Going up with the down market

October 22, 2008 10:30 PM

Short-the-market-filter:I have been adding to my QID position for 14 months. I've only "lost" (made less) when I got comfortable writing calls every month on half my position (Did not like getting relieved of shares at 59 at October expiration). Bought back at 65 and 75. Anyway, Am I crazy to think that the VIX (or maybe VXN?) is the best indication that it's "safe" to stay in QID? I mean, the VIX is hovering miles above where it's never been before.
posted by Rafaelloello to work & money (8 comments total)

QID doesn't seem any worse or better than SDS, SRS, or TWM.

This is just my gut talking, but I think we're closer to the beginning of the end than the end of the beginning as far as the stock declines go, ie. I feel the current market IS NOT going to do a nikkei-style decades-long swan dive from these prices.

TA-people I follow and fear like drawing price supports from 1996 (ie S&P at ~400) or whatever but I think that's crazy considering that M3 has basically doubled since then.

I think the market is way, way, way oversold now and semi-expect to see it return to 1050 or so by the end of the year (this was my original target back in June and I'm sticking with it).

But of course all this depends on the macro situation. The wheels can in fact still come off (more than they have). Euro and JPY moves are troubling I guess.

This probably wasn't helpful but good luck. IME the ultrashorts work best over shorter terms, but if I had just bought and held from back in May I'd have twice the gains I have now.
posted by troy at 11:23 PM on October 22, 2008

Taking advice from people you dont know one MeFi - well you get what you deserve.

Roubini says on CNBC (on Oct. 21st) that the worst is yet to come and to stay in cash.
posted by gen at 11:34 PM on October 22, 2008

at this point VIX is saying nothing more than that its volatile out there. Its directional "buy when it gets above 30" value has to be tossed. Also consider that the short-selling ban is exactly the time when the VIX started to soar - there was likely quite a bit of skew put into VIX as people could only play downside with options instead of stock.

As for QID, I dont understand why people like these ETF's. If you are serious about this you should be trading the NQ futures that dont have any of the issues the ETF's have like them not tracking what they are supposed to.

so, no - VIX alone is not enough.
posted by H. Roark at 12:39 AM on October 23, 2008

One of the advantages to trading QID and other leveraged ETFs is being able to expose yourself to the options and futures markets in portfolios like IRAs that don't normally allow for trading of options and futures.

I would second the suggestion that the VIX is nothing more than a volatility indicator, but it must be said that as long as it remains high, it bodes well for QID due to the general down trend of the market and the sentiment about future earnings. If earnings continue to be at the low end of estimates, you have already seen the market reconsider the P/E on all the major indexes.
posted by jkluk at 2:35 AM on October 23, 2008

You have to be very careful with TA here, because TA works on historical data, and we don't have much.

After 1-3 sigma drops? Tons of data. After 5-6 sigma drops? Three events, if I'm counting correctly. So, the traditional drawing lines and watching is dicey.

Personally? I think we're in a triangle consolidation around 900 on the SPY, but if there's any sort of major bad news, we're going to plummet -- I wouldn't be surprised to see 780. We're in big bear country, and until I see a real capitulation, I'm assuming we're heading down.

However, VIX being that high, and the swings we're seeing, makes QID seem wrong to me -- given the 5-10% index swings -- in *both* directions -- we've seen over the last two days, I'd be hesitant to trust fast shorting. But I'm a coward. :-)

Where I'm betting now: Treasuries. Looking at Healthcare, consumer staples, and, uhh, that's it. I'm of the wrong attitude to short, though, so I may not be the best adviser for you.
posted by eriko at 2:57 AM on October 23, 2008

Wow. Check out this call spread. Betting on the the volatility of volatility. I thought I was adventurous for owning 5 Nov 60 calls. Have my order in to copy this spread (1 contract worth) only because it seems like somebody gave this a lot of thought.
posted by Rafaelloello at 4:20 AM on October 23, 2008

Anyway, Am I crazy to think that the VIX (or maybe VXN?) is the best indication that it's "safe" to stay in QID?

Yes, seems a bit crazy to me to think of elevated volatility making a position in stocks more safe, long or short. Maybe there is method to your madness, if you have looked at past bear markets and concluded that volatility falls before they end, as in the common saying to the effect that bear markets end quietly. But predicting the direction of the market is not so easy that you can rely on any simple indicator like this.

Nonetheless, my personal favourite thing to watch right now for a sign where things are going is the US dollar; when it starts going down again I will take that as an indication that things are getting back to normal.
posted by sfenders at 7:13 AM on October 23, 2008

Note that the short and ultrashort ETF's may also have counterparty risk -- they exist partially through swaps made with banks, so if it's a big meltdown scenario and their bank implodes, they may suddenly not track the underlying anymore.

So a safer idea (oddly enough) may be to buy in-the-money puts on a long ETF, rather than buying the short ETF outright.
posted by Asparagirl at 9:16 AM on October 23, 2008