jaudio shorts

The SLO Napoleon Complex

Rating: 1.17 not yet rated(6 votes)    Vote:

You are logged in as | Logout

The short side traders in the SLO get no respect. We lack Net Asset Value, causing our "Fund Envy" to make us prone to irrational behavior. When our portfolios get ravaged by the never ending bull market, we double down in our quest to make up for our shortcomings. We want our time in the sun, and we want status. For once, the Napoleon complex may be paying off.

Through September and October, my portfolio could be compared to a farm that had been hit with drought, striking farm workers, a plague of locusts, and a field fire. At one point in time, there were several of my short ETFs that were close to a 20% loss, and some well beyond 20%. Digest that one for a moment . . . numerous -20% numbers staring back at you on the screen is nothing short of gut wrenching. Some would rather see the rivers turn to blood that stomach a 20% loss. I can only imagine the much greater feeling of disgust real traders had back in October of '29 and '87. I pale in comparison.

Nevertheless, I have held true and not bailed on the ETFs I bought for sound reasons. As with all SLO traders, had I hit at the right time, I would be in great shape. A couple weeks ago I made a case for SKF and SRS, the Ultra Short ETFs for financials and real estate. Both have been stellar since their October lows. Just one month ago SKF was sitting around $74 per share and SRS around $80 per share. Now they are sitting at $99 and $105, close to a 33% gain for SKF and 31% gain for SRS. The great thing is that these still have room to run. The market is now in the midst of ridding itself of denial about financials and real estate. It isn't that the prices are reflecting the current situation. Rather, they are reflecting what we know about the situation in the past few months. It took a while to get into the mess, and it will take a while to get out. These markets will eventually recover, but don't expect a financials and real estate rally during an economic slowdown, and yes, the economy is slowing down. SKF and SRS are risky Ultra Short ETFs, that is, when the sector goes up, they get doubly hurt since they seek to inversely double the return of their respective sector. However, if SKF and SRS get popped 2-3% (as they are accustomed to from time to time), look at it as a buying point, take your position, and ride it to the end of the game. Even if other sectors stage a small rally, the financials and real estate will be down for several months.

The best buy on the short side I am seeing right now is QID, the Ultra Short Nasdaq ETF. This is by far my worst performing holding. Even after rising 4.5% in one session, I am still down almost 20% due to my entry in August. How do I come back from a blow like that? Well, I am going to drop another $40,000 on QID.

Why?

I am insane, that's why. No really, it's a matter of acknowledging I was wrong about my first entry point and doubling down at the correct entry point. QID gained 4.5% yesterday, and I expect the short sellers to cover in order to lock in some gains, so there should be some retreat. I would like to see a 2% retreat to get back in, but if not, I will buy regardless of what happens on Monday morning.

Tech has been a bright spot in the market volatility in the past 2 months. When the DOW and S&P had rough days, the Nasdaq was not so rough. In fact, QID is one of the few short ETFs that is only a few days removed from its all time low. Back in August QID reached a high of $50 when the Nasdaq followed the DOW and S&P downward. This time the Nasdaq has remained resilient. That's contrarian speak for "short buying position". QID reached an August high of around $50, so at $36 a share now, it would be a steal. When the Nasdaq follows the other markets downward, look for QID to crack that $50 mark again and lock in a 38% gain.

Don't fear a market downturn-- bank on it. Don't sock your money away under the mattress--buy Index tracking ETFs. It may not be time to swing for the fences yet, but don't let the hanging curve get by without trying for a base hit. Opportunity seldom knocks; fear is leaning on the doorbell.