The S&P500 closed fractionally higher again today – volatility has just collapsed in the past month – but yesterday’s losses were significantly pared by the move in one single market – natural gas. Yesterday ERTS bought back the 4th allowable tranche of HNU at $4.23, and today the ETF rallied over 13% from $4.14 with today’s snap-back in gas to close at $4.69. A double bottom? Anyway, this, plus some positive action in gold stocks moved the portfolio back up almost a full 1% despite a little more erosion in the short ETF position. The portfolio is still down .3% in the first two trading days of February, but today it went the right way.
I’ve decided to scrap trading leveraged short ETFs. The math just doesn’t work. Most of the time markets slowly trend higher, and tend to come down more sharply. The inverse of that is that with short ETFs most of the time you are losing money, and then occasionally you get a spike in your favour when markets get volatile to the downside. These longer declining periods are further exacerbated by the mathematics of daily re-balancing, and their value rapidly erodes. So much so that the next burst upward in the ETF will likely not even get you back to your starting point. Unless you time them imminently before a pullback, you can’t really make money with them. It’s a huge headwind even though ERTS is designed for short-term trading. So out they go. Today I sold off ERY, since it was at about break-even, and put stop-losses under EDZ, TYP and DRV. EDZ and TYP are already quite a bit under water, so I’ll give them a little more risk on the off-chance the market corrects for a few days. It could happen, given the steady upward rise its seen in the past couple of months.
Leveraged long ETFs have the same re-balancing drag as the short ones, except that their ability to recover is better. Barring really huge declines like we saw in commodities in the second half of 2008, they will generally bounce back over time. The main reason again is the mathematics of gains and losses. For a stock to go from $10 to $5 is a 50% move. For it to go from $5 to $10 is a 100% move. Same price distance – different profitability. When I did analyses on long/short ETF pairs these – I found that short ETFs deteriorate in value (from rebalancing) 3-4 times more quickly than leveraged long ETFs. So for a short term in-and out trading strategy, the long side avoids much of the re-balancing, and tends to be uptrending over longer periods than down-trending (depends on the markets of course, but in general). The short side unfortunately absorbs much of it, and the risk-reward is brutally bad as it relentlessly declines toward $0. So there you have it.
| TRADING | 2-Feb-12 | UPDATE | 673 | |||||
| # | Trade | Qty | Stock | Symbol | Price | Acct | ||
| 9 | Sold | 2.2% | Drxn Energy 3X Sh ETF | ERY | @ | $10.29 | 2 | |
| Qty % is the portfolio weighting | ||||||||
| EXTENSION REVERSAL TRADING SYSTEM (ERTS) | ||||
| *********************************************************** | ||||
| 02-Feb-12 | ||||
| S&P500 | 1325.5 | 1.5 | 0.1% | |
| TSX | 12553.5 | 35.8 | 0.3% | |
| *********************************************************** | ||||
| PORTFOLIO STATUS | ||||
| Market | JAN 12 | YTD | Incep | |
| Canadian Dollar | 0.9990 | -0.4% | 2.0% | -3.7% |
| S&P500 | 1325.5 | 1.0% | 5.4% | 4.0% |
| TSX | 12553.5 | 0.8% | 5.0% | -5.9% |
| Weight | ||||
| Portfolio % USD | 34.1% | -3.0% | -0.9% | 11.6% |
| Portfolio % CAD | 65.9% | 0.9% | 6.8% | -1.7% |
| FX | ||||
| PORTFOLIO EQUITY | CAD | -0.3% | 3.5% | 3.6% |
| USD ERTS vs SP500 | USD | -4.1% | -6.3% | 7.6% |
| CAD ERTS vs TSX | CAD | 0.1% | 1.8% | 4.2% |
| ERTS vs SP500/TSX | CAD/USD | -1.3% | -1.0% | 5.3% |
| Inception is 30 Jun 11 | ||||
| *********************************************************** | ||||
| Portfolio Direction | Long | Short | Net | |
| Position | 16.1% | 18.9% | -2.8% | short |
| ETF Leverage-adjusted | 34.5% | 56.8% | -22.3% | short |
| CURRENT POSITIONS | ||||
| STOCK/ETF | SYM | LAST | Profit | WGT |
| CASH | 64.9% | |||
| Drxn Gold Sh 3X ETF | NUGT | $26.41 | 2.20% | 2.3% |
| HBP Glb Gold 2X ETF | HGU | $13.78 | 1.86% | 6.8% |
| HBP Nat Gas 2X ETF | HNU | $4.69 | 1.44% | 7.1% |
| Potash Corp | POT | closed | 0.78% | 0.0% |
| Drxn Real Est 3X ETF | DRN | closed | 0.34% | 0.0% |
| Silver Wheaton | SLW | closed | 0.33% | 0.0% |
| Cenovus Energy | CVE | closed | 0.28% | 0.0% |
| Drxn Energy 3X ETF | ERX | closed | 0.24% | 0.0% |
| Cameco | CCO | closed | 0.23% | 0.0% |
| Teck Corp | TCK.B | closed | 0.19% | 0.0% |
| Drxn Energy 3X Sh ETF | ERY | closed | 0.02% | 0.0% |
| Drxn Gold Sh 3X Sh ETF | DUST | closed | 0.00% | 0.0% |
| Drxn Tech 3x ETF | TYH | closed | 0.00% | 0.0% |
| Claymore BRIC ETF | CBQ | closed | 0.00% | 0.0% |
| Drxn Em Mkt 3x ETF | EDC | closed | 0.00% | 0.0% |
| HBP Glb Gold 2X Sh ETF | HGD | closed | 0.00% | 0.0% |
| Drxn Real Est 3X Sh ETF | DRV | $30.83 | -0.28% | 4.1% |
| EnCana Corp | ECA | closed | -0.36% | 0.0% |
| Drxn Em Mkt 3x Sh ETF | EDZ | $13.00 | -1.29% | 7.4% |
| Drxn Tech 3x Sh ETF | TYP | $12.27 | -1.36% | 7.4% |
…
