The Short Case for Shorting Somthing…
August 8, 2008
There has always been a stigma attached to shorting stocks with the average investor, as if betting a company will fail rather than succeed isn’t the American way. Maybe it was because of how short sellers got vilified in the media, or because the cost of shorting was just too much or too risky, as a lot of people don’t want to deal with a margin account or options. However, these days there are so many cheap ways to get short exposure through ETF’s that it would be a shame to not consider shorting something. Whether you just want to protect some downside movement on your overall portfolio with index short ETF’s, or believe the bubble is popping in energy and want to take advantage of some of that downside movement with a commodity short ETF. Better yet, if you feel like oil prices have peaked and oil services companies have a lot of downside, you could pick up some DUG which looks like it’s breaking out of a nice round bottom with a lot of room for upside.
Think about it like this – there’s always a down-trend or a bear market in something – right now it’s commodities, the first half of the year it was…well pretty much anything except commodities – if you only play one side of the market you are missing out on a lot of potential gains. We are in a bear market, and there are plenty of opportunities to benefit in this environment. If you believe the bottom is in and it’s straight up from here and the worst is behind us, well I guess this doesn’t apply to you – but if you think there is more downside risk and want to sleep soundly at night, then why not short something?
Here is a list of some liquid ultra-short ETF’s for your consideration.
DXD UltraShort Dow30
SKF UltraShort Financials
DUG UltraShort Oil & Gas
QID Ultrashort QQQ (Nasdaq)
SDS UltraShort S&P500
TWM UltraShort Russell 2000
FXP UltraShort FTSE/Xinhua China 25
EEV UltraShort MSCI Emerging Markets
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Technical Analysis = Mumbo Jumbo?
August 5, 2008
Technical Analysis = Mumbo Jumbo?
The average investor believes any sort of technical analysis is a waste of time, and it usually gets lumped together with astrology or clairvoyance. A fundamentalist thinks that one should analyze any investment and come up with a fair value, and eventually the market will realize reflect this fair value and the astute investor will be rewarded. He or she would need to consider past and future revenue/income/cash-flow and growth, management ability, the current and expected future economic environment, risk premium, and a whole host of other factors. A technician, on the other hand, basically only considers 3 factors – price, volume, and time. While most people think that technical analysis is akin to trying to predict the future, at the end of the day fundamental and technical analysis are both using the same mechanisms to try and achieve the same result – using past data to come up with a probability of a future event occurring.
I will admit, I used to only consider fundamentals for my investment strategy – I was brought up on the “religion” of long-term buy and hold, diversification, buying great companies and holding for the long haul, dollar cost averaging, etc. Then someone turned me onto technical analysis and I felt like a light bulb turned on in my head. Don’t get me wrong, I had looked at charts before but I might as well have been using the phases of the moon to time my trade entries and exits. Most people think that TA is only for “traders” or those with a short term time horizon. However, I found that if nothing else, not using TA is like trying to complete a puzzle that has half the pieces missing. If you only consider the Balance Sheet, Income Statement, expected earnings, etc. and ignore what the market is believes the investment is worth, you are basically just gambling. Now I try and take into account all the information the market provides me, including fundamental and technical data, as well as market sentiment.
Think about it like this – suppose you were considering buying Crox early in 2008 because you feel the stock had been unfairly beaten down and was starting to look cheap – in other words you crunched the numbers and you felt it was trading well under fair value and there was a lot of cushion if you were wrong – now suppose you ignored any sort of technical analysis and just started dollar cost averaging –where would you be?
Now, obviously I have cherry picked an example for effect – but consider two things: 1) what if you built in a stop loss – that is what if you said “if the trade goes against me x% I will get out and consider that I was wrong and look for a better entry.” Yes, you would have had a small loss, but the opportunity cost of not getting out was far greater; 2) what if you looked at a chart and used one of the most simple trend following methods – that is you would only buy if the stock made a higher high, that is a closing price that was higher than in December of 2007. Now, you might have missed out on a few points if that were to happen, but obviously in this case you would have saved a whole lot of money.
I’m not trying to “convert” anyone or convince you that technical analysis is the holy grail, and it’s not for everyone, but I think there is a misconception about TA because of how it has been treated in the media, academia, and because value investors like Warren Buffett grab most of the headlines. My point is - just keep an open mind. There are an enormous amount of resources out there to help make you a better investor, why not consider all the information out there such as sentiment, fundamentals, and technicals? Don’t knock what you don’t understand…
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The Myth of Buy Low Sell High
August 4, 2008
There is one constant in the trading world that you hear over and over again like a broken record. Buy Low Sell High. It is treated as trading law and if you don’t follow it you are bound to lose. We are not saying this is completely wrong because if you do find a good low entry to buy in and then turn around and sell it at a high, you made a good trade. However in a Bearish market especially as bad as the one we are in, trying to Buy Low based on the theory that it is at a near term low or close to it’s 52 week low could lead to further losses. How many times have you heard “It can’t go any lower, it’s bound to turn around” Based on this logic you might as well just mail a check to your broker to re-fund your trading account. We advocate looking for the strongest 2-3 stocks in any given sector that have been able to thrive in this down market and buy on pullbacks. These stocks are strong for a reason and show the strength of the company as opposed to looking for the cheap and easy buck on the bargain basement stock that hasn’t reported Positive Earnings in 6 quarters.
Do not look for stocks that have been beaten down continuously and pray thats the bottom. Look for strength or weakness and buy the Put or Call accordingly.
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Cash is a position
July 29, 2008
We put picks out every week and do the best we can to make them successful ones, however this is a market that no one has seen since the 80’s as far as the volatility and constant double digit percentage moves day in and day out. Just this week we have seen 250 points down on Monday only for it to rebound almost 300 on Tuesday. Something to consider is taking profits early or remaining in a cash position waiting for the storm to subside a little bit. In an options market like this, if you wait to try and squeek out an extra 50 cents on the contract you could be looking at risking your entire Premium. We preach sound Money Management and there is no better time to observe this. Capital preservation is the key to staying alive to trade another day. Inside the mind of an analyst at www.hptrades.com
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Recent Posts
- Market Commentary - 8.17.2008
- Market Commentary - 8.10.2008
- The Short Case for Shorting Somthing…
- Technical Analysis = Mumbo Jumbo?
- The Myth of Buy Low Sell High
- Market Commentary - 8.03.2008
- Cash is a position
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