Back On D

The S&P 500 closed below its 200 DMA for second day in a row yesterday after having recently going back above the 200 DMA.

We did not buy the ProShares UltraShort SPX ETF (SDS) however, instead we bought ProShares Ultra Short Dow 30 ETF (DXD). The reasons for DXD are pretty simple. We wanted to preserve the small loss taken on the last SDS trade for anyone who would want it, we wanted everyone to own the same ETF and needed a fund with sufficient liquidity.

At times the Dow 30 will look a lot like the S&P 500 and other times not so much. If the SPX were to drop 5% I'm not sure what DXD would do but if the SPX drops 40%, which obviously would be down a lot, then I am quite confident that the Dow 30 would also drop a lot and the DXD position would provide the desired hedge.

As a reminder the desired hedge is to protect client accounts in case the market goes down a lot; philosophically, enduring down a little simply goes with the territory.

When I blogged about the recent SDS trade I noted my gut feel that things were not over and the expectation of going back on defense fairly quickly of course I wish we didn't need to take the action. While I am not certain I think if it goes back above the 200 DMA in very short order again I may give at a week before taking DXD off. While this would not guarantee avoiding another whipsaw it might help. Additionally I would rather hold onto a defensive position a little too long than have no hedge at all for too long.

In the very short term this sort of thing either turns out to be correct or not but the short term is not the objective. As I have been saying for almost six years now the goal is to avoid the full brunt of down a lot when it occurs.