Schmacko (97.08)

Dipping back in to ultrashorts...

August 05, 2011 – Comments (2) | RELATED TICKERS: DXD , SMN , ITT

I stumbled onto a blog on forbes today that touched on some things I've been pondering the last few weeks:

"There are only two things you need to be concerned with as an investor currently:

1. At what point should I raise more cash?

2. Where will be the point at which I should put that cash to work?"

I don't do what real TA people would call technical analysis but I do a kind of squinty eyed half cocked version that I try and use to figure out decent entry and exit points.  About a week ago (July 25) I decided it might be a good idea to sell a few positions to raise some cash.  It looked like we'd hit at the minimum a short term top and we had a good chance of heading down, that was about 2 days into this 9/10 day route.  I didn't go crazy but I took my cash position from 10% to 20%.  Just to lock in some profits and get ready for pottential down side.  Once we pushed through DJI 1200 I became pretty convinced we were going to drop at least to DJI 1100.  I think there's enough fear right now that 1100 could be broken through and we could go to 10500 or even 1000, I'm hoping we don't go below that.  I don't think things are as bad as 2008, so I don't see another return to the 7000s but I do think we have more downside. 

I don't short stocks and I don't buy options.  I'm pretty conservative small time investor.  I will however buy ultrashort ETFs to try and play the downslide.  So two days ago I bought some DXD, I'd thought about picking some up earlier but I didn't think we'd have this many down days in a row.  Yesterday the blood started flowing.  I picked up some SMN as well to try and make money off of fear.  I'm not going crazy and these plays kind of act as a hedge.  I'm still about 80% long and a fair amount of those positions are in positions I started in 2009 in solid dividend paying stocks.  They have some good cushion room before they go red and pay me to hold them.  I'm now about 15% cash and 5% ultrashort. 

I think in response to the two questions from the forbes blog, the time to raise cash is now.  I still plan on making monthly cash contributions to my account.  The ultrashorts act as kind of a portfolio hedge for further moves downside.  If we get a rally next week (or anywhere in the short term) I think that's the opportunity to sell off weaker or unwanted long positions to raise cash or expand ultrashort positions for further moves down.  Whenever we get to a consolidation point thats an opportunity to scale out of ultras (hopefully at a profit) and move some of the money back into the longside either into long term dividen payers with good yields or something with a higher beta for swing trades on short rallys.

I imagine over the next month my portfolio will start to look more like 70-75% long, 10-15% cash, 10-15% ultrashort.  At some point the market will bottom, I won't try and claim to know at what point that will be, and then it will be time to go for a more permanent long.  Until then I'll make shopping lists and look for the swing trade opportunities that choppy markets can present.

On ultrashorts in general:

Don't hold them long term swing trade only.  If the market continues to rally there's a good chance I'm going to sell my two positions today and lock in the small term gains I've already picked up.   

Update on older blog:

I've blogged about ITT a few times this year.  It's pretty much been on my watchlist since announcing the breakup of the company.  Before the announcement it was trading at $52 and change and then spike up to the low $60s.  It is now trading at $48 and change well below it's announcement price.  This is a three company for the price of one play and one of the things I'm thinking about scooping up if the price looks right.  I'm primarily interested in the fluid/water business part of the spinoff.  I'm neutral on the motion/flow aspect, and very bearish on the defense sector side.  If I do get in before th split, which is supposed to be early next year, I will sell my defense side shares immediately and reinvest them in the water unit.  Since the motion/flow unit will be the one still calling itself ITT I'm guessing it will keep paying a dividend and so that will probably be a hold.

On defense stocks in general- Unless it pays a dividend or has a good amount of it's business coming from non-DOD related sources just stay away from them.  There's better opportunites elsewhere and I expect the segment as a whole to underperform the market for a while.