Several readers have emailed over the past few days requesting some details about the execution of the hedge trades.
The issue is when setting up the hedge by purchasing SH for the short side and mutual funds for the long side, which order do you place first on days when the markets rally sharply?
This certainly was the case on Monday as all major indexes shot into the stratosphere. On Monday morning, you could have placed your (long) mutual fund orders to be filled at that day’s ending prices.
But what about SH? Entering the order and getting it filled early or at mid-day would have exposed you to losses as the market rallied on.
I was caught in that exact position. Due to a prior commitment, I had to leave the office about an hour before the markets closed. At that point, the rally was on and the Dow was up some 300 points and rising. My plan had been to simply enter the short position as close to closing time as possible to limit any adverse price action.
Since that was not possible, I simply postponed any action and will enter my long and short positions on a day when I will be around at closing time.
I suggest you follow a similar pattern so that you don’t enhance the odds of starting your hedge with a slight loss.
Comments 9
Ulli,
Suppose you are using ETFs instead of mutual funds for the long side.
Do you place orders for the long ETF(S) and the short ETF at approx. the same time?
Thanks
Hi Ulli,
Normally your trend tracking index and 39/40 week SMA match closely. This time however, as the TT index closes in on a new buy point, the S&P; is still about 27% below its 40 week SMA. I am sure you have thought about this. Can you give us your perspective?
Some miscalculation there. I meant S&P; is about 20% below its 40 week SMA.
Yes, using ETFs only, you can place all orders at the same time.
Ulli…
VR,
My TTI is not related, in terms of price movement, to the S&P; 500 at all. I am not sure I understand your question. For purposes of hedging, I am using a short-term 10 week average to find an entry point.
Ulli…
Ulli,
What used to be so simple with your plan is now getting more complicated all the time, now we have two parts of the plan to have to fiddle with.
B.B.
BB,
It’s a simple as it always has been.
Just because many readers like the hedging concept does not mean you have to participate. Stick to the long term trends if that fits your risk profile best.
Ulli…
Hi
I get the SH which is a S&P; 500 ETF but is the reason you use 2 long funds simply to get coverage of full market? eg a large and mid cap fund.
What would happen if you just took a S&P500; etf short (SH) and matched it to a single S&P; 500 long etf (assuming there is one)?
t
T,
If you did that, you would have the “perfect” hedge in that all gains and losses would cancel each other out.
Ulli…