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UltraShort Indices

Posted By Barry Ritholtz On February 14, 2011 @ 10:30 am In Really, really bad calls,Short Selling,Trading | Comments Disabled

I don’t understand why, but I keep seeing portfolios strewn with Ultra-Short inverse funds. These are the ETFs that bet 2X and even 3X that major indices will go down. 20, 30 even 40% of some accounts are laden with these.

Please stop.

Eventually, the downside bet will be a moneymaker. Eventually. But if you make that Macro call even a few Qs early with a leveraged bet, the negative consequences could be severe. As I have frequently suggested, waiting for a technical signal prior to shorting is a much better approach than guessing.

[1]Note that I have no problem with the concept or the use of these – but you must understand the risks and issues of using these very short term instruments. There is lots of slippage relative to the indices they seek to short, meaning lots of tracking error. But that is the technical reason for why these should be used sparingly, or as a hedge, and only for days and weeks — not years.

The more basic question is the foolishness of shorting strong indices running straight up — without any technical or timing signal, it is suicidal to guess when this all comes to an end.

It is one thing to miss opportunity sitting in Treasuries or cash; it is something else entirely to fight the tape, let the trend run you over, and argue with the market.

Unless you have a red “S” on your chest and wear a cape, do not step in front of a speeding locomotives . . .


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