Click chart to enlargeIf one were to hold 5 uptrending stocks (stocks trading above an uptrending moving average making new highs), and simultaneously short 5 downtrending stocks (stocks trading below a downtrending moving average making new lows), one's portfolio would likely perform well every week, regardless of overall market direction. That's what we try to accomplish with our trading. While Ag has been the preferred long and financials have been the preferred short for some time, diversification is important. No one would normally consider CROX a hedge against Ag, but long AG and short CROX was a killer combo this week, to say the least.
Of course we don't know where Blue Coat Systems (BCSI - see chart above) is headed next, but it is definitely worth keeping on a list of names to short. If it can't rally on a day when the Dow is up 200 and the Nasdaq is up 55, it is clearly out of favor. While we wouldn't dump our entire portfolio into a short position on BCSI, it is certainly a good candidate for being one of those 5 shorts that could continue to underperform the market.
Like the long positions, one could scale in and out of the short positions given their location in their channels and positions with respect to their moving averages. We've used a 50dma for BCSI because the stock responds to it.
There are many stocks in downtrends at any given time. It can't hurt to diversify between the sectors when choosing the 5 that will make up the short side of your portfolio. For example, short C (financial), CROX (retailer), BCSI (technology), would protect you from individual sector risk while maintaing your portfolio's bias of "long strength, short weakness". As with long positions, short positions should be lightened ahead of earnings reports to avoid sudden reversals of trend. We often hold some of our position through earnings if we believe in the overall "story" behind the company, and with some consideration for how overbought or oversold the stock is going into the report.
8 comments:
Snot, in the past you have said that you do not short individual stocks, but that you only use ultrashorts. While you have recommended some individual stocks to others, you claimed that you did not short individual equities. You said it was because of the kind of account you had. When you advised another poster to get a margin account so that he could play both sides of the market, could he not play both sides even before he has enough money to get a margin account by buying ultrashorts?
When you trade several times a day/week, as we do, tax time is a real burden if you trade in a taxable account. For that reason, we started trading solely in a SEP. The SEP has no tax burden, and is not limited to the +/-$5,000 yearly contribution that the Roth is.
You can trade solely in an SEP by hedging with Ultrashorts, but you miss out on a great deal of opportunities in shorting individual stocks.
We thought that with the advent of Ultrashort ETF's, we could do away with our margin account. This has turned out to be only partly true, and it has left us trading with one hand tied behind our backs.
We're in the process of opening a new account with margin priviledges. Many say that shorting is dangerous. We have no fear of it, and actually think that if you are responsible and reasonable, it is less dangerous than going long. Our only fear of the new account will be figuring out capital gains at year's end. Considering we like to layer in and out of positions with partial sales, and often face wash sale implications, tax time is no fun.
Nevertheless, a margin account is a necessary part of an overall "long strength, short weakness" trading strategy, so we are looking forward to re-entering the "dark side" of the market.
Thanks for the explanation. Could you explain what an SEP account is?
Isn't SEP a retirement account for small businesses?
I had the tax problem this year, It took me about an hour to fill up all my in-out trades.
I bought a small amount of SMN today. Hoping it goes up by the end of the week for a nice 4-5% gain. I am scared of holding it further because of its downward channel.
An SEP is a Simplified Employee Pension. It's a retirement account you can get through an employer in lieu of a pension, or self-employed people can set one up for themselves. It's tax-deferred, not tax-exempt.
We doubled our SMN today, too. Still a relatively small position. It's either that or sell the last remaining Ag shares we have, which we don't want to do.
Max out your Roth 1st...my 2 cents for the day, especially if you plan on being in a higher tax bracket later on. Snot, what settings are you using on your charts to draw your trend lines? Am I correct in saying that you are simply drawing a linear regression line and then offsetting the upper/lower range by an equidistant amount from linear regression?
Someone earlier had asked about charting software. Incredible Charts Pro is free,as is fcharts.
Definitely max out the Roth first... couldn't agree more. With Ameritrade's Strategy Desk linear regression tool, the top and bottom lines are drawn automatically. You just put in a value for the distance of the offset. They are parallel lines.
Thanks for the tips on the free software, will check it out.
Hey Darren,
Does tehincredible charts have the linier regression line that draws your trend cahnnel automatically? Etrade is pissing me off. Every time i draw my channels (by eye) they are gone the following day when i reopen the program. Very annoying..
Post a Comment