Walking the Walk, with Rydex Positions
by David Nichols
Lately I've been outlining a strategy to try to get short at the "right time" in a mid-term downtrend; namely, on the typical bounce that follows the initial decline. If it's a real mid-term downtrend, then the coming down leg will be even meatier than the first move down from SPX 1040 to 990.
So I've been talking the talk -- and now it's time to walk the walk. The market has obliged my humble little theory by rallying furiously yesterday, also potentially forming the right shoulder of a head-and-shoulders top. So we're going to dive in on the short side as of the close today, using both the Rydex Venture Fund (RYVNX) and the Rydex Tempest Fund (RYTPX) as our chosen vehicles. (You, of course, can use whatever verhicle you want -- I just use these funds as they're liquid, leveraged, and fair, as everybody has the chance to get the exact same end-of-day NAV).
I've been monitoring a pretty good-looking sell signal generated when the VIX started popping up during that rapid cascade down from SPX 1040. I was perhaps being a little cute waiting for this bounce -- as often a falling market just won't bounce, and a trade will be missed -- but with such a strong underlying bid it seemed a good bet that a decent bounce would materialize.
So here we are, now in the previously identified short zone, and it's time to enter the fray. But suddenly going short doesn't seem so appetizing, does it?
But I'm advocating sticking to the outlined plan. It's really quite a low-risk position, as if I'm wrong -- always a strong possibility -- then we'll know it quickly. So the specific instructions are to load your chosen amount of speculative capital into the Rydex Tempest Fund (RYTPX) and the Rydex Venture Fund (RYVNX) at the close on Thursday. I would put 50% of your allotment into each of these. Ideally, we'll get higher prices into the close as we load in -- as the closer to SPX 1024 we can enter, the better. That level is our stop on this, cutting down the risk significantly.
I'm often asked what an appropriate amount of speculative capital is for these Rydex positions. The fact is only you can know that. All I can recommend is that you never, ever want to be over-exposed in any one position. It's just not worth it. For example, if you were sitting on, say, $100,000 of liquid savings that you're looking to grow and nurture, then I might suggest putting $10,000 into each fund right now. You want enough upside that the position is meaningful, but not enough that you can't sleep at night. Again, only you can know what that right amount is, and I urge you to be introspective and honest with yourself (and your spouse/partner too, for that matter.)
Also keep in mind that the urge to make "a killing" on any given trade (greed) is a bad thing, and not a recipe for long-term financial success or happiness. Another more subtle point is that if you see the market rallying and find yourself firing off a hastily written, angry e-mail about what a doofus I am, then that's just a dead-giveaway that you're playing too large.
One final note on this position: If the SPX goes up and over 1024 convincingly on Thursday, then don't load into these funds. That will throw the idea of a developing downtrend back into neutral, and we'll just stand aside at that point. If we do enter these positions, and subsequently the market goes over 1024 and holds, then we are going to buy the SPY and the QQQ to hedge these positions intraday -- ideally in equal amounts to your initial investment. (That's another reason to have plenty of capital set aside.) If the SPX stays above this 1024 level, we'll look to take off the bearish Rydex funds with a small loss and hold on to the long SPY and QQQ, looking for a quick blow-off move up towards SPX 1054. We'll then employ this same strategy again at those higher levels.
What we're counting on with this position is that the short-term advance phase will burn itself out before the important 61.8% retracement is significantly breached. It's generally a good idea to give such levels 3 points of wiggle room.
The VIX has signaled its intentions to go higher -- which should send the market lower -- and we've got to use this bounce in prices as a chance to get short and bet on the upside VIX momentum. This strategy has worked brilliantly throughout the bear market, until this rally; that is; but I'm advocating sticking with the tried-and-true game plan here, to see if this latest spark of fear catches hold.
Sentiment Dashboard
by Adam Oliensis
Note: Because my data provider has just caught up and begun distinguishing between the old VIX (now called the VXO) and the new VIX (now called the VIX) there's a small discontinuous pop in all the readings present in the Dashboard. Until there is enough real-time history on the new VIX we'll be using the VXO in the algorithms that spit out the numbers. This is a one-off "apples to oranges" change (more like Golden Delicious to Red Delicious). There may be another one, about a year away if we switch to the new VIX, but that will just be a one-day hiccough as well. These changes should make no effective difference.
SENTIMENT TANK: Drained 13 points to 28% full of negative sentiment from Tuesday's revised reading of 41%
SHORT-TERM: Hourly gauge is in an advance phase.
MID-TERM: Progressed 1 point in the decline phase to 77%, but with Confidence jumping a whopping 4 points, across the 0 line to a bullish 2.
LONG-TERM: Backed up 8 points to 40% on the decline side from a revised 48% for Tuesday. Confidence jumped 3 points, across the 0 line to a bullish 2.
BOTTOM LINE: Over the last few days I've been saying that we would have to gauge the quality of the bounce when it would come (and it would come)....and boy did it come! So far it' a one-day affair and may just be the beginning of the quarter talking. One day rarely reverses a mid-term phase, so our mid-term gauge will require some follow-through in order to roll into an advance phase. The long-term gauge is still in a decline phase on a weekly closing basis. That weekly gauge will have to rise another 15 points to take out last Friday's close and turn bullish again.
Since we have this slight funkiness with the data, let's have a look at today's normalization of the tank.
Remember that I've been saying that if buying did not come in before the tank rose above the 40% area that a more serious selloff was imminent. I think you can see what's behind that view.
Wednesday morning I suggested that Crunch Time was imminent. Well it came. And the market sank the 3-pointer at the buzzer. That was a powerful event. Problem is, it's a long "playoff series." On a one-day basis that was about as good as it gets. Now we have to see if the market wants to follow through or not. (A classic follow-through day is a rise of at least 1-2% on rising, above-average volume, preferably with a close near the daily high, and coming 4-7 days after the reversal day.)
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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