to say that this is "THE WAY", but it is "A WAY" on how to play this market.  Please don't be critical that I moved into longs and that the market went down -- that scenario was FULLY baked in to the money management that I chose.
 
I welcome your comments below.

As always, thanks for the dialog.

Regards,

pgd