Monday, April 20, 2009

Ticker correction.

In an earlier post, I mentioned shorting the Dow, and I accidentally mentioned shorting DXD. It should have read "shorting DDM." DXD is the ultra short fund, and DDM is the ultra long fund. We of course want to short the ultra-long fund!

I'm still watching the Dow vs. the S&P, and it may indeed be better to short the S&P 500 (by shorting SSO) than shorting the Dow anyway.

Remember, I feel it is much better to short these ultra long funds than it is to buy one of the ultra short funds. Volatility eats away at these funds, and we're in an extrememly volatile environment. An extreme example of this would be the 3X financial sector funds. FAZ is a 3x ultra short. FAS is a 3x ultra long. You'd think that if you want to short the market, you can either buy FAZ (since it is an ultra short) or short FAS. They should do the same thing. And indeed, if you look at a five-day chart comparing both, you'll see that they are pretty close to being a mirrior image of each other.

But if you pull back and look at a six month chart of both of these funds, you'll see that they've both crashed! The ultra long fund is down 61%, as you'd expect. But the ultra short fund is down even more at -90%! Imagine correctly predicting the collapse of the financial system, levering up 3:1 because you're so sure you're right, and then losing 95% of your wealth. I'd rather be short the long index than long the short. They are not the same thing.

This is why I've advocated putting your play money into shorting FAS rather than buying FAZ.

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