First, a bookkeeping note - the 50% of position stop out at $112 on Potash (POT) we mentioned premarket as a limit order hit this morning, so our position size is cut in half with a $5 gain on a 1% allocation. Content to hold the other half and add to it if the stock falls near support. Likewise if after that purchase the stock falls below support, we'll exit most (if not all) of the position.
I am adding two new hedging positions - there are neither long nor short but I am going to put them under the short banner when we do our weekly summary just because they only seem to increase when the market drops. Both of these are going to replace what we were using as portfolio insurance... that is, attempting to short this market. We had been using out of the money puts quite a few months out, and the past 3 attempts have had our heads handed to us. In a sideways market, or one which is not up 9 MONTHS in a row, these hedging techniques work. This is not a normal market, so we'll adjust for now.
First, everyone hates the dollar and for good reason. But it is so crowded, we can have a synthetic short on the market by going long the dollar. Let me be clear - for many years the market went up AS the dollar went up... only recently has this ridiculous inverse correlation dominated.
Second, volatility has come in a lot as people now assume the market can only go up. So this gives us a chance to go long volatility as a hedge. Hence both being long the dollar and volatility assume that at some point the market becomes more volatile while the dollar bounces. If we are wrong the pain won't be so intense as trying to short the Ben Bernanke supported stock market.
We are putting on 2 positions
- iPath S&P 500 VIX Short Term Futures (VXX) - 3% allocation [shorter term trade]
- March 22 Calls on Powershares DB US Dollar Bullish (UUP) - 1.5% allocation [longer term trade]
On first glance the VXX seems to be a flawed instrument as it is not replicating the performance of the VIX (volatility) index well at all, but it is a short term trade for us. I might replace it with VXN ETF for a longer term trade in the future.
As for the dollar, well you know the story there... all the world is against the dollar. Due to Investopedia.com rules I can only buy things that have a good amount of volume; in a real world situation I would be buying Jun 2010 23 calls... but since the March 22 calls are what had volume today that's what I have to go with. I will keep this one in the portfolio as a short although its technically a long... now the US dollar moves relatively slow even when it falls week after week so the type of insurance this will provide is if there is any sort of panic moment between now and March 2010 the premium should expand quite quickly (and in options the premium is the price). And if we're wrong and the dollar just continues to fall for another 60-90 days straight in a row our losses should be less painful than shorting the S&P 500.
Long all names mentioned in fund; no personal position