FYI Proshares offers etf's that allow you to go short the market at 1x or 2x the inverse so you have yet another choice besides cef's or oef's. You probably know this but others may not. As far as I know only proshares has short etf's approved by the SEC.
Thanks. It's been much on my mind of late, as it seems our family situation is going to dictate a safer and less active management style. The products available to the small investor now are truly wonderful. BTW, I forgot to mention that most SPX sectors roughly correspond to Proshares "Ultra Sector" (leveraged) products, though the latter are benchmarked to Dow Jones, rather than SPX, sector indicies. (I just compare the Proshares product to the SPDR over time and on a closing basis to check for correlation.)
We're hoping to do a little more liquidation on this rally as well and, so, hoping for some legs. I am a little concerned about the punky trading volumes on the recent advance, though closing location value and internals have been pretty good.
Great stuff, and pretty much what I expect to see happen as the broader index script. Keeping lots of powder dry for a major purchase of a Rydex or Profunds inverse on the S&P(as the efficiency has been picking up I am now leaning more and more towards the two times Profunds cef rather than the Rydex oef). I expect to add to cash on this last gasp rally up, and send it all that way.
Beginnings of the technology-led primary bear market of 2000-2001:
Beginnings of the financials-led primary bear market of 2007 to ______?
Under net distribution and, to a lesser extent, net accumulation in the broad index $SPX, there will performance divergence between the 9 SPX industry groups.
As the bear or bull primary trend becomes more evident, most sectors will tend to gain or lose value--to move more in lockstep. At that time, the short or long position on the total index, $SPX, becomes the simplest profitable position.
One important difference between now and 2000 is that the sector SPDRS have gained enough of a following to be effective held long or short. Obviously, the diversification gained by the sector equity hedge could be extended across asset classes--into the debt markets for example. At present, we're lacking an effective short sale against the muni bond markets; but that should be remedied once the new muni etfs gain their followings, as I think they must. (E.G. the Barclay's I-share national, California, and New York tax exempt index products.)
Re the "evaluative index"
One easy way to do this today is to look at SPX in terms of its nine "industry groups" as represented by the tradable Select Sector SPDRS. At the SPDRS home site, you'll find a fact sheet on each--which shows its cap weight as a percentage of index SPX on a given day:
It is then a simple matter to apply some basic technical measure of bullishness or bearishness to each of these nine SPDRS--(e.g. trading below declining long term MA)--to total the weighting of bullish and bearish sectors, and thereby get a idea of HOW bullish or bearish the broad market is at any given time. For instance, a market in which both financials, XLF, and consumer durables, XLY, were clearly bearish would equate to an S % P 500 roughly
27% bearish. Were energy, XLE, to join the parade downwards, SPX would be about 45% bearish. And so forth.
In this way, one gets a rough idea of correct market position for a diversified portfolio at times when stocks are not advancing or declining in lockstep. A portfolio constructed along these lines will outperform its benchmark index in periods of overall distribution or accumulation, (when the index itself isn't making too much headway,) and will do so with generally better risk characteristics.
It won't make the kind of money one would make by being long the very best or short the very worst sectors that comprise the subject index.
Another technique which may or may not apply or appeal to any particular investor.
Those who're interested in the hedge or arbitrage concept can find one of the simplest and best explanations in Magee and Edward's classic TECHNICAL ANALYSIS OF STOCK TRENDS, chapter 38 "Balanced and Diversified: the not-all principle--the evaluative index--reducing risk and anxiety." (St. Lucie Press/American Management Association, 7th Edition 1998.)
I prefer Magee and Edward's treatment to the more complex mathematical forumulations of Modern Portfolio Theory. The concept itself is simple, though disconcerting in practice due to relatively large drawdowns and such. Magee's "Evaluative Index" was just the forerunner of present day technical measures, available at most quality services; so one needs to spend minimal time in calculation
Not a bad idea to understand this rather old discipline in principle before attempting it in practice or, even, selecting a managed hedge. One needs to have realistic expectations for this conservative technique and/or a means to evaluate the consistency with which it's practiced by a particular manager.
I presume this statement's in the public domain since posted to the website. I call your attention to the net position of the fund, (more "bullish" than last month,) and particularly to the low beta, correlation coefficient, and such:
From my point of view, the net effect of the discipline is to wrest asset quality out of unpromising market materials.
Many things can go wrong with such complex strategies, but this happens to be a very ethical management: they haven't always been successful, but they've always done what they say they will do.
You know, they're located down your way, and I believe Michaeal Orkin learned the equity hedge from Gene Caldwell of the private client group at one of your big Southern banks, (Sun Trust?).
So, like most investment disciplines--e.g. value--it's something that can be taught and learned. The problem, imo, is to master the underlying concept: "safety" not as a property of things but of their relations.