As investors chant about an upside breakout based on Tuesday's strong price action
and eBay's strong earnings report after the close, I remain content to bide my time
here, as the sentiment figures simply don't support a prolonged up move here. The
CBOE Volatility Index (VIX) dropped to 23.51 Tuesday, its lowest level since last
May. The CBOE Nasdaq Volatility Index (VXN) plunged to new lows yet again also,
finishing at 33.65. Certainly this rally could continue day-to-day and volatility
could keep plunging. But the odds over the 2-3 month time horizon still favor the
bearish case, as the longer-term 20-month moving averages on the Dow (currently 9019)
and Nasdaq Composite (currently 1537) remain as overhead resistance and continue to
suggest a bearish long-term trend until we see two straight monthly closes through
these resistance levels.
In the meantime, I am a bear but not blindly so. I still maintain a two-thirds cash
position in my Ultimate Fund portfolio, and will be looking to add to my bearish
position once I see further evidence that the short-term strength is ending. So today
I begin a series geared to examining which bear tools are best to capitalize on the
next bear move after this short-term strength fades.
Here is a chart on the best performing bear funds from 2002, and how they are faring
in 2003:
David Tice's Prudent Bear Fund (BEARX) has thus far been the clear winner in both
upside appreciation last year and reduced downside risk to date in 2003. Prudent
Bear looks to take not only short positions in what Tice believes are overpriced
stocks, but it also can purchase put options to profit from downside moves (more on
Puts as a bear tool in Friday's update). Prudent Bear can also buy stocks, and Tice's
preference has been towards the precious metals stocks which help drive the strong
showing in 2002 and gives diversification compared to the remaining bear funds, which
are geared to move more clearly inverse to market benchmarks.
RYDEX Dynamic Venture 100 (RYVNX) is targeted to move 2-to-1 inversely to the Nasdaq
100 Index, as is the ProFunds UltraShort OTC (USPIX). You can see that their returns
the past two years have been very comparable, with a slight edge to the RYDEX fund.
ProFunds UltraBear (URPIX) and RYDEX Dynamic Tempest 500 (RYTPX) are targeted to move
2-to-1inversely to the S&P 500, and here the ProFunds choice has had the slightest of
edges. One advantage for those using the RYDEX Dynamic family is the ability to buy
four Dynamic funds (in addition to Venture and Tempest, RYDEX offers Titan and
Velocity bull funds leveraged 2-to-1 on the S&P 500 and Nasdaq 100, respectively) at
a morning pricing at 10:30 AM if orders are entered in advance of that time. Potomac
also offers an OTC/Short fund that moves inversely 1-to-1 with the Nasdaq 100.
How do these funds have the ability to move inversely to the markets? Using short
sales of the futures markets, plus in some cases put options, these funds can create
this bearish exposure. One of the areas to watch is how well the funds are tracking
their intended goal, as the 2-to-1 leverage for example is a target but is not
guaranteed. Any difference is known as tracking error, and may occur for several
reasons. Most prominently, if markets are relatively flat over time, option
positions purchased stand to lose time value and could cause a loss for the fund even
if the market had marginally declined.
It's still too early on a day-to-day basis to add more bearish fund exposure. I'm
looking for signs of a reversal, preferably on a day which opens strongly to the
upside but finishes down or near the lows. I'm also looking for a day where the
close is below the prior day's low. These would be signals of a technical reversal
to the downside to support the longer-run sentiment concerns.
SUPPORT RESISTANCE
Nasdaq Composite 1420 1500
S&P 500 890 920
Dow Industrials 8300 8500
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!
#forex4u - chat forex MIRC
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