Careful shorts, don’t press your luck.
6 Oct 2008 6: 20 am | Filed under: bear markets, crash, short selling, technicalsThis sell-off is nearly overextended. Sure, the odds of a real crash are as high now as they will ever be (markets crash from oversold), but all the same, those are extremely rare events. Bear markets of this magnitude last for years, and there will be lots more rallies to short on the way down. Be prepared for one heck of a dead cat bounce when this panic subsides. The Ministry of Truth is full of fools and knaves bearing advice about averaging down, and there are still lots of buy-and-holders out there whom the market hasn’t sufficiently demoralized.
I started to close out my near-term puts last week, and hope to take care of a bunch more in the coming days. There is nothing wrong with cash. It gives you ammo to do this all over again. And if you don’t want to abandon shorting/hedging altogether, consider switching to long-term puts, like SPY Dec 2010s. They will go down less in a bounce.
That said, I have never seen a more powerful decline than this one, and it could easily take us below 9000 on the Dow by Christmas. It is just that there is no need to swing for the fences when this game lasts your whole life.
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Dima
October 6th, 2008 at 10:40 am
There will probably be some government action to ’cause’ a bounce too.
btw canadian energy trusts were down 20% in the morning, wow
Brian
October 6th, 2008 at 2:10 pm
Thanks for the crappy advice dude. I was ready to pull the trigger on a broad mix of ETF shorts, and then you and my friend conspired to convince me that I shouldn’t get too fired up. So here I am watching the freaking markets blow up from the sidelines. We wil NEVER see a day like this again. NEVER. If I have kids, I’ll be able to tell them the story of how dad saw the depression coming years beforehand - and then the day it hit the fan, he was nowhere to be found. You owe me a big freaking beer…BIG…like 64oz of some ridiculously expensive microbrew…and hot wings too…at least two dozen…and the drumstick part too, not the crappy bony part.
Seriously bummed out Brian
Mike
October 6th, 2008 at 3:39 pm
Dude, you have to short the rallies and cover in the plunges if you want to make bank.
You’re telling me you didn’t think about shorting until today? Guess you just found this blog.
Brian
October 6th, 2008 at 4:02 pm
Well, I’ve had a little time to mull it over (lubricated by a gin and tonic), so I’m a bit more relaxed than when I originally posted. And of course my original post was somewhat tongue in cheek. How many people get pissed off and demand compensation in beer and chicken wings, for God’s sake?
Obviously, whatever trading decisions are my responsibility. However, I had a series of orders placed for short ETFs (SKF, DXD, QID, DUG, etc) this morning before the market opened and then I made the mistake of calling my friend on the phone. He hemmed and hawed and suggested that placing buy orders for these inverse ETFs pre-market was a bad idea - expecting as we both did a down day. My position was that the day would probably see a significant drop and that if the orders filled soon enough after the bell, I wouldn’t miss much. However, it did plant the seed of doubt, and then I read your post here and thought - well maybe I would be better off to be patient.
I don’t claim to be an expert by any means. However, I have been buying and selling these inverse ETFs for about two months now (as well as a few other things as I deem appropriate). I agree with what you are saying in terms of broad timing - buying on the decline is not the ideal strategy. Indeed it was my intention to buy on Friday. But Friday was a surprise in and of itself! I was frankly astonished that the market ended down, and I was therefore quite sure we would see a significant decline today. I mean to say, what possible good news could they possibly come out with after Congress pulled the super-stupendous fix-it-all bailout out of its hat? Maybe free blow-jobs for everyone who doesn’t empty their bank account?
Honestly, I like the blog and agree with your philosophy. I do think this particular article was ill-timed though. The advice is sound, but today - with every market in the world tanking before the US markets opened, there wasn’t much doubt in terms of direction. The open question was magnitude of the move. And boy, did it move.
I wasn’t completely out. It’s more a question of breadth of exposure. If I’d stuck with my original conception, I would’ve had three times the volume of inverse ETFs I did have today.
Best regards,
Not so bummed Brian