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Long Dow, Short Russell 2000- Real Money Trade

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November 18, 2009 – Comments (12) | RELATED TICKERS: DDM , TWM , SPX

I just initiated a long position in "DDM" The Ultra-Long Dow 30 ETF, and a long position in "TWM" the Ultra-Short Russell 2000. I initiated this paired trade to try and capitalize on what I believe will be a continue "flight to quality" as managers shift their money into more of the large cap names. This has been occurring over the past couple of months and I think should continue as managers balance their fear that this rally is "phony" and stretching the fundamentals (and therefore want to be in more established companies with more earnings visibility), and the fear of missing the rally before the year-end. Thoughts?

12 Comments – Post Your Own

#1) On November 18, 2009 at 4:41 PM, rosemanjhk (52.32) wrote:

Sounds logical - I have read a couple of articles that make the same assumption.  Let us know how it works out for you down the road....

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#2) On November 18, 2009 at 4:43 PM, JaysRage (90.10) wrote:

I don't think it's a smart play at all, personally.  

I'm not a fan on betting on macro events like the ones that you describe.   Not all of the Dow is worth your money and not all of the small caps are worth your short.    Why not find a quality blue chip and dump money into it and find some junk small caps and short them?

Because you don't know which ones are good?  Then you've got no busines making a real money play like the one that you're describing above.  

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#3) On November 18, 2009 at 4:55 PM, davejh23 (< 20) wrote:

That sounds like a decent play for now.  Even if the overall market begins to fall, the small caps should underperform by quite a bit, so you should be somewhat protected.  However, I wouldn't consider these "long" positions.  It's never smart to hold these "Ultra" ETF's for more than relatively short-term trades.  Unless the market moves in a straight line from the day you make your picks, these ETF's don't hold up well.

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#4) On November 18, 2009 at 5:23 PM, XMFConnor (97.73) wrote:

JaysRage,

Thank you for the comments. Of course not all of the Dow is worth my money and not all of the small caps are worth my shorts.. and the majority of my portfolio is security-specific long/short. However, the specific event I am betting on can be achieved through diversifying throughout the Dow and the Russell 2000. This is an asset allocation play... not a security selection play, so investing in individual securities does not make a lot of sense. I would like to take security selection out of it as much as possible (for this play) which is why the ETF's make sense. In addition, ETF's easily offer you 2X leverage and diversification... and with individual securities you can get more easily squeezed.

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#5) On November 18, 2009 at 9:37 PM, streetflame (30.50) wrote:

I agree that small caps are slightly overpriced compared to large caps.  But buying leveraged ETFs is stupid.  You will probably lose money on this trade.

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#6) On November 19, 2009 at 1:07 AM, XMFConnor (97.73) wrote:

How is buying leveraged ETF's stupid when you are neutral? The only difference is you put up less capital to get the same spread.

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#7) On November 19, 2009 at 7:47 AM, JaysRage (90.10) wrote:

Here's why I'm not a big fan of this play.   Leveredged ETFs are essentially derivatives.    Therefore, there are no dividends, just movement.   In addition, they have very high maintenance fees.   I'll throw out a few scenarios.  

Scenario 1 -- Doom and Gloom.   This is good for you.   Small caps go down faster and lower.   Large Caps will go down slower and less.   (Perhaps not as good as you think because the big banks will get crushed in this scenario). 

Scenario 2 -- We jump higher from here.   Not good for you.  Small caps go higher faster and further and the big boys don't go up that far that fast.     

Scenario 3 - We float sideways.   This is also not good for you.  With the high maintance fees and the lack of dividends that make the S&P stocks worthwhile, you're not going to make any money here either. 

You're betting on doom and gloom, but somewhat hedging it.  To me, there are a lot better ways to spend your money.  

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#8) On November 19, 2009 at 11:39 AM, XMFConnor (97.73) wrote:

JaysRage,

 If you look at the charts, I think you will find a different story. What you said is normally true, but the whole reason I am making the play is I think we are in a unique environment where managers are switching to more quality names and avoiding speculation (and increasingly as we rally). Just look at the 6 month chart of all of the indices, we have jumped big, yet the Dow is OUTPERFORMING the russel by 2X over the past six months! This is the whole point of the trade... So I very much disagree with scenario #2. And as with #3, the expense fees are not a major factor in the trade because if I am right, I will make money regardless (even sideways). We are talking about less than 1% on each side on an annual basis- and this is more of a short-term trade.

 

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#9) On November 19, 2009 at 11:46 AM, cubanstockpicker (21.03) wrote:

In a bear market, which this still is, your going to burn through your money. The DOW is being suppoorted by the euphoria that everything is over. There isnt an indicator that supports continued growth since there needs to be a driver. This "BULL" run is BULL. Housing just claimed a new adjustment downward. Unemployment is "steady"???? at 504,000 new claims. Its usually the small caps that flourish in big recessions since they can grow in a downturn.

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#10) On November 19, 2009 at 1:03 PM, UltraContrarian (31.86) wrote:

The problem is not mainly fees but volatility decay.  Both ultralong and ultrashort ETFs dramatically underperform over the long term.  Compare their historical results to 2x the underlying and you will see.  Look at allstars like ultrasuck, volatilitydecay or any of the hundreds of CAPS posts which have detailed why ultra ETFs are not good holdings even if you are right on the macro forces.

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#11) On November 19, 2009 at 3:31 PM, XMFConnor (97.73) wrote:

Completely agree about the long-term view, but this is more of a short-term trade- and I used 2X leverage to be able to put up less capital

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#12) On November 19, 2009 at 10:35 PM, UltraContrarian (31.86) wrote:

That's what options are for.

Get out of this trade before you lose too much money. And read something by the thousands of people who have investigated ultra ETFs more closely than you have.  For example: http://news.morningstar.com/articlenet/article.aspx?id=271892

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