Doc's Diamonds

Patience and avoiding greed is essential when shorting stocks

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At the present time I have multiple positions in my portfolio that are "ultrashort" ETFs. These positions seek to return double of the inverse of a stock price change. The three ETF shorts are Proshares ultrashort Nasdaq, Proshares ultrashort financials, and Proshares ultrashort gas and oil. I have built these positions based on stock moves and purchased them in a contrarian fashion. In other words, as they have gone down I have added to my positions. I built up full positions in all three ETFs.

Oil prices moderated slightly last week and the ultrashort oil and gas ETF rose to over $33 per share. I sold some of my DUG position with a gain and held onto the rest. Since then, Oil and Gas have gone back up and I have moved into a losing position. My resolve has not changed with respect to Oil and Gas prices. I expect a significant correction of something in the range of 14 - 20%. When that occurs, I will sell my position and probably not restart it again unless there is another meteor rise in Oil. However, what if Oil continues to rise and reaches rediculous levels before it decides to correct? I will likely "stay the course" and withstand the hit. If oil continues to go up in a rediculous way, I may sell out but that is very unlikely.

The NASDAQ has done very well as I have built my ultrashort position. As with oil and gas, I will exert substantial patience because I believe that there will be a turn in sentiment relatively soon. When that happens, the NASDAQ will likely drop for days or weeks before beginning to recover. Further, the summer is not a good time to be in the NASDAQ historically. I will count on that and that this rally is likely a bear market rally. If I am right, the market will correct and we might retest our March lows. I will profit from my patience. If this does not happen, then I am hoping my long positions will "cover" for a losing ultrashort.

Financials are doing much better recently, but I am confident that more bad news is on the way and financials will correct downward as well.

These ultrashort positions can be very frustrating and require courage and patience. I will report back in a week or so with my progress.

If anyone looked at my account they might have noticed that I now own POT, the very stock I said to "sell" and get out of the way of a correction. I expected a sharp selloff in agricultural commodities (especially fertilizer) and was even quoted on MSN in the strategy lab open report as being bearish at that time. However, I pointed out that it would be a good time to reenter these stocks if they corrected. At the time I posted my decision to sell all POT and MOS, POT was selling at around $215 per share. When POT corrected rapidly down back to $177, I decided to "FLIP" the trade and go back long with POT. Since that time, POT has returned to about $200 per share. When I went long I did not buy a full position but a half position. This was in case POT had further to drop. I waited for a 15 - 20% correction and jumped back in. This move has proven a very positive one and I expect similar success with my ultrashorts.

Time will tell. I will report back soon.