Photo:jeffhuttonphoto, Creative Commons, Flickr
Market players are facing plenty of reasons to exit positions and avoid any near term selloff in the coming weeks. Geo-political instability in the oil markets and rising interest rates are putting pressure on stocks, and the lack of a strong follow through on the recent retracement has given traders a clear signal to avoid long positions while taking a breather. With earnings season around the corner, it is going to take some very strong results or hints of lower interest rates to come before this market finds its way to new highs.
When these occasions arise, the ultra-short ETFs that track the major market indexes are a great way to hedge current portfolios without exiting all of an investor's long holdings. The three funds that track the Dow Jones30 Industrials, the S&P500 and the Nasdaq 100 are, respectively, DXD – The Ultra-Short Dow 30 Proshares, SDS – The Ultra-Short S&P 500 Proshares, and QID – The Ultra-Short QQQ Proshares. The funds strategies are leveraged so that they track the major indices at twice the rate of their individual moves. If for example, the Dow Jones Industrial Average falls 1 percent for the day, the DXD – Dow 30 Ultra-Short Proshares, will rise by 2 percent for the day.
Now as for how much size to take in relation to your portfolio, this trader generally believes that a hedge position should not exceed 30 percent of the overall portfolio, unless the position creates a "true neutral" overall position in the market. If not, then the hedge position should not exceed 15 percent of the overall portfolio. For purposes of tracking, I will update readers on positions of 200 shares each representing a total investment just under $30,000, which would be roughly 30 percent of my model portfolio.
Disclosure: The positions I executed when the indexes and where the funds were trading at the time of execution.
Dow Jones 30 Industrials – 13,652.55 – 200 shares of DXD $48.82
S&P 500 – 1533.87 – 200 shares of SDS $51.01
Nasdaq – 1946.82 – 200 shares of QID $45.50