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A Welcome Market Gift
Rating: 2.13 (8 votes)
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Well, maybe not so nice of a gift to Jonathon Coyle, recently quoted in the strategy lab open as saying that he wanted to recoup from his worst performing stock, the QID (Ultra short NASDAQ EFT) which he originally bought in August. He was going to do that by buying another $40,000 of the QID no later than ths Monday. So much for timing, the QID got hammered today only one day after he indicated he would buy it. The position might still turn out fine if we go into another slide, but it doesn't look nearly as good now. My reason for mentioning this is certainly not to dis Mr. Coyle. What he did was like "doubling down" in Vegas when he was down. That is often a good strategy. BUT............. why do you think a better entry point for shorting is after the market has retraced nearly all of it's gains for the year? I have been burned more by this "momentum" method than I care to remember. In other words, beware of market momentum. It can turn on a dime. That is why throwing good money after bad is often futile and lends itself to poor timing. I should know. I have done it several times during this competition and have been burned every time. As I said a little after midnight last night, the markets had shown some signs of stabilizing and many great momentum stocks were technically oversold. They were due for a bounce. If you had sold when everyone was fearful, you would have missed a golden opportunity to exit positions at a much higher level. Think if you had 300 shares of AAPL and RIMM and 50 shares of Google. You were fearful and sold all of these positions Monday after they had another frightening slide. Even if you are convinced that you need to sell them, that fear cost you thousands of dollars. If you had simply waited for the bounce today, you would have sold with about $9,269 more capital at the end of trading. I realize that these are just perfect examples and reality is somewhere in between. However, saying that short selling makes the most sense after a rocket move downward is the same as saying that excess exhuberence makes the most sense after a rocket move upward. Neither approach is likely to make you much money. You might guess right and ride the wave (up or down) but with far greater risk. Just my thoughts. Doc | ||
Comments (2)
I agree with your thesis in general. Timing the market is incredibly tough, but one could certainly use ultra short positions to decrease the volatility of the overall portfolio. If you believe that volatility equals risk this would mean higher risk adjusted return.
I certainly would agree that one should not buy short ETFs with an intent to actually increase long term returns but decreasing volatility is possible.
Posted by dishwasher | November 13, 2007 11:32 PM
I just gave you a plus 3 rating on your blog.
I actually ended up dropping the money on QID on Friday before it had retraced all gains, so the timing didn't quite bite me too hard. I am not looking for short term quick money on my trades. In fact, I have few trades compared to our SLO brethren. I have been able to get hit over 20% in the upswings of the market, and then storm back in the downswings. One Dow 300 day hurts, but it doesn't worry me. Give it another month as more info works its way through the market. I just hope the game doesn't end a month or two before the "buy and hold ultra short" strategy pays off.
Posted by Jonathan Coyle | November 14, 2007 3:43 PM