Hopefully everyone had a good Thanksgiving weekend.  The market got back in its groove with a huge late move downwards, but with lighter than normal volume.  The sell-off shouldn’t have surprised anyone given the weakness of the previous week’s bounce.  The real question to ask is, "How deep will this dip go?"  We haven’t truly taken out the lows from 2002 yet, and I would expect at least a little more short term support there ($75 on the chart above).  That still leaves 9% to the immediate downside though, and with the current fundamentals I wouldn’t be surprised to see that short term support fail sooner rather than later.  So what does that mean?  It means you should keep avoiding bullish positions and try to open bearish ones.

The volume eased up today as we head towards the holiday weekend.  The fact that the market didn’t completely reverse is a good sign for the bulls, but it’s still too early to say that $75 is going to be the bottom on the SPY.  I wouldn’t read too much into whatever the market does the rest of this week since the volume will be light, especially since Friday is a half day.  It will be interesting to see how the holiday sales go this year and how the market reacts, since expectations are already pretty low.  Since I probably won’t be posting again before Thursday, have a happy Thanksgiving everyone.

Friday closed out the week in typical fashion with a last hour 3% move.  The week still closed below support with pretty strong volume though.  We’re around the 10 year level of support right now, so we’ll see if it holds at all or if we’ll be seeing prices not seen since the 1990s. 

Yesterday I mentioned one way to size short ETF positions to hedge a portfolio.  So if you can do just as well without putting up as much cash, why would anyone not go for these things all the time?  Well, there’s a lot that goes on behind the scenes with these guys.  Short ETFs just attempt to match the daily move of the underlying index by fudging their positions on a daily basis.  Since it’s an ETF that’s very actively managed, there are a lot of fees that go along with it. 

Also, since it’s just matching the daily movements of the index, over the long run that doesn’t quite work out due to compounding.  Say you started both funds at $100, one which is a double short of the other.  If the index goes up 1%, the double short goes down 2%.   After the first day, the index would be $101 and the ETF would be $98.  If the same thing happened a second day, the index would be $102.01 and the ETF would be $96.04.  Now let’s say the index goes back to $100 on a 1.97% drop; the ETF would go up 3.94% and end up at $99.82.  That’s minor right now, but over the long run it will end up not tracking the index as tightly as you may be hoping for. 

While not a disaster, it helps to understand why the S&P500 may go down 30% but SDS only goes up 50%.  Ideally, if you truly want two times the short exposure to an index, you would play the index futures or options so that you can manage your long term exposure a little more finely, but of course those have a whole other can of worms that go along with them.  Your 401k probably doesn’t have that option though, so knock yourself out with the short ETFs and watch your portfolio at least stay afloat while everyone else is eating it.

This last hour surge has become quite a bad habit now.  We were down about 3% at 3pm today, and the last hour bled off an additional 4%.  The November downtrend failed to find much support so we’re continuing down to the super long term support line from 2002.  Where will it stop?

If SDS isn’t enough for you, there are actually triple short (and triple long) ETFs out there.  I didn’t mention when they opened up at the beginning of the month, since I use options when I want that much movement, but someone asked about them so I figured I should comment.  One way to use these things is to decrease your position size and put the rest of the money towards something safer. 

For example, if I had $10k that I was putting into SH (1x short), I would instead put $5k into SDS (2x short) + $5k into a safe investment, or $3.3k into BGZ (3x short) + $6.7k into the safe investment.  The numbers today show that the results of the ETF parts would have been SH +5.78% (+$578), SDS +11.22% (+$561), or BGZ +16.98% (+$565).  Depending upon how lucrative the "safe" part is, it could be a good idea to have other investments while still hedging the same amount.  Note, SH and SDS are S&P 500 ETFs while BGZ is a Russell 1000 ETF triple short, but this was just a general idea of how to split your money and why these aren’t just for the crazies. 

I thought today would be a last gasp bounce, but it didn’t happen.  A late surge downwards took the market below support, but the way the market’s been going, maybe it would have been up a couple percent if there were an extra 2 hours in the day.  My guess is there will be a bounce still, but it looks like it won’t hit the top line again before starting the next leg down.  Watch for the follow through tomorrow. 

Today was opposite day with the market trading up early on, diving in the afternoon, but then rallying in the last hour to end on a positive note.  That support line seems to be holding steady for now, but I still wouldn’t recommend making too many bullish trades off of it.  We’re bound to fall through at some point, and it could be a really steep drop if the base continues to strengthen.

I saw this on The Daily Show the other day and found it amusing…

Nothing too exciting again today.  The market was shaky for a while, poking into the positive before staging another last minute dive that pushed towards the bottom support line again.  While not the most important news, the most interesting news of the day to me was Jerry Yang’s stepping down from Yahoo (YHOO).  You can bet that YHOO will be seeing some major changes in the future, and it will be interesting to see what those are.  YHOO will probably get a boost tomorrow on the news, but will it spill over into other techs?