In this video, my goal is to walk you through my thinking on the $DZZ hedge that I initiated on Friday. Keep in mind that I am net long stocks, but I am looking to take off my $QID hedge sometime next week if technology continues to correct in time more than in price. I feel that an ultrashort gold play offers more of a “heads I win, tails I win” scenario, where if gold weakens and the U.S. Dollar bottoms out here, stocks may not necessarily roll over. That scenario would be a repeat of 2004, where correlations between asset classes became detached. As you know, 2004 is a relevant comparison to 2010 in many respects. Moreover, even if stocks fall along with gold in a “risk off” herd mentality, then my hedge will have worked as planned, in the sense that it will ease the pain of my losing longs. The only scenario where I get crushed is if gold rockets higher, but the stock market sells off. The last time we saw that happen was in the late 1970’s and early 1980’s, where a wage-price spiral led to massive inflation. Needless to say, with the current economy in a completely different spot than it was back then, I am willing to take the other side of that bet.
Regardless of what happens in this trade, the more important idea is that I believe you should consider how each trade you make fits in to the broad puzzle of your portfolio. Sure, the ultrashort gold trade individually does not make much sense, as gold is in a very strong uptrend. However, there is a little more substance to my style on this one.
Thus, you should always be taking the chess game of the market into account.
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[youtube:http://www.youtube.com/watch?v=T11GRdLH5LA 450 300]r
Interesting but this strategy involves top (and bottom) picking which is something better left to others.
At the end of the day it is still just a hedge. To broadly say “I will never, ever try to pick a top or bottom,” is to miss out on countless opportunities in the market.
Totally agree, I miss tons of opportunities but that’s ok
You are an excellent trader, I’m sure it’ll pay off and then some
Thanks.
Good thinking
Ever short the leveraged long Etfs rather than going long the leveraged short ones? Or do you not hold these hedges long enough to worry about the decay in them? Just a thought. Another great post keep em coming
Thanks, Skibbs.
I usually don’t hold them long enough to suffer from the decay. I know Goat is all over that strategy of shorting and holding them, which works well.
Chess – Great explanation of a great idea. Every new trader who tries to follow someone else’s trades should read this post and watch the video until they understand what’s going on here. I suppose it’s like someone trying to learn how to drive at speed by asking an experienced driver how much they turn the steering wheel when they go through a turn. Yeah, sometimes I touch the brakes (hedge) to go fast. It might not seem to make sense to someone who’s just watching my brake lights.
Always interesting and I love to hear an analysis of the gestalt of your positions. In a way, I’ve done the same thing based on pretty much the same reasoning by going long a number of precious metal stocks since August to ensure that my long positions in other equities were compensated for should they turn down.
In my case, it did indeed turn out to be a win win situation as the PMs keep going up and I caught the majority of the rest at the right time.
With regard to my PMs today, I’ve cut them in half waiting for a pull back as of about a week ago, but most seem to keep going up anyway.
Thanks again for the analysis.