Click Chart to EnlargeThis Ultrashort ETF contains MOS, MON, POT, AGU, CF, TRA and TNH. Great news for anyone looking to short the Ag names as they reach the top of their channels. Unfortunately, this ETF tracks the inverse of the Dow Jones U.S. Basic Materials Index, so it also includes coal and steel, as well as precious metals. These are the hottest sectors right now.
Despite that, this ETF would be a great hedge against any long Ag positions. Here's the thinking: back in October, SMN was trading at around $44. Today it is 23% lower, at $34. In the meantime, MOS went up 100%, and POT went up about 50%. So why bother holding both, considering all SMN could do is eat away at your gains? The answer is found in mid January's action. From the 1st of January to the 22nd, MOS dropped about 28% and POT dropped about 26%. In that same time frame, SMN went up 50%. That's how these hedges work. They are like insurance policies. You can buy small amounts of them and forget you have them as long as you're holding your long position/s. If ever there is a raid on commodities, you'll find that your little SMN insurance policy is capable of doing more good than it ever did harm. We will be starting a small position in SMN tomorrow to allow us greater confidence in holding the Ag names this close to the top of their channels.
6 comments:
As for ag names, DBA is approaching the middle of the channel after its recent pullback. Does it look like a buy?
http://stockcharts.com/h-sc/ui?s=DBA&p=D&yr=1&mn=0&dy=0&id=p64659780512
Same question for gold and silver, since you mentioned precious metals. If one held these three names, how would you use this ETF as a hedge with them?
http://stockcharts.com/h-sc/ui?s=GLD&p=D&yr=1&mn=0&dy=0&id=p64659780512
http://stockcharts.com/h-sc/ui?s=SLV&p=D&yr=1&mn=0&dy=0&id=p64659780512
Since oil is at a peak now, what about DBC, which is half oil? Would it be best to wait for a pullback on DBC and then jump in? Do you think oil will pull back anytime soon?
DUG is up today, its second day up, if it holds, after many days down. Can energy/oil hold at current highs? How many more days of a pullback on energy would you wait for before jumping long into DUG or shorting DIG? I've already started a small position in DUG and am looking to increase it.
What's your take on VNQ? It recently bounced off the top of the BBs. It is below its 200 DMA and above its 50 DMA and just bounced off the middle of the channel today. Just normal volatility? Too open to the downside with financials reporting next week? VNQ is REITs, BTW.
(On my last message, I didn't mean that DUG was up two days in a row, but if it stays up today, that is two days in the past week after a long downtrend. IEO is at the top of the channel as is DJUSEN, XLE, etc.)
Someone else agrees with you
http://seekingalpha.com/article/71852-hedging-against-my-portfolio-with-ultrashort-basic-materials?source=side_bar_short_ideas
Snot, it seems counterproductive to me to short the same sector in which one is long. I thought you tried to go long areas of strength in an uptrend while hedging via shorting an area of perceived weakness, thus stacking the odds in your favor. Shorting the same area in which one is long should produce a wash.
Joel,
VNQ's uptrend ended in early March 07. It has been in a downtrend ever since. It will remain in a downtrend until it starts putting in higher highs and higher lows above an uptrending 200dma. Much like the market itself.
Sorry, we don't trade oil at all, seeing as how it has a mind of its own. The talk is that it is going to continue going higher, which has been the right call for over 5 years now.
The SMN hedge makes sense when you look at the relatively small percentage it moves over a longer time period (several months) vs. the stocks themselves. Then, when commodities sell off, it returns such a huge percentage relative to the percentage of the selloff in the individual names, that it is really effective to hedge your longs without taking much away while they are advancing. This is especially true if you are buying SMN as the Ag names approach the top of their channels, and selling it off as they drop. It's all just a balancing act. It's either that, or buy and hold. My great grandfather bought GM stock in 1965. He paid more for it than it's worth today. We did not chose trading, it chose us.
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