Click charts to enlargeYou may feel giddy watching the market jump nearly 900 points, but it would be crazy not to use this opportunity to hedge your longs once again. That is, assuming you're long this market at all. The above charts are our favorite ways to hedge against market downside. The chart at the top is an Ultrashort ETF of the emerging markets (EEV) and the chart below it is Ultrashort China (FXP). If you're not already familiar with them, be careful. They make the Dow's recent volatility look like a walk in the park. EEV may be the better of the two, as it moves in a slightly wider range, and is more diversified. A very small amount of either of these can effectively hedge a lot of long capital because of the percentages involved.
We added some FXP today at 114.6, and will continue to add slowly until it reaches the 80's, at which point we would start to buy it more aggressively. If we get a decent rally tomorrow and can get FXP below 100, we would add another layer there.
6 comments:
If we get a brief rally up to and following (for 30 minutes) the rate cut, after that we are back to reality. What would be a decent long position to hedge one's shorts? GLD has come down hard. Would people turn back to it? Any currencies? Or should you just buy a good fund of corporate or muni bonds for a long and otherwise short real estate and emerging mkts?
Hey Snot,
Do you think the B.D.I.'s going to .14 cents? I've watched it fall from 12,000 to 982 in 5 short months and don't know what to think. SEA trades anemically but doesn't/won't the world still need to move things around? I can't see bulk shippers being usurped by any new technology and people always need stuff right?
As always, thanks!
I'm not a fan of EEV because it doesnt trade as fluidly as FXP during premarket.
Anon, so you're looking to add a long to hedge your shorts? We're doing just the opposite... hopefully you're doing better than us, as we're just breaking even in this market.
We like hedging with Ultrashorts like FXP, EEV and SMN because when fear really kicks in, they go up a disproportionate amount relative to how much the longs positions drop. That is to say, they normally stay in a pretty small range (60-90), then when you really need them, they go up 100% as your longs drop only 20%-30%.
They make very effective hedges, and even a small amount of them can help you sleep at night.
Have you considered applying the same concept to your situation by shorting FXP to hedge your shorts?
Of course we would not recommend doing that now, but when FXP is at 180, what do you have to lose by adding a little? We've heard that finding shares to borrow is not so easy. Perhaps shorting SMN or EEV on spikes would be easier?
Pullo,
The BDI is like oil. It won't go to zero, it cannot go bankrupt, but it is very difficult to predict and your best bet is to trade with the overall trend. Oil is in a downtrend. We don't follow the BDI, but imagine it must be, too. Look at a chart of OIL. We wouldn't touch it until it at least broke its 40dma. This is the moving average that it has responded to best in its recent past. When it simultaneously broke its 40dma and its trend channel on July 17th, it had reversed trend. The 40dma will be your first indication that OIL is ready to reverse course again, with the 50dma as confirmation.
I tried to short EEV and FXP yesterday when they were around $160 but there were no shares to short. Alas. I was being sarcastic about buying longs to hedge my shorts. I'm all cash except for some gold as I await the FED and the market reaction, so I can sleep well at night when I'm all cash. Thanks as always for your interest in others' capital preservation.
I would have bought DBA today but my account was down for an hour and it ran up 4% during that time. Still may buy it, as it is way, way down and it will do its own thing rather than follow the market as a whole. It should come back, I would think.
The grocery store shelf companies seem to be doing fairly good - K, KFT, etc.
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